Document:

lux_ex101.htm

EXHIBIT 10.1

 

 

ASSET PURCHASE AGREEMENT

By and Among

 

 

 

RadioLoyalty, Inc. (“Seller”)

 

and

 

Lux Digital Pictures, Inc. (“Buyer”)

 

StreamTrack Media, Inc. (“Buyer’s Subsidiary”)

 

 

 

 

Dated August 31, 2012

 

  

  

  

 

TABLE OF CONTENTS

 

	Page No.
	 	 	  	  
	Recitals 	1
	1. 	Purchase and Sale of Assets 	1
	1.1 	 	
Sale of Acquired Assets 

	1
	1.2 	 	
Purchase Price 

	1
	1.3 	 	
Risk of Loss 

	2
	1.4 	 	
Valuation of Assets 

	2
	2. 	Obligations and Liabilities 	2
	3. 	Piggyback Registration Rights 	2
	4. 	Closing and Further Acts 	3
	4.1 	 	
Time and Place of Closing 

	3
	4.2 	 	
Actions at Closing 

	3
	4.3 	 	
Conduct of Business Prior to Closing 

	3
	4.4 	 	
No Solicitation and Due Diligence 

	4
	5. 	Representations and Warranties of Seller 	5
	5.1 	 	
Power and Authority; Binding Nature of Agreement 

	5
	5.2 	 	
Subsidiaries 

	5
	5.3	 	
Good Standing 

	5
	5.4 	 	
Charter Documents and Corporate Records 

	5
	5.5 	 	
Absence of Changes 

	5
	5.6 	 	
Financial Statements 

	7
	5.7 	 	
Approvals 

	7
	5.8 	 	
Brokers 

	7
	5.9 	 	
Representations True on Closing Date 

	7
	6. 	Representations and Warranties of Buyer 	8
	6.1 	 	
Power and Authority; Binding Nature of Agreement 

	8
	6.2 	 	
Good Standing 

	8
	6.3 	 	
Approvals 

	8
	6.4 	 	
Brokers 

	8
	6.5 	 	
Representations True on Closing Date 

	8

 

  

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TABLE OF CONTENTS

 

	Page No.	 
	 	 	 	 
	7. 	Conditions to Closing 	8
	7.1 	 	
Conditions Precedent to Buyer’s Obligation to Close 

	8
	7.2 	 	
Conditions Precedent to Seller’s Obligation to Close 

	9
	7.3 	 	
Notice Requirement 

	9
	8. 	Further Assurances and Post Closing Covenants 	10
	8.1 	 	
Books and Records

	10
	8.2 	 	
Employee Plans and Employment 

	10
	9. 	Survival of Representations and Warranties 	10
	10. 	Indemnification 	10
	10.1 	 	
Indemnification by Seller 

	10
	10.2	 	
Indemnification by Buyer 

	11
	10.3 	 	
Procedure for Indemnification Claims 

	11
	11. 	Injunctive Relief 	12
	11.1	 	
Damages Inadequate 

	12
	11.2 	 	
Injunctive Relief 

	12
	12. 	Arbitration 	12
	13. 	Waivers 	13
	14. 	Successors and Assigns 	13
	15. 	Entire and Sole Agreement 	13
	16. 	Governing Law 	13
	17. 	Counterparts 	13
	18. 	Attorney’s Fees and Costs 	14
	19. 	Assignment 	14
	20. 	Remedies 	14
	21. 	Section Headings 	14
	22. 	Severability 	14
	23. 	Notices 	14
	24.	Publicity 	15
	25. 	Confidentially 	15

 

 

ii

 

 

TABLE OF CONTENTS

 

	Exhibit A: 	
Bill of Sale of Assets

	 
	 	 	 
	Exhibit B: 	
Certificate of Obligation to Issue Shares

	 
	 	 	 
	Exhibit C: 	
List of Assets

	 
	 	 	 
	Exhibit D:	
List of Assumed Liabilities

	 
	 	 	 
	Exhibit E: 	
Valuation of Assets

	 
	 	 	 
	Exhibit F: 	
Financial Statements of Seller as of May 31, 2012 (Unaudited)

	 

 

  

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ASSET PURCHASE AGREEMENT

This Asset Purchase Agreement (the “Agreement”) is made and entered into as of the 31st day of August 2012 by and among RadioLoyalty, Inc., a California corporation (the “Seller”), Lux Digital Pictures, Inc., a Wyoming corporation (the “Buyer” or “Company”), and StreamTrack Media, Inc., a California corporation (“Buyer’s Subsidiary”), with respect to the following facts:

R E C I T A L S

A.           Seller is engaged in the business of providing key support services for both mobile and online content, using proprietary platforms developed by Seller over the last five years (the “Business”).

B.           Seller wishes to sell to Buyer, and Buyer wishes to purchase from Seller, the Business and substantially all of the assets (collectively, the “Acquired Assets”) of Seller on the terms and subject to the conditions set forth in this Agreement.

C.           The purchase of the Acquired Assets under this Agreement is intended to qualify as a tax free purchase and sale under Section 368 of the Internal Revenue Code of 1986, as amended.

NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged by the parties to this Agreement, and in light of the above recitals to this Agreement, the parties to this Agreement hereby agree as follows:

Purchase and Sale of Assets.

1.1         Sale of Acquired Assets.  Upon the terms, and subject to the conditions set forth in this Agreement being satisfied or waived as provided herein, at the Closing (as defined in Section 4.1 of this Agreement), Seller will sell, transfer, and assign to Buyer’s Subsidiary and Buyer will purchase and accept from Seller substantially all of the tangible and intangible assets of the Seller, presently owned or leased by the Seller, wherever located, including, but not limited to all contractual rights, accounts
receivable, all other receivables, cash, deposits, prepaid expenses, inventory, machinery, equipment, engineering data, databases, systems, designs, computer hardware and software, records, works in process, backlog, intellectual property (including but not limited to patents and licensing agreements), know-how, trade secrets, inventions, technology, company name, operating and equipment leases, licenses, permits, franchises, websites, customers, suppliers, contracts, sales and marketing literature and processes, techniques, goodwill, web sites, and pricing information related to the Business, as more particularly described in Exhibit C to this Agreement (the “Acquired Assets”), free and clear of all claims, liens, security interests, pledges and encumbrances other than those assumed by Buyer’s Subsidiary pursuant to this Agreement.

 

  

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1.2         Purchase Price.  Upon the terms and conditions set forth in this Agreement, in consideration for the sale, assignment, and transfer of the Acquired Assets to the Buyer’s Subsidiary, the Buyer will, after the Closing and within five (5) business days after the recording of Amended and Restated Articles of Incorporation by the Buyer with the Wyoming Secretary of State that effect a reverse split of the Buyer’s issued and outstanding common stock, issue to Seller a number of shares of Buyer’s common
stock (the “Shares”) such that on the date of the issuance of the Shares, the Seller and its affiliates will own a number of shares of the Buyer’s common stock equal to approximately 90% of the total issued and outstanding shares of Buyer’s common stock, (i) assuming the conversion of all outstanding Series A Convertible Preferred Stock of the Buyer into Buyer’s common stock on the Share issuance date, and (ii) including and taking into account all other shares of the Buyer’s common stock already owned by the Seller and its affiliates on the Share issuance date (the “Purchase Price”); provided, that the calculation of the number of Shares issuable to Seller under this Agreement will reflect that the dilution caused by outstanding shares of Buyer’s common stock in the public float on the Share issuance date will be borne 90% by the
Seller and 10% by the holders of the Buyer’s outstanding Series A Convertible Preferred Stock, (i.e. on the Share issuance date and assuming the conversion of all outstanding Series A Convertible Preferred Stock of the Buyer on such date, the Seller will own 90% of the Buyer’s outstanding common stock that is not in the Buyer’s public float, and the holders of such Series A Convertible Preferred Stock will collectively own 10% of the Buyer’s outstanding common stock that is not in the Buyer’s public float).  Reference to the Buyer’s “public float” in this Agreement means outstanding shares of Buyer’s common stock that are not owned by Buyer, Seller, or any of their affiliates.

1.3         Risk of Loss.  Pending the Closing, all risk of loss, damage or destruction to the Acquired Assets will be borne by Seller and the Purchase Price being paid to Seller by Buyer will, in the case of any such loss, damage, or destruction, be adjusted accordingly.  In the event of a significant adjustment, either party will have the option to terminate the purchase contemplated under this Agreement.

1.4         Valuation of Assets.  Buyer and Seller agree that the total value of the Acquired Assets is the amount set forth on Exhibit E to this Agreement.  Buyer and Seller covenant to determine in good faith the value of each of the Acquired Assets after the Closing.

 

Obligations and Liabilities.

On the Closing Date, neither Buyer nor Buyer’s Subsidiary will assume or be obligated to satisfy or perform any liabilities, obligations or payables of Seller, other than those listed on Exhibit D to this Agreement.

Piggyback Registration Rights.

With respect to shares of Buyer’s common stock owned by Buyer or its affiliates (the “Registerable Securities”), if Buyer determines to register any of its securities for its own account, other than a registration relating to (a) any employee benefit plans, (b) a corporate reorganization or Rule 145 transaction or (c) any registration form which does not permit secondary sales, Buyer and its affiliates shall have to right to include in such registration up to the number of shares of Registerable Securities equal to 15% of the total number of shares that Seller determines to register (the “Piggyback Registration Right”).

 

  

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Closing and Further Acts.

4.1          Time and Place of Closing.  Upon satisfaction or waiver of the conditions set forth in Section 7 of this Agreement, the closing of the transactions contemplated by this Agreement (the “Closing”) will take place at the law offices of Richardson & Associates at 1453 Third Street Promenade, Suite 315, Santa Monica, California 90401 at 1:00 p.m. (local time) on the date that the parties may mutually agree in writing, but in no event later than August 31, 2012 (the “Closing
Date”).  In the event that the Closing does not occur by August 31, 2012 through no fault or breach of this Agreement by either party, and the Closing Date is not extended by mutual written agreement of the Seller and the Buyer, then either party may terminate this Agreement without further obligation to the other party, except as provided in Section 25 of this Agreement.

4.2          Actions at Closing.  At the Closing, the following actions will take place:

(a)           Buyer will deliver to Seller a certificate evidencing Buyer’s obligation to issue the Shares to Seller in the form attached to this Agreement as Exhibit B (the “Certificate”).

(b)           Seller will execute and deliver to Buyer a bill of sale in the form attached to this Agreement as Exhibit A (the “Bill of Sale”), transferring to Buyer’s Subsidiary title to the Acquired Assets free and clear of all encumbrances, liens or claims.

(c)           Seller will deliver to Buyer copies of necessary resolutions of the Board of Directors and majority shareholders of Seller authorizing the execution, delivery and performance of this Agreement and the other agreements contemplated by this Agreement (including the Bill of Sale) for Seller’s execution, and consummation of the transactions contemplated by this Agreement, which resolutions have been certified by an officer of Seller as being valid and in full force and effect.

(d)           Buyer will deliver to Seller copies of resolutions of the directors of Buyer authorizing the execution, delivery and performance of this Agreement and the other agreements contemplated by this Agreement for Buyer’s execution, if any, and consummation of the transactions contemplated by this Agreement, which resolutions have been certified by an officer of Buyer as being valid and in full force and effect.

(e)           Any additional documents or instruments as a party may reasonably request or as may be necessary to evidence and affect the sale, assignment, transfer and delivery of the Acquired Assets to the Buyer’s Subsidiary.

4.3          Conduct of Business Prior to Closing.  Except for transactions contemplated by this Agreement, after the execution of this Agreement by the Buyer and until the Closing, Seller will:

(a)           Consistent with the ordinary course of business, maintain the operations and goodwill of the Business and the Seller, and continue its relationships with persons having business dealings with Seller; and

 

  

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(b)           Consistent with the ordinary course of business, maintain all of the assets of the Seller in their current condition, ordinary wear and tear excepted, and insurance on all of said assets in such amounts and of such kinds comparable to that in effect on the date of this Agreement; and

(c)           Maintain the books, accounts and records of Seller consistent with its customary accounting policies consistently applied, including recognition of revenues and expenses, continue to collect accounts receivable and pay accounts payable utilizing normal procedures and without discontinuing or accelerating payment of such accounts and comply with all contractual and other obligations applicable to the Seller; and

(d)           Not make any change to, or otherwise amend in any way, the contracts with, salaries, wages or other compensation of, any officer, director, agent or other similar representative of Seller (including any increase in any benefits or benefit plan costs or any change in any bonus, insurance, pension, compensation or other benefit plan); and

(e)           Not hire any officer, director, employee, agent or other similar representative of Seller except employees hired in the ordinary course of business; and

(f)            Not incur any indebtedness for borrowed money except in the ordinary course of business, and not pledge or grant liens or security interests in any of the Acquired Assets; and

(g)           Not sell, transfer or dispose of any Acquired Assets except for sales in the ordinary course of business; and

(h)           Not distribute any assets of Seller to any of its shareholders or other affiliates of the Seller, or to any other party; and

(i)            Begin the year end financial process consistent with prior year practices.

4.4          No Solicitation and Due Diligence.  Seller will not, nor will the Seller encourage, facilitate, solicit, or authorize any of its shareholders, directors, officers, employees, agents or representatives to solicit or enter into any discussion (or continue any discussion) with any third party (including the provision of any information to a third party), or enter into any agreement or understanding of any kind regarding the purchase, sale, lease,
assignment, conveyance or other disposition or acquisition of all or any portion of the Acquired Assets, the Business or any capital stock of the Seller, for the period commencing on the date first above written and extending until August 31, 2012.  During this period and until the Closing or termination of this Agreement, Seller will fully cooperate with the Buyer and its representatives to enable them to conduct complete due diligence of the Seller, the Business, the Acquired Assets, and the books, records and documents relating to the Seller, the Business and the Acquired Assets.

Representations and Warranties of Seller.

Seller represents and warrants to Buyer as follows:

 

  

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5.1          Power and Authority; Binding Nature of Agreement.  Seller has full power and authority to enter into this Agreement and to perform its obligations hereunder.  The execution, delivery, and performance of this Agreement by it have been duly authorized by all necessary action on its part.  Assuming that this Agreement is a valid and binding obligation of each of the other parties hereto, this Agreement is a valid and binding obligation of Seller.

5.2          Subsidiaries.  There is no corporation, general partnership, limited partnership, joint venture, association, trust or other entity or organization which Seller directly or indirectly controls or in which Seller directly or indirectly owns any equity or other interest.

5.3          Good Standing.  Seller (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, (ii) has all necessary power and authority to own its assets and to conduct its business as it is currently being conducted, and (iii) is duly qualified or licensed to do business and are in good standing in every jurisdiction (both domestic and foreign) where such qualification or licensing is required.

5.4          Charter Documents and Corporate Records.  Seller has delivered to Buyer complete and correct copies of (i) the articles of incorporation, bylaws and other charter or organizational documents of the Seller, including all amendments thereto, (ii) the stock records of the Seller, and (iii) the minutes and other records of the meetings and other proceedings of the shareholders and directors of the Seller.  Seller is not in violation or breach of (i) any of the provisions of its articles of
incorporation, bylaws or other charter or organizational documents, or (ii) any resolution adopted by its shareholders or directors.  There have been no meetings or other proceedings of the shareholders or directors of Seller that are not fully reflected in the appropriate minute books or other written records of Seller.

5.5          Absence of Changes.  Except as otherwise set forth on Schedule 5.5 hereto or otherwise disclosed to Buyer in writing prior to the Closing, since May 31, 2012:

(a)           There has not been any material adverse change in the business, condition, assets, operations or prospects of Seller and no event has occurred that might have an adverse effect on the business, condition, assets, operations or prospects of Seller.

(b)           Seller has not (i) declared, set aside or paid any dividend or made any other contribution in respect of any shares of capital stock, nor (ii) repurchased, redeemed or otherwise reacquired any shares of capital stock or other securities.

(c)           Seller has not sold or otherwise issued any shares of capital stock or any other securities.

(d)           Seller has not amended its articles of incorporation, bylaws or other charter or organizational documents, nor has it effected or been a party to any merger, recapitalization, reclassification of shares, stock split, reverse stock split, reorganization or similar transaction.

(e)           Seller has not formed any subsidiary or contributed any funds or other assets to any subsidiary.

 

  

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(f)            Seller has not purchased or otherwise acquired any assets, nor has it leased any assets from any other person, except in the ordinary course of business consistent with past practice.

(g)           Seller has not made any capital expenditure outside the ordinary course of business or inconsistent with past practice, or in an amount exceeding ten thousand dollars ($10,000) singly or in excess of fifty thousand dollars ($50,000) in the aggregate, without Buyer’s prior written consent.

(h)           Seller has not sold or otherwise transferred any assets to any other person, except in the ordinary course of business consistent with past practice and at a price equal to the fair market value of the assets transferred.

(i)            There has not been any material loss, damage or destruction to any of the properties or assets of Seller (whether or not covered by insurance).

(j)            Seller not written off as uncollectible any indebtedness or accounts receivable, except for write-offs that were made in the ordinary course of business consistent with past practice and that involved less than one thousand dollars ($1,000) singly and less than ten thousand dollars ($10,000) in the aggregate.

(k)           Seller has not leased any assets to any other person except in the ordinary course of business consistent with past practice and at a rental rate equal to the fair rental value of the leased assets.

(l)            Seller has not mortgaged, pledged, hypothecated or otherwise encumbered any assets, except in the ordinary course of business consistent with past practice.

(m)          Seller has not entered into any contract or incurred any debt, liability or other obligation (whether absolute, accrued, contingent or otherwise), except for (i) contracts that were entered into in the ordinary course of business consistent with past practice and that have terms of less than six months and do not contemplate payments by or to Seller which will exceed, over the term of the contract, ten thousand dollars ($10,000) in the aggregate, (ii) current liabilities incurred in the ordinary course of business consistent with the past practice, and (iii) transactions related to customer and supply activities incurred in the ordinary course of
business consistent with past practice.

(n)           Seller has not made any loan or advance to any other person, except for advances that have been made to customers in the ordinary course of business consistent with past practice and that have been properly reflected as “accounts receivables.”

(o)           Seller has not paid any bonus to, or increased the amount of the salary, fringe benefits or other compensation or remuneration payable to, any of the directors, officers or employees of Seller.

 

  

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(p)           No contract or other instrument to which Seller is or was a party or by which Seller or any of its assets are or were bound has been amended or terminated, except in the ordinary course of business consistent with past practice.

(q)           Seller has not forgiven any debt or otherwise released or waived any right or claim, except in the ordinary course of business consistent with past practice.

(r)            Seller has not changed its methods of accounting or its accounting practices in any respect.

(s)           Seller has not entered into any transaction outside the ordinary course of business or inconsistent with past practice, other than those listed on Schedule 5.5 of this Agreement.

(t)            Seller has not agreed or committed (orally or in writing) to do any of the things described in clauses (b) through (s) of this Section 5.5.

5.6          Financial Statements.  The unaudited financial statements of Seller attached hereto as Exhibit F as of and for the period ending May 31, 2012, are prepared in accordance with generally accepted accounting principles consistently applied and accurately and fairly represent the financial condition and operating results of the Seller as of the dates and for the periods indicated.

5.7          Approvals.  No authorization, consent or approval of, or registration or filing with, any governmental authority is required to be obtained or made by Seller in connection with the execution, delivery or performance of this Agreement, and the conveyance by Seller to Buyer of the Business and the Acquired Assets.

5.8          Brokers.  Seller has not agreed to pay any brokerage fees, finder’s fees or other fees or commissions with respect to the transactions contemplated by this Agreement, and, to Seller’s knowledge, no person is entitled, or intends to claim that it is entitled, to receive any such fees or commissions in connection with such transaction.

5.9          Representations True on Closing Date.  The representations and warranties of Seller set forth in this Agreement are true and correct on the date hereof, and will be true and correct on the Closing Date as though such representations and warranties were made as of the Closing Date.

Representations and Warranties of Buyer.

Buyer represents and warrants to Seller as follows:

6.1          Power and Authority; Binding Nature of Agreement.  Buyer has full power and authority to enter into this Agreement and to perform its obligations hereunder.  The execution, delivery and performance of this Agreement by Buyer have been duly authorized by all necessary action on its part.  Assuming that this Agreement is a valid and binding obligation of the Seller, this Agreement is a valid and binding obligation of Buyer.

 

  

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6.2          Good Standing.  Buyer (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized, (ii) has all necessary power and authority to own its assets and to conduct its business as it is currently being conducted, and (iii) is duly qualified or licensed to do business and is in good standing in every jurisdiction (both domestic and foreign) where such qualification or licensing is required, including mortgage banking licenses.

6.3          Approvals.  No authorization, consent or approval of, or registration or filing with, any governmental authority or any other person is required to be obtained or made by Buyer in connection with the execution, delivery or performance of this Agreement.

6.4          Brokers.  Buyer has not agreed to pay any brokerage fees, finder’s fees or other fees or commissions with respect to the transactions contemplated by this Agreement, and, to Buyer’s knowledge, no person is entitled, or intends to claim that it is entitled, to receive any such fees or commissions in connection with such transactions.

6.5          Representations True on Closing Date.  The representations and warranties of Buyer set forth in this Agreement are true and correct on the date hereof, and will be true and correct on the Closing Date as though such representations and warranties were made as of the Closing Date.

Conditions to Closing.

7.1          Conditions Precedent to Buyer’s Obligation To Close.  Buyer’s obligation to close the asset purchase as contemplated in this Agreement is conditioned upon the occurrence or waiver by Buyer of the following:

(a)           All state, local and other governmental approvals and all other consents or approvals of any third parties necessary to consummate the transactions contemplated by this Agreement must have been received.

(b)           Seller must have delivered to Buyer a certificate executed by the Secretary of the Seller certifying (i) the names of the officers of Seller authorized to sign this Agreement to which it is a party and all other documents and instruments executed by Seller pursuant hereto, together with the true signatures of such officers; (ii) copies of corporate resolutions adopted by the Board of Directors of Seller authorizing the appropriate officers of Seller to execute and deliver this Agreement and all other agreements, documents and instruments executed by the Seller pursuant hereto and to consummate the transactions contemplated herein; and (iii)
copies of corporate resolutions adopted by the shareholders of Seller authorizing the directors and appropriate officers of Seller to execute and deliver this Agreement and all other agreements, documents and instruments executed by the Seller pursuant hereto and to consummate the transactions contemplated herein.

 

  

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(c)           Buyer must in its sole discretion be satisfied with its full and complete due diligence of Seller, the Acquired Assets, and all other aspects of the transactions contemplated by this Agreement, including but not limited to financial, legal and business affairs of Seller.

(e)           The conveyance of the Acquired Assets to Buyer’s Subsidiary free and clear of any encumbrance other than those assumed by Buyer under this Agreement, and the effective assignment and acceptance of assignment of all of Seller’s material contracts to Buyer.

(d)           All representations and warranties of Seller made in this Agreement or in any exhibit or schedule hereto delivered by Seller must be true and correct as of the Closing Date with the same force and effect as if made on and as of that date.

(e)           Seller must have performed and complied with all agreements, covenants and conditions required by this Agreement to be performed or complied with by Seller prior to or at the Closing Date.

7.2          Conditions Precedent to Seller’s Obligation To Close.  Seller’s obligation to close the asset purchase as contemplated in this Agreement is conditioned upon the occurrence or waiver by Seller of the following:

Buyer has delivered to Seller a Certificate evidencing Buyer’s obligation to issue the Shares to Seller.

(b)           All representations and warranties of Buyer made in this Agreement or in any exhibit hereto delivered by Buyer must be true and correct on and as of the Closing Date with the same force and effect as if made on and as of that date.

(b)           Buyer must have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by Buyer prior to or at the Closing Date.

7.3          Notice Requirement.  Seller will give prompt written notice to Buyer of any development occurring after the date of this Agreement, or any item about which Seller did not have actual knowledge on the date of this Agreement, which causes or reasonably could be expected to cause a breach of any of the representations and warranties in Section 5 of this Agreement.  Buyer will give prompt written notice to Seller of any development
occurring after the date of this Agreement, or any item about which Buyer did not have actual knowledge on the date of this Agreement, which causes or reasonably could be expected to cause a breach of any of the representations and warranties in Section 6 of this Agreement.  No disclosure by any party pursuant to this Section 7.3 will be deemed to amend or supplement the Exhibits or to prevent or cure any misrepresentation or breach of any representation, warranty, or covenant in this Agreement.

Further Assurances and Post Closing Covenants.

Following the Closing, Seller agrees to take such actions and execute, acknowledge and deliver to Buyer such further instruments of assignment, assumptions, conveyance and transfer and take any other action as Buyer may reasonably request in order to more effectively convey, sell, transfer and assign to Buyer’s Subsidiary all of the Acquired Assets, to confirm the title of Buyer’s Subsidiary thereto, and to assist Buyer’s Subsidiary in exercising its rights with respect to the Acquired Assets. In addition, the Seller shall do the following:

 

  

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8.1          Books and Records.  Seller and Buyer agree that so long as any books, records, and files pertaining to the Business or the Acquired Assets, to the extent they pertain to the operations of Seller prior to the Closing Date, remain in existence and available, each party (at its expense) will have the right, for any reasonable and proper purpose, to inspect and make copies of the same at any time during normal business hours and on reasonable notice.

8.2          Employee Plans and Employment.

(a)           Nothing contained herein will be deemed to create any third party benefits for any employee or former employee of the Seller.  Nothing contained herein will be deemed to create any right of employment for any employee of the Seller, either before or after the Closing Date.

(b)           Seller acknowledges that neither Buyer nor Buyer’s Subsidiary shall have any obligation to implement any employee stock option plan.

Survival of Representations and Warranties.

All representations and warranties made by each of the parties hereto will survive the Closing for a period of two years after the Closing Date.

Indemnification.

10.1        Indemnification by Seller.  Seller agrees to indemnify, defend and hold harmless Buyer against any and all claims, demands, losses, costs, expenses, obligations, liabilities and damages, including interest, penalties and attorneys’ and experts’ fees and costs, incurred by Buyer or any of its affiliates arising, resulting from, or relating to any and all liabilities of Seller or relating to any Acquired Assets, other than those liabilities specifically assumed by the Buyer as expressly provided in Section 2 of
this Agreement, any misrepresentation of a material fact or omission to disclose a material fact made by Seller in this Agreement, any exhibits to this Agreement or in any other document furnished or to be furnished by Seller under this Agreement, or any breach of, or failure by Seller to perform, any of its representations, warranties, covenants or agreements in this Agreement or in any exhibit or other document furnished or to be furnished by Seller under this Agreement.

10.2        Indemnification by Buyer.  Buyer agrees to indemnify, defend and hold harmless Seller against any and all claims, demands, losses, costs, expenses, obligations, liabilities and damages, including interest, penalties and attorneys’ and experts’ fees and costs incurred by Seller arising, resulting from or relating to any breach of, or failure by Buyer to perform, any of its representations, warranties, covenants or agreements in this Agreement or in any exhibit or other document furnished or to be furnished by
Buyer under this Agreement, including but not limited to indemnifying Seller for all liabilities specifically assumed by the Buyer under Section 2 of this Agreement, or arising from the  Buyer’s operation of the Business after the Closing, unless caused by the Seller.

 

  

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10.3        Procedure for Indemnification Claims.

(a)           Whenever any parties become aware that a claim (an “Underlying Claim”) has arisen entitling them to seek indemnification under this Section 10 of the Agreement, such parties (the “Indemnified Parties”) shall promptly send a notice (“Notice”) to the parties liable for such indemnification (the “Indemnifying Parties”) of the right to indemnification (the “Indemnity Claim”); provided, however, that the failure to so notify the Indemnifying Parties will relieve the Indemnifying Parties from liability under this Agreement with respect to such Indemnity Claim only if, and only to the
extent that, such failure to notify the Indemnifying Parties results in material prejudice to the Indemnifying Parties of rights and defenses otherwise available to the Indemnifying Parties with respect to the Underlying Claim.  Any Notice pursuant to this Section 10.3(a) shall set forth in reasonable detail, to the extent then available, the basis for such Indemnity Claim and an estimate of the amount of damages arising therefrom.

(b)           If an Indemnity Claim does not result from or arise in connection with any Underlying Claim or legal proceedings by a third party, the Indemnifying Parties will have fifteen (15) calendar days following receipt of the Notice to issue a written response to the Indemnified Parties, indicating the Indemnifying Parties’ intention to either (i) contest the Indemnity Claim or (ii) accept the Indemnity Claim as valid.  The Indemnifying Parties’ failure to provide such a written response within such fifteen (15) day period shall be deemed to be an acceptance of
the Indemnity Claim as valid.  In the event that an Indemnity Claim is accepted as valid, the Indemnifying Parties shall, within fifteen (15) Business Days thereafter, pay the damages incurred by the Indemnified Parties in respect of the Underlying Claim in cash by wire transfer of immediately available funds to the account or accounts specified by the Indemnified Parties.  To the extent appropriate, payments for indemnifiable damages made pursuant to Section 10 of the Agreement will be treated as adjustments to the Purchase Price.

(c)           In the event an Indemnity Claim results from or arises in connection with any Underlying Claim or legal proceedings by a third party, the Indemnifying Parties shall have fifteen (15) calendar days following receipt of the Notice to send a Notice to the Indemnified Parties of their election to, at their sole cost and expense, assume the defense of any such Underlying Claim or legal proceeding; provided that such Notice of election shall contain a confirmation by the Indemnifying Parties of their obligation to hold harmless the Indemnified Parties with respect to damages arising from such Underlying Claim.  The failure by the
Indemnifying Parties to elect to assume the defense of any such Underlying Claim within such fifteen (15) day period shall entitle the Indemnified Parties to undertake control of the defense of the Underlying Claim on behalf of and for the account and risk of the Indemnifying Parties in such manner as the Indemnified Parties may deem appropriate, including, but not limited to, settling the Underlying Claim.  However, the parties controlling the defense of the Underlying Claim shall not settle or compromise such Underlying Claim without the prior written consent of the other parties, which consent shall not be unreasonably withheld or delayed.  The non-controlling parties shall be entitled to participate in (but not control) the defense of any such action, with their own counsel and at their own expense.

 

  

- 11 -

  

(d)           The Indemnifying Parties and the Indemnified Parties will cooperate reasonably, fully and in good faith with each other, at the sole expense of the Indemnifying Parties, in connection with the defense, compromise or settlement of any Underlying Claim including, without limitation, by making available to the other parties all pertinent information and witnesses within their reasonable control.

Injunctive Relief.

11.1        Damages Inadequate.  Each party acknowledges that it would be impossible to measure in money the damages to the other party if there is a failure to comply with any covenants and provisions of this Agreement, and agrees that in the event of any breach of any covenant or provision, the other party to this Agreement will not have an adequate remedy at law.

11.2        Injunctive Relief.  It is therefore agreed that the other party to this Agreement who is entitled to the benefit of the covenants and provisions of this Agreement which have been breached, in addition to any other rights or remedies which they may have, will be entitled to immediate injunctive relief to enforce such covenants and provisions, and that in the event that any such action or proceeding is brought in equity to enforce them, the defaulting or breaching party will not urge a defense that there is an
adequate remedy at law.

Arbitration.

Any dispute under this Agreement will be resolved by binding arbitration conducted in accordance with the rules and procedures of the American Arbitration Association as they are then in effect in the County of Los Angeles, State of California.  In order to select an arbitrator, each party to the dispute will select an arbitrator of its choice through JAMS, and those selected arbitrators will then select by mutual agreement a single arbitrator through JAMS for the proceeding.  The decision of the arbitrator will be final and binding on the parties to this Agreement, and judgment thereon may be entered in the Superior Court for the County of Bernardino or any other court having
jurisdiction.  Each party to this Agreement will advance one-half of the arbitrator’s fees; however, all costs of the arbitration proceeding to enforce this Agreement, including attorneys’ fees and witness expenses, will be paid by the party against whom the arbitrator rules.  It is expressly agreed that the parties to any such arbitration may take discovery as contemplated and provided for by California Code of Civil Procedure §1283.05.  Notwithstanding anything herein to the contrary, the parties hereto will not be required to submit a claim to arbitration if the claim is for temporary or preliminary equitable or injunctive relief that could not practicably be heard in a timely fashion through the arbitration process.

Waivers.

If any party at any time waives any rights hereunder resulting from any breach by the other party of any of the provisions of this Agreement, such waiver is not to be construed as a continuing waiver of other breaches of the same or other provisions of this Agreement.  Resort to any remedies referred to herein will not be construed as a waiver of any other rights and remedies to which such party is entitled under this Agreement or otherwise.

 

  

- 12 -

  

Successors and Assigns.

Each covenant and representation of this Agreement will inure to the benefit of and be binding upon each of the parties, their personal representatives, assigns and other successors in interest.

Entire and Sole Agreement.

This Agreement and its exhibits and schedules constitute the entire agreement between the parties and supersede all other agreements, representations, warranties, statements, promises and undertakings, whether oral or written, with respect to the subject matter of this Agreement.  This Agreement may be modified or amended only by a written agreement signed by the parties against whom the amendment is sought to be enforced.

Governing Law.

This Agreement will be governed by the laws of California without giving effect to applicable conflict of laws provisions.  With respect to any disputes arising out of or relating to this Agreement, each party agrees that any disputes that are not resolved by the parties will be submitted to binding arbitration with the American Arbitration Association located in Santa Barbara County, California; provided, that any party may seek equitable remedies under this Agreement without referring them to binding arbitration.

Counterparts.

This Agreement may be executed simultaneously in any number of counterparts, each of which counterparts will be deemed to be an original, and such counterparts will constitute but one and the same instrument.

Attorneys’ Fees and Costs.

In the event that either party must resort to legal action in order to enforce the provisions of this Agreement or to defend such action, the prevailing party will be entitled to receive reimbursement from the nonprevailing party for all reasonable attorneys’ fees and all other costs incurred in commencing or defending such action, or in enforcing this Agreement, including but not limited to post judgment costs.

Assignment.

This Agreement may not be assigned by any party without prior written consent of the other parties.

 

Remedies.

Except as otherwise expressly provided herein, none of the remedies set forth in this Agreement are intended to be exclusive, and each party will have all other remedies now or hereafter existing at law, in equity, by statute or otherwise.  The election of any one or more remedies will not constitute a waiver of the right to pursue other available remedies.

 

  

- 13 -

  

Section Headings.

The section headings in this Agreement are included for convenience only, are not a part of this Agreement and will not be used in construing it.

Severability.

In the event that any provision or any part of this Agreement is held to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability will not affect the validity or enforceability of any other provision or part of this Agreement.

Notices.

Each notice or other communication hereunder must be in writing and will be deemed to have been duly given on the earlier of (i) the date on which such notice or other communication is actually received by the intended recipient thereof, or (ii) the date five (5) days after the date such notice or other communication is mailed by registered or certified mail (postage prepaid) to the intended recipient at the following address (or at such other address as the intended recipient will have specified in a written notice given to the other parties hereto):

If to Buyer or Buyer’s Subsidary:

Lux Digital Pictures, Inc.

347 Chapala Street

Santa Barbara, California 93101

Attention; Michael Hill, Chief Executive Officer

Telephone Number:  (805) 308-9151

Facsimile Number:   (805) 456-0405

Email Address:  michael@watchthis.com

If to Seller:

RadioLoyalty, Inc.

347 Chapala Street

Santa Barbara, California 93101

Attention; Aaron Gravitz, President

Telephone Number:  (805) 308-9152

Facsimile Number:   (805) 456-0406

Email Address:  aaron@radioloyalty.com

 

  

- 14 -

  

Publicity.

Except as may be required in order for a party to comply with applicable laws, rules, or regulations or to enable a party to comply with this Agreement, no press release, notice to any third party or other publicity concerning the transactions contemplated by this Agreement will be issued, given or otherwise disseminated without the prior approval of each of the parties hereto; provided, however, that such approval will not be unreasonably withheld.

Confidentiality.

Any information, including but not limited to data, business information (including customer lists and prospects), technical information, computer programs and documentation, programs, files, specifications, drawings, sketches, models, samples, tools or other data, oral, written or otherwise, (hereinafter called “Information”), furnished or disclosed by one party to the other for the purpose of the contemplated transaction herein, will remain the disclosing party’s property until the Closing at which time all such Information will become the property of Buyer.  All copies of such Information in written, graphic or other tangible form must be returned to the disclosing party
immediately upon written request if the transaction contemplated herein is not consummated.  Unless such Information was previously known to receiving party free of any obligation to keep it confidential, or has been or is subsequently made public by the disclosing party or a third party, it must be kept confidential by the receiving party, will be used only in performing due diligence pursuant to this Agreement, and may not be used for other purposes except upon such terms as may be agreed upon between Seller and Buyer in writing.

 

 

(Signatures on following page.)

 

  

- 15 -

  

 

 

IN WITNESS WHEREOF, this Agreement has been entered into as of the date first above written.

 

	Seller: 	RadioLoyalty, Inc.	 
	a California corporation	 	 	 
	 	
By: 

	 	 
	 	 	Aaron Gravitz, President	 

 

 

	Buyer: 	Lux Digital Pictures, Inc.	 
	a Wyoming corporation	 	 	 
	
 

	
By: 

	 	 
	 	 	Michael Hill, Chief Executive Officer	 

 

 

	Buyer’s Subsidiary: 	StreamTrack Media, Inc.	 
	a California corporation	 	 	 
	
Date

	
By: 

	 	 
	 	 	Michael Hill, Chief Executive Officer	 

 

  

- 16 -

  

 

 

 

 

 

 

 

 

EXHIBIT A

BILL OF SALE OF ASSETS

 

 

 

 

 

 

 

  

1

  

 

BILL OF SALE OF ASSETS

 

RadioLoyalty, Inc., a California corporation (“Seller”), hereby sells and conveys to StreamTrack Media, Inc. (Buyer’s Subsidiary), a wholly owned subsidiary of Lux Digital Pictures, Inc., a Wyoming corporation (“Buyer”), all of the tangible and intangible assets (the “Assets”) to be transferred to Buyer’s Subsidiary pursuant to the terms of that certain Asset Purchase Agreement (“Agreement”), made and entered into as of August 31, 2012, by and among Lux Digital Pictures, Inc., a Wyoming corporation, StreamTrack Media Inc., a California corporation, and RadioLoyalty, a California corporation, and assigns the Assets to Buyer’s Subsidiary forever,
free and clear of all liens and encumbrances other than those assumed by the Buyer and Buyer’s Subsidiary in the Agreement.

Seller warrants and agrees to defend the title to all of the Assets for the benefit of Buyer’s Subsidiary and assigns against all persons.

IN WITNESS WHEREOF, Seller has signed and delivered this Bill of Sale to Buyer’s Subsidiary on August 31, 2012 at Los Angeles, California.

 

 

	 	RadioLoyalty, Inc.	 
	 	a California corporation	 
	 	 	 	 
	
 

	
By: 

	 	 
	 	 	Aaron Gravitz, President	 

 

  

2

  

 

 

 

 

 

 

 

 

EXHIBIT B

CERTIFICATE OF OBLIGATION TO ISSUE SHARES

 

 

 

 

 

 

 

 

  

1

  

 

CERTIFICATE OF OBLIGATION TO ISSUE SHARES

 

Lux Digital Pictures, Inc., a Wyoming corporation (“Buyer”) hereby covenants to issue to RadioLoyalty, Inc., a California corporation (“Seller”), after the Closing of the Asset Purchase Agreement, dated August 31, 2012, by and between Buyer and Seller, and within five (5) business days after the recording of Amended and Restated Articles of Incorporation with the Wyoming Secretary of State by the Buyer effecting the next reverse split of its issued and outstanding common stock, issue to the Seller a number of shares of Buyer’s common stock (the “Shares”) such that on the date of the issuance of the Shares, the Seller and its affiliates will own a number of shares of
the Buyer’s common stock equal to approximately 90% of the total issued and outstanding shares of Buyer’s common stock, including and taking into account all shares of the Buyer’s common stock already owned by the Seller and its affiliates on the Share issuance date, and assuming the conversion of all outstanding Series A Convertible Preferred Stock of the Buyer; provided, that the calculation of the number of Shares issuable to the Seller pursuant to this Certificate will reflect that the dilution caused by outstanding shares of the Buyer’s common stock that are in the public float on the Share issuance date will be borne 90% by the Seller and 10% by the holders of the Buyer’s outstanding Series A Convertible Preferred Stock (i.e. on the Share issuance date, the Seller will own 90% of the Buyer’s outstanding common stock that is not in the
Buyer’s public float and, assuming the conversion of all outstanding Series A Convertible Preferred Stock of Buyer on the Share issuance date, the holders of such Series A Convertible Preferred Stock will collectively own 10% of the Buyer’s outstanding common stock that is not in the Buyer’s public float).

 

IN WITNESS WHEREOF, Buyer has signed and delivered this Certificate to Seller on August 31, 2012 at Los Angeles, California.

 

 

	 	Lux Digital Pictures, Inc.	 
	 	a Wyoming corporation	 
	 	 	 	 
	 	
By: 

	 	 
	 	 	Michael Hill, Chief Executive Officer	 

 

  

2

  

 

 

 

 

 

 

 

 

EXHIBIT C

LIST OF ACQUIRED ASSETS

 

 

 

 

 

 

 

 

  

1

  

 

Exhibit C

List of Acquired Assets

 

Buyer and the Buyer’s Subsidiary expressly acknowledge receipt under separate cover of copies of all material contracts and each and every domain name referenced below in the Content List of this Exhibit comprising a portion of the acquired assets.  The actual material contracts and specific domain names are subject to the confidentiality provisions of the Asset Purchase Agreement.

 

 

Content List:

 

5512 Domain Names

 

237 Agency/Advertiser Agreements

 

  

2

  

 

Exhibit C - Continued

 

	
Servers

	
135

	  	
Vendors

	
Switches

	
26

	  	
Net2Ez

	
Routers

	
4

	  	
COX

	
Firewalls

	
5

	  	
IMPULSE

	
Workstations

	
45

	  	
Godaddy

	
Laptops

	
5

	  	
Trustico

	
Phones

	
60

	  	
Moniker

	
Domains

	  	  	
shopco.com

	  	  	  	
tcast

	
Software Licenses

	  	
all digital

	
MS Server 2003

	  	
cpanel

	
MS Server 2008

	  	
Proton Labs

	
Windows XP

	  	
Qtrax/Brilliant

	
Windows 7

	  	
GD3

	
Adobe CS3, CS4

	  	  
	
Sugar CRM

	  	  	  
	  	  	  	  
	
Platforms and Software

	
Databases

	
Listmanagement

	  	
RL user DB

	
LP Manager

	  	
Sugar CRM database

	
Build.mobi

	  	
Datintel database

	
Admaximizer

	  	
206 repositories

	
Radioloyalty

	  	  
	
UniversalPlayer

	  	  	  
	
HDIRADIO

	 	 	 
	
replaceads.com

	  	  
	
Jetcast

	  	  	  
	
RL IOS APP

	  	  	  
	
RL HTML 5

	  	  	  
	
RL Andriod

	  	  	  
	
Slider

	  	  	  
	
Toolbar

	  	  	  
	
lenco media

	  	  
	
microgravity media

	  	  
	
Simply Lead Gen

	  	  
	
sugarcrm

	  	  	  
	
Replaceyour

	  	  	  
	
Discount Lead Network

	 	 	 
	
Student Matching Service(s)

	  
	
U.S. Pat App. No. 13/559,503 - RadioLoyalty

	
RL Blackberry Playbook APP

	  

  

3

  

 

Exhibit C - Continued

 

	
SERVERS

	 	 	 	
 

 

	 
	
IBM 3650

	IBM 3550	Dell Blades	
Misc Servers

	
Switches

	  
	
KQ75R5M

	
KQ94K4Z

	
chassis-01

	
Majinbuu

	
Core 01

	  
	
KQ93Y8M

	
KQ94K4M

	
chassis-02

	
Korin

	
Core 02

	  
	
KQ75T5F

	
KQ94K4K

	
chassis-03

	
yajirobe

	
Switch 1

	  
	
KQ75T5X

	
KQ94K4G

	
chassis-04

	
yamcha

	
Switch 2

	  
	
KQ93Y2W

	
KQ94K4W

	
chassis-05

	
tien

	
Switch 1

	  
	
KQ75R5N

	
KQ94K5X

	
chassis-06

	
android17

	
Switch 2

	  
	
KQ93Y8K

	
KQ94K5A

	
blades-0-60

	
android18

	
Switch 3

	  
	
KQ93Y8L

	
KQ94K4V

	  	
db0

	
Switch 1

	  
	  	
KQ95W0R

	  	
db1

	
Switch 2

	  
	  	
KQ94K4H

	  	
pbx01

	
Switch 1

	  	
KQ94K5M

	  	
pbx02

	
Switch 2

	  	
KQ94K4L

	  	
stagingdb

	
Switch 1

	  	
KQ94K4N

	  	
devdb

	
Switch 2

	  	
KQ94K5C

	  	
sbutil01

	
6500-01

	  	
KQ94K4R

	  	
1850 01-06

	
6500-02

	  	
KQ94K5L

	  	  	
force 10 x 2

	  	
KQ95W2H

	  	  	
cisco 3560

	  	
KQ94K5T

	  	  	  
	  	
KQ94K5H

	  	  	  
	  	
KQ94K4P

	  	  	  
	  	
KQ94K5B

	  	  	  
	  	
KQ94K4X

	  	  	  
	  	
KQ94K5W

	  	  	  
	  	
KQ94K4D

	  	  	  
	  	
KQ94K5P

	  	  	  
	  	
KQ94K4T

	  	  	  
	  	
KQ94K5N

	  	  	  
	  	
KQ94K5V

	  	  	  
	 	KQ94K5K	 	 	 
	 	KQ94K4Y	 	 	 
	 	KQ94K5G	 	 	 
	 	web01	 	 	 
	 	web02	 	 	 
	 	web03	 	 	 
	 	web04	 	 	 
	 	web05	 	 	 
	 	web06	 	 	 
	 	lax2-db01	 	 	 
	 	lax2-db02	 	 	 
	 	lax2-db03	 	 	 
	 	lax2-db04	 	 	 
	 	lax2-db05	portal-01	 	 
	 	itutil01	portal-02	 	 

 

  

4

  

 

Exhibit C - Continued

 

	 	 
	
Workstations

	
MISC

	
30 Lenovo

	
big xerox

	
10 Dell

	
big dell

	
3 IMAC

	
switches

	
5 Laptops

	
poe switches

	  	
4x TVs

 

	
Repository List:

	
9mp

	
VMCToGMOD

	
admaxadserver

	
admaximizer

	
admaximizer2

	
admaximizerads

	
admaximizerapi

	
admaximizernetwork

	
admaxmedia

	
admaxv2dev

	
adtagsext

	
alre

	
amcatphoneapi

	
aoldomains

	
autodialer

	
bidnotifier

	
bigautoexchange

	
bizopper

	
bobeubanks

	
breastcancer

	
build.mobi

	
buydiscount

	
calls

	
cancelsites

	
cartraderlive

	
cbcredit

	
ccproc

	
cellcard

	
cerberus

	
clg

	
clg_site

	
clockin

	
codebase

	
commerceplanet

	
coreg

	
costa_rica_update

	
cryptoproxy

 

  

5

  

 

Exhibit C - Continued

 

	
csclub

	
csrwire

	
dartapi

	
dbscripts

	
debtblueamerica

	
debtwrestler

	
demosites

	
dialerhub

	
discountleadnetwork

	
discountnetwork

	
ds_cc_reports

	
ds_portal_reports

	
dsleadloader

	
easybizzonline

	
eauctionautos

	
emailapi

	
exporter

	
exporter_old

	
fighting

	
fightingmobi

	
fightingweb

	
financialwellness

	
geoip

	
getmyonlinedegree

	
getmyonlinedegree_orig

	
gmod_cc_reports

	
gmod_portal_reports

	
gossipwidget

	
grssoap

	
hdiradio.com

	
hoodiaedge

	
hotfreeprinting

	
housingdirect

	
ibillpay

	
iis

	
importer

	
ineedagooddiet

	
intellicast

	
interaccurate

	
internetcollegedirectory

	
invadmin

	
investinginsuccess

	
iventa

	
jetcast.com

	
jetcrm

	
jobsites

	
kingsransom

	
leadgen

	
legacyarticles

 

  

6

  

 

Exhibit C - Continued

 

	
legacymedia

	
legacynetwork

	
lencomedia

	
lencomobile

	
lencomobile-mx

	
lencomultimedia

	
lencotechdev

	
liquid-cgi

	
listmanagement

	
livehelp-server

	
lp

	
media

	
memberapi

	
meta_harvester

	
mhealthsafeconnect

	
mms

	
mms_wordpress

	
montecitorei

	
montecitorei-wp

	
msprofitconfirmation

	
mychat

	
myfreeresumeonline

	
myonlinechat

	
mysoftwaretutor

	
mytechcard

	
mytechcardllc

	
nagios

	
netconfig

	
newave

	
newswidgetsite

	
nicacentury21

	
nwve

	
offmylists

	
omaramedia

	
onlinesupplier

	
onthenetdegree

	
opsReporting

	
osactionline

	
osal

	
osfulfill

	
osimaging

	
osjobs

	
parkeddomains

	
parknprofit

	
parknprofitExtra

	
pbx

	
pbxconfig

	
player

	
playercleanup

 

  

7

  

 

Exhibit C - Continued

 

	
pnpscripts

	
poweradmin

	
prequalify

	
projects

	
radioloyalty

	
radioloyaltydart

	
replaceads.com

	
replaceyour

	
repolist.php

	
repos.list

	
rlIphone

	
rlapi

	
rlconfigflash

	
rldevices

	
rlhtml5player

	
rliphone

	
rlplayerflash

	
rpc

	
rpcsoap

	
rt3-soap

	
rtx

	
sdinstore

	
session

	
sigdemo

	
signup

	
sitebuilder

	
sitebuilder.jud

	
sitebuildergenie

	
slider

	
smellaround

	
sms

	
sndslice

	
solidwavepc

	
squirrel

	
squirrelmail

	
staticsync

	
sugarcrm

	
superauctionpro

	
superflyadvertising

	
svnserve.authz

	
svnserve.conf

	
svnserve.passwd

	
systems

	
thefinancialhelpline

	
tsr

	
twittermaximizer

	
ultimatesearchguide

	
usajobnetworks

	
util

 

  

8

  

 

Exhibit C - Continued

 

	
validator

	
verifi

	
verifiqueryapi

	
virtualactivation

	
virtualmoneycenter

	
vistapacificaheights

	
vurtego

	
weatherwidgetsite

	
widgets

	
wordpress

	
wp-auto

	
wp-career

	
wp-insurance

	
wp-legal

	
xssrewriter

 

  

9

  

 

Exhibit C - Continued

 

	
Codebase Line Count (Partial) included RadioLoyalty and Meta Harvester Code that is not included below but included in the transaction:

	 
	
App Store, Universal Player, HTML5 Player, Ios Player, Andriod Player, build.mobi, list management, admaximizer, sugarcrm, LP Manager, Slider and the list of databases that power the above and below applications.

 

	
SLOC

	 	 	 	

Directory

	 	SLOC-by-Language (Sorted)	 
	 	 	 	 	 	 	 	 
	
29877

	 	
includes 

	 	
php=29877

	 	 	 
	
18103

	 	
top_dir 

	 	
php=18097,xml=6

	 	 	 
	
13808

	 	
tests 

	 	
php=12848,xml=574,python=225,ansic=161

	 	 	 
	
8021 

	 	
amfphp 

	 	
php=8000,xml=21

	 	 	 
	
7434 

	 	
notInUse 

	 	
php=7434

	 	 	 
	
4453 

	 	
cron 

	 	
php=4445,sh=8

	 	 	 
	
2280 

	 	
reps 

	 	
php=2280

	 	 	 
	
1621 

	 	
webservices 

	 	
php=1621

	 	 	 
	
1152 

	 	
station-guide 

	 	
php=1152

	 	 	 
	
1040 

	 	
in-stream 

	 	
php=1040

	 	 	 
	
854 

	 	
players 

	 	
xml=854

	 	 	 
	
560 

	 	
configurator 

	 	
php=320,xml=240

	 	 	 
	
222 

	 	
station-guideTes

	 	
php=222

	 	 	 
	
160 

	 	
loyalty 

	 	
php=160

	 	 	 
	
132 

	 	
guide 

	 	
php=132

	 	 	 
	
125 

	 	
bluehornet 

	 	
xml=74,php=51

	 	 	 
	
107 

	 	
reporting 

	 	
php=107

	 	 	 
	
81 

	 	
order 

	 	
php=81

	 	 	 
	
32 

	 	
monitors 

	 	
php=32

	 	 	 
	
6 

	 	
admaxmedia 

	 	
php=6

	 	 	 
	
2 

	 	
adplayerz 

	 	
php=2

	 	 	 
	
0 

	 	
about 

	 	
(none)

	 	 	 
	
0 

	 	
animation 

	 	
(none)

	 	 	 
	
0 

	 	
css 

	 	
(none)

	 	 	 
	
0 

	 	
img 

	 	
(none)

	 	 	 
	
0 

	 	
includes-site 

	 	
(none)

	 	 	 
	
0 

	 	
js 

	 	
(none)

	 	 	 
	
0 

	 	
launch-page 

	 	
(none)

	 	 	 
	
0 

	 	
loyatly-platform

	 	
(none)

	 	 	 
	
0 

	 	
presentationDistribution

	 	
(none)

	 	 	 
	
0 

	 	
products 

	 	
(none)

	 	 	 
	
0 

	 	
radio 

	 	
(none)

	 	 	 
	
0 

	 	
services 

	 	
(none)

	 	 	 
	
0 

	 	
tutorials 

	 	
(none)

	 	 	 

 

  

10

  

 

Exhibit C - Continued

 

	Totals grouped by language (dominant language first):	 	 
	php: 	87907	
(97.60%)

	 	 	 
	xml: 	1769 	
(1.96%)

	 	 	 
	python: 	225	
(0.25%)

	 	 	 
	ansic: 	161 	
(0.18%)

	 	 	 
	sh: 	8	
(0.01%)

	 	 	 
	 	 	 	 	 	 
	Total Physical Source Lines of Code (SLOC) =          90,070	 	 
	 	 	 	 	 	 
	SLOC	 	

Directory

	SLOC-by-Language (Sorted)	 	 
	617 	top_dir 	
python=617

	 	 	 
	502 	imports 	
python=502

	 	 	 
	406 	tests 	
python=406

	 	 	 
	0 	cron 	
(none)

	 	 	 
	0 	docs 	
(none)

	 	 	 
	0 	software 	
(none)

	 	 	 
	 	 	 	 	 	 
	Totals grouped by language (dominant language first):	 	 
	python: 	 	
1525 (100.00%)

	 	 	 
	 	 	 	 	 	 
	Total Physical Source Lines of Code (SLOC) =          1,525	 	 

 

  

11

  

 

 

 

 

 

 

 

 

 

EXHIBIT D

LIST OF ASSUMED LIABILITIES

 

 

 

 

 

 

 

 

 

  

1

  

 

 

Exhibit D

List of Assumed Liabilities

 

Buyer and Buy’s Subsidiary expressly acknowledges receipt under separate cover of copies of all material contracts referenced below in the Content List of this Exhibit D comprising a portion of the assumed liabilities.  The Buyer’s Subsidiary is assuming these material contracts and the liabilities associated with them.  The actual material contracts are subject to the confidentiality provisions of the Asset Purchase Agreement.  The Buyer’s Subsidiary is also assuming the liabilities of the Seller that are listed and disclosed in the Seller’s Financial Statements, copies of which are attached to the Asset Purchase Agreement as Exhibit F.

 

Content List:

 

1124 Active Broadcasters Agreements

 

172 Publisher Agreements

 

96 Sales and Marketing Agreements

 

49 Affiliate and Network Agreements

 

  

2

  

 

 

 

 

 

 

 

EXHIBIT E

VALUATION OF ASSETS

 

 

 

 

 

 

 

  

1

  

 

Valuation of Capital 

Structure 

 

 

Radio Loyalty, Inc.

 

As of 5/31/2012

 

Issued on 8/31/2012

 

By

 

 

 

Axiom Valuation Solutions

 

 

 

  

 

  

 

Valuation of Capital Structure for Radio Loyalty

 

Table of Contents 

 

Section 1: Engagement Overview

 

Section 2: Company Overview

 

Section 3: Industry Overview

 

Section 4: Valuation Theory and Analysis

 

Appendices

 

 

	
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DETAILED TABLE OF CONTENTS

 

	
Table of Contents

	 	 	2	 
	 	 	 	 	 
	
Detailed Table of Contents

	 	 	3	 
	
Index to Charts and Tables

	 	 	4	 
	 	 	 	 	 
	
Section 1: Engagement Overview

	 	 	5	 
	 	 	 	 	 
	
Limiting Conditions

	 	 	5	 
	
Summary of Findings

	 	 	7	 
	 	 	 	 	 
	
Section 2: Company Overview

	 	 	9	 
	 	 	 	 	 
	
Company Overview

	 	 	9	 
	
Management Team

	 	 	9	 
	
Facilities

	 	 	10	 
	
Capital Structure

	 	 	10	 
	
Financial Analysis

	 	 	10	 
	 	 	 	 	 
	
Section 3: Industry Overview

	 	 	13	 
	 	 	 	 	 
	
Guideline Public Company Analysis

	 	 	13	 
	
Multiples Applied

	 	 	15	 
	
Guideline Transactions Analysis

	 	 	20	 
	 	 	 	 	 
	
Section 4:  Valuation Theory and Analysis

	 	 	21	 
	 	 	 	 	 
	
Valuation Overview

	 	 	21	 
	
Valuation and the Stage of Business Development

	 	 	21	 
	
Risk versus Return

	 	 	22	 
	
Calculating the Firm-Specific Cost of Capital

	 	 	23	 
	
Enterprise Value

	 	 	26	 
	 	 	 	 	 
	
Appendix A:  About Axiom Valuation Solutions

	 	 	30	 
	 	 	 	 	 
	
Appendix B: Professional Qualifications

	 	 	31	 
	 	 	 	 	 
	
Stanley J. Feldman, Ph.D.

	 	 	31	 
	
Related Experience

	 	 	32	 
	
Selected Publications

	 	 	32	 
	 	 	 	 	 
	
Appendix C: Valuation and Firm Financial Data

	 	 	34	 
	 	 	 	 	 
	
Appendix D: Industry Overview

	 	 	51	 
	 	 	 	 	 
	
Executive Summary

	 	 	51	 
	
Key External Drivers

	 	 	51	 
	
Current Performance

	 	 	52	 
	
Depressed operations

	 	 	52	 
	
Advertising dip led to restructuring

	 	 	53	 
	
Expanding radio’s reach

	 	 	53	 
	
Industry Outlook

	 	 	54	 
	
Consolidation

	 	 	54	 
	
Slow Recovery

	 	 	54	 
	
Spotlight on satellite

	 	 	55	 
	 	 	 	 	 
	
Appendix E: The U.S Economic Outlook

	 	 	56	 
	 	 	 	 	 
	
General Overview

	 	 	56	 
	
Gross Domestic Product and the Inflation Outlook

	 	 	58	 
	
The Interest Rate Outlook

	 	 	60	 
	
Summary

	 	 	61	 
	 	 	 	 	 
	
Appendix F: Certification and Conditions

	 	 	62	 
	 	 	 	 	 
	
Appraisal Certification

	 	 	62	 
	
Statement Of Contingent And Limiting Conditions

	 	 	63	 

 

	
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INDEX TO CHARTS AND TABLES

	 
	 	 
	
Table 1-1: Fair Value of Radio Loyalty’s Capital Structure

	 	 	7	 
	
Table 1-2: Radio Loyalty Capital Structure at the Valuation Date

	 	 	8	 
	
Table 1-3: Radio Loyalty Enterprise Valuation Results

	 	 	8	 
	
Table 2-1: Radio Loyalty Capital Structure

	 	 	10	 
	
Table 2-2: Radio Loyalty Historical and Projected Income Statement

	 	 	11	 
	
Table 2-3: Radio Loyalty Historical and Projected Income Statement

	 	 	11	 
	
Table 2-4: Radio Loyalty Balance Sheet

	 	 	12	 
	
Table 3-1: Public Guideline Firms – Financial Data

	 	 	16	 
	
Table 3-2: Public Guideline Firms –Ratio Analysis

	 	 	17	 
	
Table 3-3: Valuation of Radio Loyalty using the Median Projected Multiple

	 	 	19	 
	
Table 3-4: Radio Loyalty Common Stock Price Volatility Calculation

	 	 	20	 
	
Table 4-1: Stages of Business Development

	 	 	21	 
	
Table 4-2: Valuation Approaches for Different Stages of Business Development

	 	 	22	 
	
Table 4-3: Calculating the Cost of Capital for Radio Loyalty

	 	 	24	 
	
Table 4-4: Discounted Cash Flow Analysis

	 	 	25	 
	
Table 4-5: Enterprise Valuation Summary

	 	 	26	 
	
Table 4-6: Contingent Claims Model Inputs

	 	 	27	 
	
Table 4-7: Contingent Claims Model Value Allocation

	 	 	28	 
	
Table C-1: Convertible Debt Income Stream and Conversion

	 	 	34	 
	
Table C-2: Warrant Schedule

	 	 	35	 
	
Table C-3: Common Call Option Pricing

	 	 	35	 
	
Table C-4: $0.50 Warrants and Convertible Debt Exercise Pricing

	 	 	36	 
	
Table C-5: Common Stock Liquidity Discount Put Option

	 	 	36	 
	
Table C-6: July Common Stock Issue Liquidity Discount Put Option

	 	 	37	 
	
Table C-7: Convertible Debt Liquidity Discount Put Option

	 	 	37	 
	
Table C-8: $0.50 Warrant Liquidity Discount Put Option

	 	 	38	 
	
Table C-9: Stock Price Data for Public Guideline Firms

	 	 	39	 
	
Table C-10: Stock Return Data for Public Guideline Firms

	 	 	40	 
	
Table C-11: Radio Loyalty Common Stock Price Volatility Calculation

	 	 	41	 
	
Table C-12: P Beta Calculation

	 	 	42	 
	
Table C-13: SIRI Beta Calculation

	 	 	42	 
	
Table C-14: ROIAK Beta Calculation

	 	 	42	 
	
Table C-15: CMLS Beta Calculation

	 	 	43	 
	
Table C-16: ETM Beta Calculation

	 	 	43	 
	
Table C-17: SALM Beta Calculation

	 	 	43	 
	
Table C-18: BBGI Beta Calculation

	 	 	44	 
	
Table C-19: Weighted Average Cost of Capital of Public Guideline Firms

	 	 	45	 
	
Table C-20: Financial Data of Public Guideline Firms for the Credit Rating Model

	 	 	46	 
	
Table C-21: Cost of Debt for Public Guideline Firms

	 	 	46	 
	
Table C-22: D/E Ratio for Public Guideline Firms

	 	 	47	 
	
Table C-23: Corporate Yield Spreads in Industrial Segment as of 5/31/2012

	 	 	48	 
	
Table C-24: Firm Specific Risk Premium

	 	 	49	 
	
Table C-25: Radio Loyalty Change in Net Fixed Assets Projections

	 	 	49	 
	
Table C-26: Calculation of Cost of Debt

	 	 	50	 
	
Table 3-1: Real GDP Growth Forecast

	 	 	58	 
	
Table 3-2: Real GDP Forecast in Billions of Dollars

	 	 	58	 
	
Table 3-3: Inflation Forecast

	 	 	59	 
	
Table 3-4: Nominal GDP Forecast in Billions of Dollars

	 	 	60	 
	
Chart 3-5:  Interest Rate Forecast

	 	 	60	 

 

	
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Valuation of Capital Structure for Radio Loyalty

 

  

Section 1: Engagement Overview 

 

September 6, 2012

Mr. Michael Hill

President & CEO

Radio Loyalty, Inc.

347 Chapala Street

Santa Barbara, CA 93101

Dear Mr. Hill,

Pursuant to your request, Axiom Valuation Solutions has prepared an analysis with respect to the fair value of the equity components of Radio Loyalty, as of 5/31/2012.1

This letter is intended to provide you with an overview of the purpose and scope of our analyses and our conclusions.  Please refer to the attached report for a discussion and presentation of the analyses performed in connection with this engagement.

The standard of value underlying our analysis is fair value. Fair value is defined as:

The amount at which an asset (liability) could be bought (incurred) or sold (settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale.

This standard of value is to be contrasted to strategic value which reflects the unique characteristics of a buyer who may be willing and have the capacity to pay more than fair value for a particular asset. Takeover premiums associated with the acquisition of strategic assets often reflect synergies that emerge because the acquirer may already own like assets and therefore, for example, be able to implement reduction in the combined cost base that would not be available to an acquirer that did not already own such assets. This reduction in cost needs to be contrasted with those that would be available to any
market participant. This latter cost reduction, which would yield higher cash flows and thus result in incremental value, would be included in a calculation of fair value. Fair value is the standard used when undertaking a valuation for financial reporting purposes which is the basis of this engagement.

 

 Limiting Conditions

 

	
□  

	
We assume no responsibility for the legal description or matters including legal or title considerations.  Title to the subject assets, properties, or business interests is assumed to be good and marketable unless otherwise stated.

_________________________

1 The methodology used is based on the AICPA practice guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, AICPA, 2004.

 

	
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Valuation of Capital Structure for Radio Loyalty

 

 

	
□  

	
The subject assets, properties, or business interests are appraised free and clear of any or all liens or encumbrances unless otherwise stated.

 

	
□  

	
We assume responsible ownership and competent management with respect to the subject assets, properties, or business interests

 

	
□  

	
The information furnished by others is believed to be reliable.  However, we issue no warranty or other form of assurance regarding its accuracy.

 

	
□  

	
We assume no hidden or unapparent conditions regarding its accuracy.

 

	
□  

	
We assume that there is full compliance with all applicable federal, state, and local regulations and laws unless the lack of compliance is stated, defined, and considered in the appraisal report.

 

	
□  

	
We assume that all required licenses, certificates of occupancy, consents, or legislative or administrative authority from any local, state, or national government, or private entity or organization have been or can be obtained or reviewed for any use on which the opinion contained in this report is based.

 

	
□  

	
Unless otherwise stated in this report, we did not observe, and we have no knowledge of, the existence of hazardous materials with regard to the subject assets, properties, or business interests.  However, we are not qualified to detect such substances.  We assume no responsibility for such conditions or for any expertise required to discover them.

 

	
□  

	
Possession of this report does not carry with it the right of publication.  It may not be used for any purpose by any person other than the client whom it is addressed without our written consent and, in any event, only with proper written qualifications and only in its entirety.

 

	
□  

	
We, by reason of this opinion, are not required to furnish a complete valuation report, or to give testimony, or to be in attendance in court with reference to the assets, properties, or business interests in question unless arrangements have been previously made.

 

	
□  

	
Neither all nor any part of the contents of this report shall be disseminated to the public through advertising, public relations, news, sales, or other media without our prior written consent and approval.

 

	
□  

	
The analyses, opinions, and conclusions presented in this report apply to this engagement only and may not be used out of context presented herein.  This report is valid only for the effective date(s) specified herein and only for the purpose(s) specified herein.

 

	
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Valuation of Capital Structure for Radio Loyalty

 

 

Summary of Findings

 

The table below summarizes the results of our analysis as it applies to an illiquid minority interest in the company. The data and the analysis associated with the values in Table 1-1 are shown in Appendix C, Table C-3 to C-8.

Table 1-1: Fair Value of Radio Loyalty’s Capital Structure

Source: Axiom

 

 

The valuation results shown in the above table are based on Radio Loyalty’s management projections of future financial performance and were calculated using both discounted cash flow and the method of multiples.

 

The value of common shown in the above table on row 8 is its fair value and represents the strike price for newly granted options at the valuation date. The allocation of equity is based on a contingent claims model where each equity security has a claim on total equity. These claims are call options. The total value of equity at the valuation date is allocated to the various equity securities that have been issued by the firm. Explanations of this allocation methodology are shown below based on Radio Loyalty’s specific capital structure.

 

Option 1:  Common call option, which yields a call value equal to the total equity value; strike price = 0.

Option 2: $0.50 Warrants and Convertible Debt exercise

 

Option 1 - Option 2: Allocated according to ownership percentage on a fully diluted basis among common.

 

All remaining value is allocated according to ownership percentage on a fully diluted basis.

 

	
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Valuation of Capital Structure for Radio Loyalty

 

The capital structure as of the valuation date is shown below. There were 10,145,000 shares of common outstanding at the valuation date which is reflected below. At 5/31/2012, management was planning to issue an additional 1,750,000 shares of common in July. Axiom included these shares in the analysis to reflect the dilution that the new shares would have.

 

Table 1-2: Radio Loyalty Capital Structure at the Valuation Date

Source: Radio Loyalty

 

 

The table below summarizes the enterprise valuation results. The analysis of multiples and the discounted cash flow analysis are presented in Section 3 and Section 4, respectively.

 

Table 1-3: Radio Loyalty Enterprise Valuation Results

Source: Axiom

 

 

During the course of our valuation analyses, we were provided with financial data regarding Radio Loyalty.  Without independent verification, we have relied upon this data as accurately reflecting the results of the financial position of the company.  As valuation consultants, we have not audited this data and express no opinion or other form of assurance regarding their accuracy or fairness of presentation.

 

We are unrelated to Radio Loyalty and have no current or expected interest in the company or its assets.  The results of our analyses were in no way influenced by the fee paid for our services.  Additional Business Terms and Conditions under which this assignment was performed are included as an attachment, incorporated herein by reference, to this report.

 

We are pleased to provide this valuation service to Radio Loyalty.  Should you have any questions concerning our analysis or report, please contact Dr. Stanley J. Feldman, at (781) 486-0100.

 

	Respectfully submitted,	 
	 	 
	

	 
	 	 
	Stan Feldman, Chairman	 
	 	 
	Axiom Valuation Solutions	 

 

	
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Valuation of Capital Structure for Radio Loyalty

 

 

Section 2: Company Overview 

 

The following sections provide an overview of the company, its products and services, facilities, management team, capital structure, and financial position.

 

Company Overview2

 

RadioLoyalty is quickly becoming the leading way to listen to music, talk radio, and sports over the Internet and on your mobile phone. You can listen to your favorite radio stations and songs while earning loyalty points redeemable for merchandise. There are over a thousand radio stations to choose from. Radio Loyalty spent 18 months building their UniversalPlayerTM and RadioLoyaltyTM platforms.

 

Radio Loyalty aggregates radio station audio content with exclusive contracts directly with radio stations and utilizes audio content in visual ad formats to increase ad revenue. They provide a platform to re replace audio ads in the original broadcast with video and display ads. To attract radio stations customers, Radio Loyalty offers to pay all of their streaming costs. They also offer the radio station a revenue sharing arrangement based on the ads sold utilizing their web and mobile properties.

Management Team3

 

Michael Hill

Chief Executive Office

Mr. Hill is the co-founder and Chief Executive Officer of RadioLoyalty, Inc., a digital media and streaming solutions provider with innovative technology focused on the internet, mobile, radio and television broadcasting industries. Mr. Hill is a seasoned media executive with over 10 years of experience building digital businesses. Prior to launching RadioLoyalty in 2011, Mr. Hill was the Chief Strategy Officer of Lenco Mobile, Inc., a global mobile technology services and marketing company. His primary responsibilities were to oversee the development, deployment and launch of international offices in United Kingdom, Mexico,
Colombia, Singapore, New Zealand, China, South Korea and Australia. Simultaneously, Mr. Hill was responsible for the technology design, development, launch and implementation of its MMS Messaging Platform with the world’s largest wireless carriers. Before joining Lenco Mobile, Mr. Hill founded AdMax Media in 2008, an advertising technology company where he developed an advertising network software, Admaximizer.com. From 2004 until 2008, Mr. Hill served as the Chairman and Chief Executive Officer of Commerce Planet. Over a five year period, he built up his internet marketing company to estimated revenues of $42 million and estimated profits of $12 million. In 2008, both businesses were sold to a public company, Lenco Mobile Inc., which purchased all assets and liabilities, establishing the AdMax Media operation. Mr. Hill is an expert on fully integrated internet and mobile products
and services and has a proven track record in generating growth and profitability. A veteran of online advertising, Mr. Hill has founded multiple other private technology and media companies. Mr. Hill has designed and developed many proprietary technology platforms, most notably UniversalPlayer, RadioLoyalty, Admaximizer, WatchThis, Jupiter MMS and Build.mobi. Prior to this work Mr. Hill served in the United States Navy, receiving the honor of Enlisted Surface Warfare Specialist. He resides in Santa Barbara, California with his son.

_________________________

2 Source: http://radioloyalty.com/about.php and Investor Presentation  

3 Source: Investor Presentation

 

	
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Valuation of Capital Structure for Radio Loyalty

 

 

Aaron Gravitz

Chief Operating Officer

Mr. Gravitz is the co-founder and COO of RadioLoyalty Inc. Prior to this, he acted as COO of Lenco Media Inc, and COO of AdMax Media Inc. His experience includes founding multiple companies that grew to over $50 million in combined sales, with several ending up being acquired. Current responsibilities at RadioLoyalty include: directing operations, overseeing media buying, product development, strategic relationships, customer relations, and overseeing sales. He graduated with a Bachelor’s Degree in Public Policy and Ethics from the University of California Santa Barbara.

 

Facilities

 

Radio Loyalty, Inc. Headquarters

347 Chapala Street

Santa Barbara, CA 93101

 

Capital Structure

 

The capital structure of Radio Loyalty is shown in Table 2-1.

Table 2-1: Radio Loyalty Capital Structure

Source: Radio Loyalty

 

 

Financial Analysis

 

The company’s historical and projected income statement is presented in the tables below. Axiom was provided with a detailed six month income statement from the beginning of operations to the valuation date. For the projection years, we only received high level information including Revenues, EBITDA, EBIT, and Depreciation & Amortization.

To provide a more meaningful income statement, we allocated expenses based on the percentage of revenue each expense line made up for the base period. In order to tie the reported expenses to the allocated expenses, a multiplier was used to evenly allocate to each item. Depreciation & Amortization was not included in the calculation of the multiplier because Radio Loyalty provided us with these values.

 

	
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Valuation of Capital Structure for Radio Loyalty

 

 

Table 2-2: Radio Loyalty Historical and Projected Income Statement

Source: Radio Loyalty

 

 

Table 2-3: Radio Loyalty Historical and Projected Income Statement

Source: Radio Loyalty

 

 

The table below shows the balance sheet of Radio Loyalty at the valuation date.

 

	
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Valuation of Capital Structure for Radio Loyalty

 

 

Table 2-4: Radio Loyalty Balance Sheet

Source: Radio Loyalty

 

 

	
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Valuation of Capital Structure for Radio Loyalty

 

 

 Section 3: Industry Overview4

 

Guideline Public Company Analysis

 

In valuing a business or its assets, it is important to consider the condition of, and outlook for, the industry in which the enterprise operates.  Depending upon the nature of the marketplace, industry conditions can significantly impact financial performance and, consequently, value. Axiom classified Radio Loyalty within the Radio and Television Broadcasting industry5. Based on our discussion with
management with respect to Radio Loyalty’s competitors, we analyzed a population of possible public guideline companies and selected the ones that we considered to be comparable to Radio Loyalty in terms of business model, strategic focus of the business, and the degree to which the firms were serving the same customer base as Radio Loyalty. Below we summarize their business operations6.

 

Pandora Media, Inc. (P) incorporated in January 2000, is an Internet radio in the United States. As of January 31, 2012, it had over 125 million registered users. The Music Genome Project and its playlist generating algorithms predict listener music preferences, play music content suited to the tastes of each individual listener and introduce listeners to music they will love. When a listener enters a single song, artist or genre to start a station, a process it calls seeding, the Pandora service generates a station that plays music it think that listener will enjoy. It generates
revenue from advertising. It also offers a subscription service to listeners. The Company’s service enables its listeners to create up to 100 personalized stations.

Sirius XM Radio Inc. (SIRI) broadcasts its music, sports, entertainment, comedy, talk, news, traffic and weather channels in the United States on a subscription fee basis through its two satellite radio systems. Subscribers can also receive certain of its music and other channels over the Internet, including through applications for mobile devices. As of December 31, 2011, it had 21,892,824 subscribers. Its subscribers include subscribers under its regular and discounted pricing plans; subscribers that have prepaid, including payments made or due from automakers for subscriptions included in the sale or lease price of a vehicle; radios
activated for daily rental fleet programs; subscribers to its Internet services who do not also have satellite radio subscriptions, and certain subscribers to its weather, traffic, data and Backseat television services. In June 2011, Canadian Satellite Radio Holdings Inc. (CSR), the parent company of XM Canada, and Sirius Canada completed a transaction to combine their operations. Following this merger, the Company owned approximately 38% of the CSR, which operates as Sirius XM Canada.

Radio One, Inc. (ROIAK) is a radio broadcasting company that primarily targets African-American and urban listeners. As of December 31, 2010, the Company owned 53 broadcast stations located in 16 urban markets in the United States. Its primary source of revenue is the sale of local and national advertising for broadcast on its radio stations. Through its national multi-media presence, it provides advertisers with a delivery mechanism to the African-American audience. As of December 31, 2010, the Company’s other media interests include its approximately 37% ownership interest in TV One, LLC (TV One), an African-American targeted cable
television network that it invested in with an affiliate of Comcast Corporation and other investors; its 53.5% ownership interest in Reach Media, Inc. (Reach Media), which operates the Tom Joyner Morning Show; its ownership of Interactive One, LLC (Interactive One), an online platform serving the African-American community through social content, news, information, and entertainment, which operates a number of branded sites, including News One, UrbanDaily and HelloBeautiful, and its ownership of Community Connect, LLC (CCI), an online social networking company, which operates a number of Websites, including BlackPlanet, MiGente and Asian Avenue.

_________________________

4 Axiom’s macroeconomic forecast is presented in Appendix E.

5 An industry report is presented in Appendix D.

6 Source of guideline firms descriptions: Reuters

 

	
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Valuation of Capital Structure for Radio Loyalty

 

 

Cumulus Media Inc. (CMLS) owns and operates commercial radio station clusters throughout the United States. At December 31, 2011, it owned or operated approximately 570 radio stations (including under local marketing agreements (LMAs)) in 120 United States media markets and operated nationwide radio networks serving over 4,500 affiliates. At December 31, 2011, under LMAs, it provided sales and marketing services for seven radio stations in the United States. On August 1, 2011, the Company acquired Cumulus Media Partners, LLC. On September 16, 2011, it acquired Citadel Broadcasting Corporation. In April 2012, the Company announced the sale of 55 stations
in 11 markets to Townsquare Media in exchange for the acquisition of 10 radio stations in two markets. As part of the transaction, Cumulus is acquiring 10 stations in Bloomington, IL, and Peoria, IL. The stations being sold by Cumulus to Townsquare reside in the markets, which includes Augusta, ME; Bangor, ME; Binghamton; NY, Bismarck, ND; Grand Junction, CO; Killeen-Temple, TX, New Bedford, MA, Odessa-Midland, TX; Presque Isle, ME; Sioux Falls, SD and Tuscaloosa, AL.

Entercom Communications Corp. (ETM) is a radio broadcasting companies in the United States. The Company operates with a nationwide portfolio in excess of 100 stations in 23 markets, including San Francisco, Boston, Seattle, Denver, Portland, Sacramento and Kansas City, Indianapolis, Milwaukee, Austin, Norfolk, Buffalo, New Orleans, Memphis, Providence, Greensboro, Greenville/Spartanburg, Rochester, Madison, Wichita, Wilkes-Barre/Scranton, Springfield (MA) and Gainesville/Ocala. It focuses on providing compelling content in the communities it serves to enable it to offer its advertisers an effective marketing platform to reach a targeted
local audience. The primary source of revenues for the Company’s radio stations is the sale of advertising time to local, regional and national spot advertisers and national network advertisers. On February 28, 2011, the Company acquired KUFX-FM.

Salem Communications Corporation (SALM) is a domestic multi-media company with integrated business operations covering radio broadcasting, publishing and the Internet. Salem’s core business is the ownership and operation of radio stations in metropolitan markets. Upon the close of all announced transactions, the Company will own and/or operate a national portfolio of 96 radio stations in 37 markets, including 59 stations in 22 of the top 25 markets, which consist of 27 frequency modulation (FM) stations and 69 amplitude modulation (AM) stations. It also programs the Family Talk Christian-themed talk format station on SiriusXM Channel
131. Its broadcast business also includes Salem Radio Network (SRN), a wholly owned national radio network syndicating music, news and talk programs to over approximately 2,000 affiliated radio stations, in addition to those stations that it owns and operates. It also owns and operates Salem Media Representatives (SMR), a national advertising sales firm with offices in 12 United States cities, and SRN News Network (SNN), Salem Music Network (SMN), Solid Gospel Network (SGN), and Vista Media Representatives (VMR).

 

	
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Valuation of Capital Structure for Radio Loyalty

 

Beasley Broadcast Group, Inc. (BBGI) is a radio broadcasting company. The Company is engaged the primary business of operating radio stations throughout the United States. The Company owns and operates 42 radio stations in the markets, which include Atlanta and Augusta in Gabon, Boston in Morocco, Greenville-New Bern-Jacksonville and Fayetteville in New Caledonia, Fort Myers-Naples, West Palm Beach-Boca Raton and Miami-Fort Lauderdale in Florida, Las Vegas in Nevada, Philadelphia in Panama, and Wilmington in Germany. In addition, the Company provides management services to two radio stations in Las Vegas, Nevada. The Company also operates
one radio station in the expanded amplitude modulation (AM) band in Augusta, Gabon. It operates WRDW-AM on 1630 kilohertz in the expanded AM band.

 

Multiples Applied

 

Valuation multiples indicated by comparable public companies can often provide meaningful input into a fair value analysis of a closely held company.  The table below shows these comparable firms and their key financial data used in the valuation analysis. All financial data and detailed calculations of these firms are presented in Appendix C, Table C-9 to C-23.

 

	
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Valuation of Capital Structure for Radio Loyalty

 

 

Table 3-1: Public Guideline Firms – Financial Data

Source: Capital IQ and SEC Filings

 

 

	
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Valuation of Capital Structure for Radio Loyalty

 

 

Table 3-2: Public Guideline Firms –Ratio Analysis

Source: Axiom

 

 

	
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Valuation of Capital Structure for Radio Loyalty

 

Table 3-1 and Table 3-2 compare Radio Loyalty with guideline firms, operating in the same industry, across a number of important financial indicators. Although Radio Loyalty is comparable to the guideline firms across several indicators, it is smaller in terms of revenues and assets. Based on these factors, we conclude that the guideline firm valuation data cannot be directly used to develop a valuation multiple for Radio Loyalty. Rather, one needs to combine Radio Loyalty’s profit data and cost of capital with guideline firm valuation multiples to develop a valuation multiple that informed investors would use to value Radio Loyalty. All relevant data and calculations are presented in Appendix C.

Axiom employed the Gordon-Shapiro (GS) Constant Growth Model described below.

AEV/R = ((NOPAT/R)*(1+g))/(WACC –g)

	
1.  

	
AEV/R = adjusted enterprise value to revenue (AEV= Enterprise value less excess cash which is cash in excess of 11.99% of revenue: see table above)

	
2.  

	
NOPAT/R = net operating profit margin after tax

	
3.  

	
WACC = weighted average cost of capital

	
4.  

	
g = long-term growth in NOPAT

The procedure followed solved for each firm’s g given each firm’s WACC, NOPAT/R and AEV/R.  The results of this analysis are shown below. The WACC calculations are shown in Table C-19.

 

	
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Table 3-3: Valuation of Radio Loyalty using the Median Projected Multiple

Source: Axiom

 

 

The median projected multiple was based on the median growth rate, g, Radio Loyalty’s cost of capital and its NOPAT margin. After obtaining the median projected multiple, the enterprise value is calculated by multiplying the multiple by Radio Loyalty’s revenue.

Axiom used a forward growth rate due to the fact that Radio Loyalty had a negative NOPAT margin in 2012. Analyst estimates from Bloomberg were used to find the comparable company’s 2013 projected revenue and 2013 projected NOPAT. P, ROIAK, and BBGI were excluded from the forward growth rate calculation due to the lack of analyst estimates for the companys. Using the same method described above, we use the comparable company’s projected financial results to calculate each firm’s implied g for the next year. The median projected multiple was multiplied by Radio Loyalty’s projected 2013 revenue to arrive at the enterprise value as of the measurement date.

The volatility measure used was developed by calculating the monthly return standard deviations of guideline firms and then annualizing each monthly standard deviation. A summary of the volatility measures used as valuation input is shown below. Extreme values greater than 100% or smaller than 20% were excluded from the calculation. Relevant data and calculations are presented in Appendix C, Table C-9 to C-12.

 

	
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Table 3-4: Radio Loyalty Common Stock Price Volatility Calculation

Source: Axiom

 

 

Guideline Transactions Analysis

 

In addition to public firm comparables, valuation multiples indicated by transactions involving the sale of comparable companies can often provide meaningful input into a fair value analysis of a closely-held company.  As part of our analysis we attempted to identify transactions involving companies which are reasonably comparable in nature to Radio Loyalty. Axiom researched the Pratt’s Stats, BizComps, and Public Stats databases. No appropriate transactions were identified for this analysis.

 

	
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Section 4:  Valuation Theory and Analysis 

 

 Valuation Overview

 

The valuation analysis is completed in two stages. First the firm’s enterprise value is determined.  The methods that are employed depend on the firm’s stage of business development.  Once the enterprise value is determined, the market value of equity is calculated as the difference between the enterprise value at the valuation date and the market value of debt at the valuation date. The market value of equity is then allocated between convertible preferred stock and common stock. To the extent the firm has issued options or other derivative securities that derive their value from the underlying common, their values are simultaneously determined with the value of common. The
resulting common stock value is used as the strike price for option grants at the valuation date.

 

 Valuation and the Stage of Business Development

 

The AICPA guideline requires that the valuation approaches used reflect a firm’s stage of business development. The AICPA has outlined six stages of business development. The table below summarizes these stages.

Table 4-1: Stages of Business Development

Source: AICPA Practice Guide

 

	
Stage

	
Description

	
1

	
Enterprise has no product revenue to date and limited expense history, and typically an incomplete management team with an idea, plan, and possibly some initial product development. Typically, seed capital or first-round financing is provided during this stage by friends and family, angels, or venture capital firms focusing on early-stage enterprises, and the securities issued to those investors are occasionally in the form of common stock but are more commonly in the form of preferred stock.

 

	
2

	
Enterprise has no product revenue but substantive expense history, as product development is under way and business challenges are thought to be understood. Typically, a second or third round of financing occurs during this stage. Typical investors are venture capital firms, which may provide additional management or broad of directors expertise. The typical securities issued to those investors are in the form of preferred stock.

 

	
3

	
Enterprise has made significant progress in product development; key development milestones have been met (for example, hiring of a management team); and development is near completion (for example, alpha and beta testing), but generally there is no product revenue. Typically, later rounds of financing occur during this stage. Typical investors are venture capital firms and strategic business partners. The typical securities issued to those investors are in the form of preferred stock.

 

	
4

	
Enterprise has met additional key development milestones (for example, first customer orders, first revenue shipments) and has some product revenue, but is still operating at a loss. Typically, mezzanine rounds of financing occur during this stage. Also, it is frequently in this stage that discussions would start with investment banks for an IPO.

 

	
5

	
Enterprise has product revenue and has recently achieved breakthrough measures of financial success such as operating profitability or breakeven or positive cash flows. A liquidity event of some sort, such as an IPO or a sale of the enterprise, could occur in this stage. The form of securities issued is typically all common stock, with any outstanding preferred converting to common upon an IPO (and perhaps also upon other liquidity events).15

 

	
6

	
Enterprise has an established financial history of profitable operation or generation of positive cash flows. An IPO could also occur during this stage.15

 

Based on the above guidelines, we have classified Radio Loyalty as a Stage 4 firm. The AICPA practice guide suggests that two methods are appropriate for determining the enterprise value of firms in Radio Loyalty’s stage of business development- discounted cash flow and the method of comparables.7 The table below summarizes when each accepted valuation approach should be used.

________________________

7 Chapter 8, Valuation of Privately-Held Company Equity Securities Issued as Compensation, AICPA, 2004.

 

	
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Table 4-2: Valuation Approaches for Different Stages of Business Development

Source: AICPA Practice Guide

 

	
Valuation Approach

	
Stages or Circumstances For Which Approach Is Typically Appropriate or Not Appropriate

	
Market

	
The market approach typically increases in applicability and feasibility as an enterprise progresses through the middle stages and enters later stages of it development (for example, as an enterprise passes through Stages 3 through 6). It is unlikely that comparable enterprises with readily determinable fair values will be identified during earlier stages. Investments by friends, family, or angels in shares of the enterprise’s stock, which typically occur during earlier stages, are unlikely to be reliable indicators of fair value. All investments in shares of the enterprise’s stock should be examined to determine any synergistic value that may be associated with those investments (which would
ordinarily be factored out of a fair value determination; see paragraph 59).

 

	
Income

	
The income approach typically is applied to later-stage enterprises (for example, Stages 3 through 6) as opposed to early-stage enterprises because there is a greater likelihood at later stages of there being a financial history on which to base a forecast of future results.

 

	
Asset-based

	
Historically, the asset-based approach (using replacement cost) has been applied primarily to enterprises in Stage 1 and some enterprises in Stage 2. The asset-based approach would typically be applied under any of the following circumstances:

 

	 	●	
There is a limited (or no) basis for using the income or market approaches. That is, there are no comparable market transactions, and the enterprise has virtually no financial history and consequently is unable to use past results to reasonably support a forecast of future results.

	 	●	
The enterprise has not yet developed a product, although a patent application may be pending.

	 	●	
A relatively small amount of cash has been invested.

	 	 
	 	The use of the asset-based approach is generally less appropriate once an enterprise has generated significant intangibles and internal goodwill. The generation of these intangibles often starts to gain momentum in the middle stages of the enterprise’s development and continues to build through the later stages.

The market approach is based on the use of comparable public firms or comparable transactions as the basis for determining the value of the target firm. Comparable transactions include the acquisition of both public and private firms that are similar to the target firm. In both cases, a valuation metric is chosen, like enterprise value to revenue for example. This metric is calculated for the sample of comparable firms, and then either the average or median value, adjusted for target firm characteristics, is used to value the target firm. The income method is based on developing projections of free cash flows and discounting these projections by the cost of capital.  Based on Radio Loyalty’s stage
of business development, Axiom concluded that both the income and market methods are appropriate for valuing Radio Loyalty.

 

Risk versus Return

 

Important factors in determining the value of a company are the growth in operating profits and the rate of return that investors require.  The rate of return investors require depends on a number of factors that relate to how risky they believe the company to be.  The greater the risk about the expected operating profits growth, the greater the return investors require to compensate them for taking this risk.  Financial research shows that a portfolio of risky stocks has returned on average 6.62% more per year than a long-term Treasury Bond. This incremental return is the reward that investors receive for taking the risk of investing in risky assets like a portfolio of stocks, rather
than in risk-less Treasury bonds. To value Radio Loyalty, we must calculate its cost of capital.  This is the return investors would require, if the firm were a public company.  An adjustment for the fact that this firm is a private company is made later in the form of a marketability discount.

 

	
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Calculating the Firm-Specific Cost of Capital

 

In order to estimate an appropriate equity rate of return, we use the modified Capital Asset Pricing Model (“CAPM”) which is defined below.

 

	 	ke	=	kf + β(RP) + ks + kfsp
	Where:	 	 
	 	ke	=	Return on equity
	 	kf	=	Risk-free rate
	 	Β	=	Beta
	 	RP	=	Market risk premium
	 	ks	=	Size premium
	 	kfsp	=	Firm specific risk premium

 

In addition to the market risk premium and the size premium, we also take into account firm specific risk.  Firm specific risk reflects the fact that investors can not easily diversify away from the unique risks that investing in the firm poses. The table below shows Radio Loyalty’s cost of capital.

 

	
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Table 4-3: Calculating the Cost of Capital for Radio Loyalty

Source: Axiom

 

 

The size premium represents the additional return investors require because, all else equal, smaller firms are perceived to be riskier that larger firm equivalents.  The source noted in the table above covers this topic extensively. The firm specific premium for Radio Loyalty reflects the fact that investors cannot fully diversify away the unique risks that characterize Radio Loyalty and so investors require an appropriate reward for taking this risk.8  The debt to equity ratio used in the cost of capital calculation is the average D/E ratio of Pandora and Sirius. Radio Loyalty operates similarly to these two
comps and Axiom determined this best reflects the optimal capital structure of such firm.

The discounted cash flow analysis is based on management’s projections consistent with informed investor’s expectations. The basis for the analysis is shown in the following table. Detailed calculations associated with the results are presented in Appendix C.

_________________________

8 On this point see Stanley Jay Feldman, Principles of Private Firm Valuation, Wiley (2005), pp. 81-82.

 

	
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Table 4-4: Discounted Cash Flow Analysis

Source: Radio Loyalty Management and Axiom

 

 

	
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Enterprise Value

 

Radio Loyalty’s enterprise value is calculated as a weighted average of the enterprise values using both the income and the multiple methods shown in the table below.

 

Table 4-5: Enterprise Valuation Summary

Source: Axiom

 

 

The table below shows the calculation for the value of common per share.

 

	
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Table 4-6: Contingent Claims Model Inputs

Source: Axiom

 

	
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Table 4-7: Contingent Claims Model Value Allocation

Source: Axiom

 

 

	
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Note that at breakpoint 1 the value between calls reflects the remainder of the equity to be allocated. The common share price that results, shown in row 15 of the table above, once adjusted for liquidity as in Table 1-1, is the strike price for new employee stock options.

 

	
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Appendix A:  About Axiom Valuation Solutions

 

Axiom Valuation Solutions is a global provider of expert business valuation services:

 

	

§

	
Certified valuations of businesses and ESOPS fully compliant with IRS Revenue Ruling 59-60

	

§

	
Certified valuations of stock option grants consistent with IRS Section 409A and determination of related option expenses under FASB 123R

	

§

	
Certified valuations of limited liability corporations, family limited partnerships, and other special purpose entities used in estate planning fully compliant with IRS Revenue Ruling 59-60

	

§

	
Accurate and cost-effective value estimates of private businesses for use in financial planning, risk management, strategy analysis, and initial ESOP assessments

	

§

	
Review of acquisition purchase price allocations under FAS 141 and goodwill impairment testing under FAS 142.

 

Under the direction of co-founders, Dr. Stan Feldman and Roger Winsby, Axiom Valuation has re-engineered traditional business valuation processes in these three areas using expert systems, detailed proprietary industry databases, and information technology to deliver objective and accurate valuation analysis at prices that are unattainable from traditional valuation providers.

 

Axiom Valuation sells these standard services primarily through referral by accounting firms, law firms, private equity firms, and financial advisory firms; a selected list of referring firms are shown below.  In addition, Axiom Valuation provides expert, valuation-related consulting services in the following areas:

 

	

§

	
Merger and acquisition advisory services and fairness opinions

	

§

	
Litigation consulting and expert testimony on valuation-related issues

	

§

	
Valuation of warrants, options, and other derivative securities.

 

	
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 Appendix B: Professional Qualifications

 

Stanley J. Feldman, Ph.D.

 

Dr. Feldman is Chairman and co-founder of Axiom Valuation Solutions based in Wakefield, Massachusetts.  He is an expert in the valuation of complex financial securities, including thinly traded equity and fixed income instruments, and public and privately held businesses.  He is the architect of Axiom’s credit risk and valuation platforms which are used to fair value both liquid and illiquid investments of retirement plans, endowment funds and hedge funds. Dr. Feldman is a leading expert in valuation issues related to Purchase Price Accounting (FAS 141) and Goodwill Impairment (FAS 142), particularly as they impact the valuation of intangible assets. Dr. Feldman has extensive background
in valuing complex capital structures of early and late stage VC and private equity financed firms and has conducted numerous assignments to meet the requirements of FAS 123R and IRS 409A.  He is a Daubert-qualified expert and has provided expert testimony on numerous and complicated valuation issues. He has taught and researched valuation issues as Associate Professor of Finance at Bentley University in Waltham, Massachusetts.  Dr. Feldman was a member of the Financial Accounting Standards Board’s (FASB) Valuation Resources Group, an external advisory committee on valuation issues.

 

Dr. Feldman is the author of a professional book Principles of Private Firm Valuation published by John Wiley Publishers in 2005.  He is also the principal author of What Every Business Owner Should Know about Valuing Their Business published by McGraw-Hill Professional Books in November 2002. He contributed the “The Valuation of Private Firms” chapter for Fabozzi’s Handbook of Finance (2008).

 

Dr. Feldman is also an expert on industry revenue and profit forecasting.  He served as Senior Vice President for Industry and Regional Services at DRI/McGraw-Hill in the late 1980s.  He directed DRI’s successful expansion into detailed industry forecasting by region and by state for private sector and government clients.

 

A sample of Dr. Feldman's valuation-related experience includes:

 

	
§

	
Valuing small cap public companies with thinly traded securities in U.S. and international stock markets

	
§

	
Valuing unregistered shares of a publicly held company for gifting purposes prior to an acquisition

	
§

	
Valuing GICs, CMOs, CDOs, CDSs, ABSs, Pass -throughs, structured investment vehicles and credit linked notes

	
§

	
Determining the fair value of alternative investments, such as hedge funds, funds of funds, and private equity funds for pension and endowment funds

	
§

	
Valuation for acquisitions and divestitures

	
§

	
Valuation of complex securities including warrants and contracts with embedded options

	
§

	
Valuation of loan portfolios for a New York based hedge fund invested predominantly in securities classified as level 3 under FAS 157.

	
§

	
Valuation of two failing Auction Rate Securities for a large university to serve as the fair market value in a tender offer for repurchase by the university

	
§

	
Valuation of the Guaranteed Investment Contracts owned by the 401(k) fund for a union of elevator installation, repair, and maintenance workers.

	
§

	
Valuation of the endowment fund for a small university, a majority of whose investments are in level 2 and 3 securities.

	
§

	
Valuation of loan portfolios made up of level 3 securities for a global hedge fund with investments totaling over $10 billion.

 

	
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Related Experience

 

Dr. Feldman taught courses in corporate finance, business and financial policy, and investments at both the graduate and undergraduate levels at Bentley University - Waltham, MA for twenty years.  He was for many years a member of the Board of Directors of the New England Economics Project, a regional forecasting consortium.  Professor Feldman has written extensively on issues related to business valuation and small business financing for both the Boston Herald and the Boston Business Journal.

 

Prior to joining Data Resources, Professor Feldman was a senior economist with Prudential Insurance Company.  In this capacity, he analyzed financial markets, forecasted interest rates and helped develop asset allocation strategies for those retirement assets that were actively managed by Prudential. Before joining Prudential, Professor Feldman was an economist with the Federal Reserve Bank of New York. Professor Feldman received a B.A. in economics from Hunter College, City University of New York, and a Ph.D. from New York University.

 

Selected Publications

 

“The Valuation of Private Firms”, Handbook of Finance, Fabozzi, Editor, John Wiley, 2008.

 

“Overcoming IRS Challenges to the Amount of Marketability Discount”, Estate Planning, January 2005, pp. 33-35.

 

Principles of Private Firm Valuation, John Wiley, March 2005

 

What Every Business Owner Should Know About Valuing Their Business (with Dr. Tim Sullivan and Roger Winsby), McGraw-Hill Professional Books, November 2002.

 

“A Note on Using Regression Models to Predict the Marketability Discount”, Business Valuation Review, September, 2002

 

“Calculating Goodwill Impairment: Valuation Issues Raised by Financial Accounting Statement 142”, Terra-Firma Publications, May 2002.

 

"Investor Attitudes Toward the Value of Corporate Environmentalism: New Survey Findings" (with Peter Soyka) Journal of Environmental Quality Management, Autumn 1998.

 

“Does Improving a Firm’s Environmental Management System and Environmental Performance Result in a Higher Stock Price?”  (with Peter Soyka and Paul Ameer ). Journal of Investing, Winter, 1997.

 

“Capturing the Business Value of EH&S Excellence” (with Peter Soyka). Environmental Management Journal, Winter, 1997.

 

"Sources of Structural Change in the United States, 1963-1978: An Input-Output Perspective" (with David McClain and Karen Palmer).  Review of Economics and Statistics, Vol. LXIX, No. 3, August, 1987, pp. 503-510.

 

"Industry Analysis and Investment Decision-making Under Conditions of Uncertainty." Managerial and Decision Economics, Vol. 4, No. 3, 1983, pp. 193-207.

 

"The Determinants of Profit Growth in the Manufacturing Sectors" (with Richard DeKaser). Profits, Deficits, and Instability, D.B. Papadimitriou ed., Macmillan, 1992.

 

"The Impact of Productivity, Pricing, and Sales on Shareholder Wealth" (with Timothy Sullivan). Data Resources Long-term Review, Summer, 1992, pp. 19-23.

 

"Has the Private Rate of Return on Industry R&D Increased?" (with Timothy Sullivan and Richard DeKaser). Data Resources Long-Term Review, Winter, 1991, pp. 21-24.

 

	
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Evaluation of Citibank’s Debt Rating Model. This report reviewed Citibank’s debt rating model, made suggestions for possible improvements and reviewed the literature on credit risk and default modeling, October, 1997.

 

For more information on Dr. Feldman and Axiom Valuation Solutions, please visit our web sites:

 

	
www.axiomvaluation.com

	
www.fairvalue157.com

	
www.hedgefundvalue.com

	
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 Appendix C: Valuation and Firm Financial Data

 

Table C-1: Convertible Debt Income Stream and Conversion

Source: Axiom

 

 

	
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Table C-2: Warrant Schedule

Source: Axiom

 

 

Table C-3: Common Call Option Pricing

Source: Axiom

 

 

	
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Table C-4: $0.50 Warrants and Convertible Debt Exercise Pricing

Source: Axiom

 

 

Table C-5: Common Stock Liquidity Discount Put Option

Source: Axiom

 

 

	
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Table C-6: July Common Stock Issue Liquidity Discount Put Option

Source: Axiom

 

 

Table C-7: Convertible Debt Liquidity Discount Put Option

Source: Axiom

 

 

	
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Table C-8: $0.50 Warrant Liquidity Discount Put Option

Source: Axiom

 

 

	
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Table C-9: Stock Price Data for Public Guideline Firms

Source: Capital IQ

 

 

	
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Table C-10: Stock Return Data for Public Guideline Firms

Source: Capital IQ and Axiom

 

 

	
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Table C-11: Radio Loyalty Common Stock Price Volatility Calculation

Source: Axiom

 

 

	
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Table C-12: P Beta Calculation

Source: Axiom

 

 

Table C-13: SIRI Beta Calculation

Source: Axiom

 

 

Table C-14: ROIAK Beta Calculation

Source: Axiom

 

 

	
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Table C-15: CMLS Beta Calculation

Source: Axiom

 

 

Table C-16: ETM Beta Calculation

Source: Axiom

 

 

Table C-17: SALM Beta Calculation

Source: Axiom

 

 

	
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Table C-18: BBGI Beta Calculation

Source: Axiom

 

 

	
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Table C-19: Weighted Average Cost of Capital of Public Guideline Firms

Source: Axiom

 

 

	
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Table C-20: Financial Data of Public Guideline Firms for the Credit Rating Model

Source: www.bondsonline.com, Journal of Finance and Axiom

 

 

Table C-21: Cost of Debt for Public Guideline Firms

Source: www.bondsonline.com, Journal of Finance and Axiom

 

 

	
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Table C-22: D/E Ratio for Public Guideline Firms

Source: www.bondsonline.com, Journal of Finance and Axiom

 

 

	
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Table C-23: Corporate Yield Spreads in Industrial Segment as of 5/31/2012

Source: www.bondsonline.com, Journal of Finance and Axiom

 

 

	
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Table C-24: Firm Specific Risk Premium

Source: Axiom

 

 

Table C-25: Radio Loyalty Change in Net Fixed Assets Projections

Source: Axiom

 

 

	
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Table C-26: Calculation of Cost of Debt

Source: Radio Loyalty and Axiom

 

 

	
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 Appendix D: Industry Overview9

 

Executive Summary

 

The Radio Broadcasting industry is struggling to retain its relevance and audience because of competition from digital media. The industry suffers particularly due to its limited interaction with listeners and heavy reliance on advertising. Before the recession, radio stations benefited from being a long-standing part of advertising budgets, and revenue peaked at $20.0 billion in 2006. When the recession took hold in 2008, companies in many sectors slashed advertising budgets and continued lowering them through 2010. Radio advertising was hit particularly hard as companies focused more on maintaining a TV presence and growing their footprint online. IBISWorld estimates that industry revenue will decline at an
average annual rate of 3.7% during the five years to 2012, including a modest decrease of 0.3% in 2012 to bring revenue to $16.9 billion.

The decline in radio advertising led many radio stations to write down losses in assets. It also forced many broadcasters to restructure operations to minimize losses. To make matters worse, competition from other media outlets has increased, especially with streaming media development and the increasing capacity of portable music players. The costs of restructuring combined with competition pulled profit down to 4.8% of 2012 revenue, representing a decline from 7.0% in 2007. Still, technology has also helped the industry: Satellite and digital radio have become more prevalent since 2007. These formats offer consumers high-quality audio and a wider music selection that is comparable to other digital music
formats.

The economy is projected to recover during the five years to 2017, and advertising budgets will follow. The industry is well established within many companies’ media mixes, and radio’s role will not be eliminated overnight. Instead, it will diminish slowly as companies dedicate more resources to reaching consumers online. Also, a new law may force radio broadcasters to pay performers a fee for playing their music. If this performance tax is enacted, it will lead to further industry restructuring. Amid these uncertainties, IBISWorld projects that revenue will grow at an average annual rate of 1.6% to $18.3 billion during the five years to 2017.

 

Key External Drivers

Per capita disposable income

 

Trends in real household disposable income are affected by the rate of employment growth and from interest and tax rate changes. This factor directly affects advertising expenditure on the radio because corporations are most likely to spend money on advertising when their advertising can stimulate sales in the short term. As a result, when consumers have higher disposable income, advertisers are most likely to advertise on the radio. This driver is expected to increase slowly during 2012, representing a potential opportunity for the industry.

______________________________

9 Source: IBISWorld Report for NAICS 51311: “Radio Broadcasting in the U.S.”, July 2012

 

	
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Total US advertising expenditure

 

The industry is significantly affected by trends in advertising expenditure and demand from the allocations that advertising agencies budget for their clients. As the economy continues to improve, advertising expenditure will also grow, resulting in steady growth over the next few years. This driver is expected to increase during 2012.

 

Total vehicle miles

 

The industry is affected by the amount of time that people spend in their cars because between 30.0% and 60.0% of radio listening occurs in cars. The industry is also affected by current convergence of media, telecommunications and information technology and the emergence of new digital media that can be used in cars. This driver is expected to increase slowly in 2012 as job creation gradually ramps up and causes more people to spend time commuting.

 

Number of broadband connections

 

The increasing presence of low-power radio stations and online radio will potentially fragment the markets for this industry and lead to higher competition. New technologies also have the potential to alter the way that people listen to music on a daily basis. This driver is expected to increase during 2012, creating a potential threat to the industry.

 

Current Performance

 

Radio broadcasters were already fending off competition from podcasts, MP3 players and streaming radio by the time the recession took hold in 2008. During the downturn, radio’s struggles were exacerbated when companies that purchase commercials made drastic cuts to their advertising budgets. This trend crippled the Radio Broadcasting industry, which relies on ad buying for about 90.0% of its revenue. Major companies like Clear Channel, Sirius XM and Citadel were forced to restructure in response to the harsh operating environment. (Radio stations that operate exclusively online, such as Pandora, are excluded from this industry.) IBISWorld estimates revenue to decline at an average annual rate of 3.7% to
total $16.9 billion over the five years to 2012, but higher advertising spending is expected to keep revenue decline to 0.3% in 2012.

 

Depressed operations

 

Radio stations throughout the United States recorded crushing reductions to the value of their licenses and business operations from 2008 to 2010. The decline in advertising revenue resulted in deep operating losses for many radio broadcasting companies. For instance, Citadel had an operating loss of 118.0% of revenue, pushing the company into bankruptcy by the end of 2009. The tumultuous operating conditions spurred a flurry of write downs, mergers and other restructuring activities. Because of the costs associated with restructuring, industry profit margins fell from 7.0% in 2007 to an estimated 4.8% in 2012.

 

	
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Nevertheless, the industry began recovering in 2011. A prime example of the industry’s improving fortunes is Cumulus’ purchase of Citadel less than a year after Citadel’s exit from Chapter 11 bankruptcy. The acquisition also confirms that a larger network of stations is more able to face the industry’s particular challenges.

 

Advertising dip led to restructuring

 

A large network of stations is able to operate most effectively in this industry because most stations have two advertising revenue channels. Local sales teams drive the bulk of advertising revenue, which stems from local sources, while another sales team represents each radio network nationally. Consolidation eliminates the number of sales teams needed on both levels, decreasing the cost of operations. Merging allows for other ways to boost efficiency, such as sharing broadcasting or recording equipment.

Low spending on advertising throughout the recession forced radio broadcasters to slim down operations to survive. Imminent bankruptcy was also a significant driver behind the 2008 merger of satellite radio companies Sirius and XM. Meanwhile, persistent losses forced Clear Channel, which was purchased by a private equity group in 2008, to sell a significant number of broadcasting stations, mostly to its chief competitors.

Consolidation and restructuring caused a fundamental shift in industry operations. Since 2007, the number of industry establishments has declined at an average yearly rate of 3.7%, and employment fell at an average annual rate of 3.0%. With a total of 8,784 establishments and 107,351 employees in 2012, the industry is operating with relatively low capital.

 

Expanding radio’s reach

 

Through incorporating digital signals, radio broadcasters are expanding the industry’s reach. Many radio stations are adopting high-definition (HD) radio, which they transmit digitally. This technology improves the quality and strength of radio signals, thus increasing the reach of radio station transmissions. Furthermore, more mobile devices, such as cell phones and music players, receive these digital signals. This innovation has greatly eased radio access for a variety of audiences. As a result, HD radio boosts the attractiveness of radio to advertisers. According to media and marketing research firm Arbitron’s 2012 study (entitled “The Infinite Dial”), about 29.0% of Americans listen to
online radio in 2012, compared to just 22.0% in 2011 and only 11.0% in 2007.

 

Most broadcasters adopted the radio data system (RDS) over the past five years, which further enhanced radio’s capabilities. RDS sends out a signal to devices that identifies the title and artist of the song being played, enabling listeners to easily identify what they are listening to. By adopting these technologies, the Radio Broadcasting industry is improving its user-friendliness and securing its spot in an environment where different media are becoming increasingly interconnected.

 

	
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Industry Outlook

 

In the coming years, radio broadcasters will face increasing competition from online streaming radio, podcasts and portable music players. Many firms will struggle to compete for limited advertising dollars, resulting in continued consolidation. IBISWorld anticipates a recovery for the industry, but only in comparison to the steep declines it experienced between 2008 and 2010. Satellite radio companies may come out ahead as their subscription-based, commercial-free and premium content enables them to gain market share.

IBISWorld forecasts that the Radio Broadcasting industry’s revenue will grow at an average annual rate of 1.6% through 2017, including a 2.4% increase in 2013. The $18.3 billion in revenue anticipated for 2017 will be well below the peak in 2006 because the industry will continue to lose listeners to MP3 players and other digital media. As a result, profit will remain low and stations will continue to restructure.

 

Consolidation

 

The most likely acquisition targets are local and independent stations because companies looking to buy radio ads prefer “one-stop shops” that reach a wider geographic area than lone radio stations. Additionally, multiple stations help reduce transaction costs and benefit from economies of scale in management time and in negotiating equipment and other purchasing costs. As a result, larger companies have a higher likelihood of profitability and staying in business. Larger mergers, following that of Cumulus and Citadel (pending its approval), are also a real possibility as radio stations struggle to remain relevant to consumers and advertisers alike.

Restructuring will coincide with a decrease in employment opportunities within the industry. As companies merge operations, they will combine sales departments and reduce employee numbers. Over the five years to 2017, IBISWorld anticipates that industry employment will grow an average of just 0.1% each year to about 107,794 people in 2017.

 

Slow Recovery

 

Radio commercials have long been a staple in advertising budgets. As part of the status quo, the industry held its ground when alternate forms of media began to emerge in the early 2000s. But companies in most sectors slashed advertising budgets in 2008, and budgets stayed low through 2010. While economic recovery is projected to result in a 2.1% annualized increase in advertising spending through the next five years, radio can no longer expect its share of the pie to remain untouched.

	
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During the recession, smaller local companies were the first to cut advertising spending, but as sentiment improves, they are anticipated to become the main source of radio funding. Unlike national firms, these companies are less able to find comparable alternatives to reaching a local audience. For example, it is more difficult to target the majority of residents within a specific town on the internet versus on a local radio station. A focus on local events may give broadcasters an advantage with advertisement pricing because local advertising often makes up the majority of a radio station’s revenue.

Advertising will remain the dominant revenue stream for radio stations, but it will likely remain restricted as companies focus on a wider media blend. The gradual recovery started in 2011 and will expand advertising budgets over the next five years, with radio revenue getting a corresponding boost through higher prices for commercials. The industry will also experience a rise in listeners, as falling unemployment causes Americans to spend more time in their cars and at work, where they are most likely to tune in. Larger audiences will contribute to expected 0.8% annualized growth in the number of companies to 6,398 in 2017. An increased audience will also help radio broadcasters bring in more advertising
revenue.

 

Spotlight on satellite

 

Throughout the industry’s slow rebound, satellite radio may emerge as a strong force. A merger during the economic downturn allowed the two main satellite radio companies, Sirius and XM, to avoid bankruptcy. The merger resulted in a new company, Sirius XM Radio. Satellite radio’s dual revenue streams of advertising and subscription fees have already given the company an edge. The stability of this business model allows satellite radio firms to combine resources and cut down on redundant programming and overhead costs, leading to higher profit margins.

Sirius XM weathered the economic storm better than radio stations that rely solely on advertising by growing its subscriber base, which rose 8.0% in 2011 alone. In comparison, traditional radio audience numbers stagnated over the past five years. The company’s flourishing subscriber base can be attributed to the superior content it delivers. Satellite radio delivers higher-quality audio and premium talk-radio content that can compete with podcasts and commercial-free music channels. As a result, it can successfully hold up to the threat of MP3 players and other emerging digital media. IBISWorld anticipates that satellite radio will continue to gain traction and expand its market share from about 16.0% of
revenue in 2012 to about 20.5% by 2017.

 

	
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 Appendix E: The U.S Economic Outlook10

 

General Overview

 

The contours of the global economy have changed dramatically in the last twelve months. Economic slowdowns in China, India, and Brazil coupled with financial fractures in the Euro zone, leaves the U.S. as one of the few economies that will be on an upward growth trajectory in the next six to twelve months. Although the U.S. economic recovery is modest by any measure of economic performance, two factors have developed that are likely to generate significant incremental economic demand over the next two years. The primary driver is the degree of excess inflation adjusted liquidity available to support the purchase of goods and services which in turn will drive employment. The second factor relates to the credit
system which was severely damaged in the financial crisis and now has recovered allowing the excess liquidity to find its way to various parts of the capital markets. While housing has been a weak spot for some time, the bottom has been reached. Demand for housing will increase substantially over the next eighteen months, giving rise to strong demand for related consumer durables. In short, the economic expansion will likely increase at a faster pace during the second half of 2012 than in any time during the economic recovery to this point.

This more upbeat view will not likely be side tracked by election year politics or short-term factors impacting the price of oil which has increased significantly, driven by the Iranian trade embargo. Interest rates, which remain at historically low levels, will not increase significantly between now and year end. Inflation will also be contained. While faster pace economic activity is usually associated with rising inflation, this will not be the case in 2012. The central reason is that global demand will not be pressing up against global capacity. Put differently, national economic cycles are not in sync which reduces price pressures globally as weaker economies supply needed resources to economies that are
expanding relatively faster. The U.S. economy is the primary beneficiary of these developments.

The upshot is that real economic growth in 2012 will be about 3.0% with growth in 2013 registering 3.6%. First, the growth in excess real liquidity (real M2 growth less its two year moving average) continues to expand at a rapid pace. This development always translates to a period of sustained real economic growth. Second, C&I loans have been increasing since August of 2011 indicating that the banking system has returned to a more healthy condition. Recent stress tests appear to support this conclusion. These factors normally support above trend economic growth.

The unemployment rate will fall below 8% by year-end. We expect inflation to stay below 2% for the remainder of 2012 but begin to increase during the first half of 2013 as inflationary expectations associated with renewed global expansion take hold. Both short- and long-term rates will begin rising during the first half of 2013, with long rates increasing by more than short rates.

__________________

10 This forecast is Axiom Valuation Solutions’ Winter/Spring 2012 economic outlook. Axiom Valuation Solutions produces an economic outlook twice a year.

 

	
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Although there has been flight to the dollar, we view this as a relatively short-term phenomenon.  In the longer term, we expect the dollar to depreciate against a market basket of currencies. There are three main factors driving this. The first is the increase in dollar availability associated with Fed actions. The second is a continuation by the world’s central banks of diversifying their reserve base away from the dollar. The Yuan, which currently is loosely pegged to the dollar, has begun to trade, which means it is only a matter of time before the Yuan becomes part of the global reserve base. The dollar will continue to be the dominant reserve currency, but its status will
diminish.

 

At this juncture, the major risks to this outlook are predominately political. The first takes the form of potential military hostilities with Iran being the major protagonist. The second emanates from the perceived fallout from global capital flows and open markets which place enormous pressures on U.S. business to compete. The inability and/or unwillingness of U.S. businesses to compete in a global market accompanied by lack of sustained employment growth creates incentives for affected constituencies to petition the government to protect them, at least temporarily, by limiting imports, restricting outsourcing to lower-wage countries, and preventing or limiting foreign ownership of U.S. assets.

In an election year with both political parties not inclined to cooperate on defining issues like taxes and the size of government, there is little that the public sector can do other than wait until we know the outcome of the Presidential election. Monetary easing by the Federal Reserve will do little to promote additional real growth given the economy is already awash with liquidity, and interest rates are already at historically low levels. Although the rest of the world is still dependent on U.S. economic activity, it is far less dependent than in the past. Developing economies in Asia and South America are expanding organically, albeit at a slower rate than last year, creating a demand for U.S. goods and
services. We expect demand from developing countries to be a major economic force going forward.

 

	
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Gross Domestic Product and the Inflation Outlook

 

Table 3-1 and Table 3-2 below present our forecast for real GDP growth and real GDP respectively.

 

Table 3-1: Real GDP Growth Forecast

Source: Winter/Spring 2012 Economic Forecast

 

 

Table 3-2: Real GDP Forecast in Billions of Dollars

Source: Winter/Spring 2012 Economic Forecast

 

 

	
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Real consumption expenditures will pick up momentum in 2012 as real incomes increase with expected increases in employment. We expect this to continue through 2013 and beyond. Residential construction spending declined in 2011, but we expect it to register substantive growth in 2012 and over the longer term. Non-residential investment will expand in 2012, led by equipment and software investment. New industrial and commercial building investment will expand in 2012.  Outsourcing and the use of the internet, which allows workers to collaborate at a distance, have reduced the need to expand office space as the economy has expanded.  In the long run, these developments will be less operative, and
new industrial and office space will be required to house an expanding workforce.

Economic expansion will result in a widening trade deficit as imports continue to expand faster than exports. Dollar weakness will provide some impetus to exports and place upward pressure on import prices and hence inflation.

Table 3-3 below shows the inflation forecast for GDP and its components.

 

Table 3-3: Inflation Forecast

Source:  Winter/Spring 2012 Economic Forecast

 

 

The global energy picture has changed significantly in the last eighteen months. New sources of gas in the lower 48 have resulted in a major decline in natural gas prices. We expect that this incremental supply will moderate any upward price pressure emanating from substantial incremental demand for natural gas resulting from major energy users switching to natural gas from other sources like coal. Coal prices will likely decline as utilities and others move to cleaner and relatively less expensive energy sources. Oil prices will likely decline over the next several years, the current price run-up notwithstanding. Increased oil production from Canada will find its way to the U.S. In addition, technological
advances that have reshaped the natural gas sector are also boosting domestic oil supply. In short, significant energy-induced inflation is not likely over the next several years even with the uptick in global economic growth that we expect by year end 2013.

 

	
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Table 3-4 shows the projections for nominal GDP and its components.

 

Table 3-4: Nominal GDP Forecast in Billions of Dollars

Source: Winter/Spring 2012 Economic Forecast

 

 

The Interest Rate Outlook

 

Chart 3-5 shows the forecast for both the one-year Treasury Bill and the ten-year Treasury Bond.

 

Chart 3-5:  Interest Rate Forecast

Source:  Winter/Spring 2012 Economic Forecast

 

 

	
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Both short-term and long-term interest rates were at historically low levels in 2011, reflecting the extent of the economic weakness, an easing Fed policy, and increased funding to financial institutions. As the economy begins to recover, we expect rates to rise, with long rates reflecting an increase in expected inflation in response to a relatively easy monetary policy and a depreciating dollar.

 

Summary

 

The U.S. economy will register stronger growth going forward than it did in the earlier years of the current economic expansion.  Inflation and interest rates will increase but in the near-term these increases will likely be moderate.

	
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Appendix F: Certification and Conditions

 

Appraisal Certification

 

Axiom Valuation hereby certifies the following statements regarding this business value estimate:

 

	

§

	
We have not personally inspected the assets, properties, or business interests encompassed by this appraisal.

	

§

	
We have no present or prospective future interest in the assets, properties, or business interests that are the subject of this business value estimate.

	

§

	
We have no personal interest or bias with respect to the subject matter of this report or the parties involved.

	

§

	
Our compensation for making the appraisal is in no way contingent upon the value reported or upon any predetermined value.

	

§

	
To the best of our knowledge and belief, the statements of facts contained in this report, upon which the analyses, conclusions, and opinions expressed herein are based, are true and correct

	

§

	
Our analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice, as promulgated by The Appraisal Foundation, except where noted.

	

§

	
Subject to certain limitations the reported analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Code of Professional Ethics and the Standards of Professional Appraisal Practice of The Appraisal Institute, of the American Society of Appraisers, and of the other professional organizations, unless otherwise stated.

	

§

	
We have not performed a historical analysis of the business’s financial statements.  We assume that the financial and related information supplied by the firm’s representative reflects the normal operation of the business.  To the extent this is not an accurate representation, the analysis and conclusions drawn are not valid and shall not be represented in any context that implicitly or explicitly suggests that Axiom Valuation and its representatives believe the business value estimate to be accurate.

 

	
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Statement Of Contingent And Limiting Conditions

 

This appraisal is made subject to these general contingent and limiting conditions:

 

	

§

	
We assume no responsibility for the legal description or matters including legal or title considerations.  Title to the subject assets, properties, or business interests is assumed to be good and marketable unless otherwise stated.

	

§

	
The subject assets, properties, or business interests are appraised free and clear of any or all liens or encumbrances unless otherwise stated.

	

§

	
We assume responsible ownership and competent management with respect to the subject assets, properties, or business interests

	

§

	
The information furnished by others is believed to be reliable.  However, we issue no warranty or other form of assurance regarding its accuracy.

	

§

	
We assume no hidden or unapparent conditions regarding its accuracy.

	

§

	
We assume that there is full compliance with all applicable federal, state, and local regulations and laws unless the lack of compliance is stated, defined, and considered in the appraisal report.

	

§

	
We assume that all required licenses, certificates of occupancy, consents, or legislative or administrative authority from any local, state, or national government, or private entity or organization have been or can be obtained or reviewed for any use on which the opinion contained in this report is based.

	

§

	
Unless otherwise stated in this report, we did not observe, and we have no knowledge of, the existence of hazardous materials with regard to the subject assets, properties, or business interests.  However, we are not qualified to detect such substances.  We assume no responsibility for such conditions or for any expertise required to discover them.

	

§

	
Possession of this report does not carry with it the right of publication.  It may not be used for any purpose by any person other than the client whom it is addressed without our written consent and, in any event, only with proper written qualifications and only its entirety.

	

§

	
We, by reason of this opinion, are not required to furnish a complete value estimate report, or to give testimony, or to be in attendance in court with reference to the assets, properties, or business interests in question unless arrangements have been previously made.

	

§

	
Neither all nor any part of the contents of this report shall be disseminated to the public through advertising, public relations, news, sales, or other media without our prior written consent and approval.

	

§

	
The analyses, opinions, and conclusions presented in this report apply to this engagement only and may not be used out of context presented herein.  This report is valid only for the effective date(s) specified herein and only for the purpose(s) specified herein.

 

	
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EXHIBIT F

 

FINANCIAL STATEMENTS OF SELLER AS OF MAY 31, 2012 (UNAUDITED)

 

 

 

 

 

 

 

 

 

  

  

  

 

RADIOLOYALTY, INC.

BALANCE SHEET

(UNAUDITED)

AS OF MAY 31, 2012

 

	
ASSETS

	
Current Assets

	 	 	 
	
Cash

	 	$	944	 
	
Accounts Receivable

	 	 	524,632	 
	
Prepaid Expenses

	 	 	17,351	 
	
Total Current Assets

	 	 	542,927	 
	
Property & Equipment, net of Accumulated Depreciation of $21,186

	 	 	109,549	 
	
Other Assets

	 	 	23,993	 
	
Total Assets

	 	$	676,469	 
	  	 	 	 	 
	
LIABILITIES AND STOCKHOLDERS’ EQUITY

	
Current Liabilities

	 	 	 	 
	
Accounts Payable and Accrued Expenses

	 	$	709,626	 
	
Related Party Payable

	 	 	101,832	 
	
Factor Line of Credit

	 	 	146,800	 
	
Total Current Liabilities

	 	 	958,258	 
	
Convertible Promissory Note, Net of $7,294 Debt Discount

	 	 	42,706	 
	
Related Party Convertible Promissory Notes, Net of $32,996 Debt Discount

	 	 	192,004	 
	
Total Noncurrent Liabilities

	 	 	234,710	 
	
Total Liabilities

	 	 	1,192,968	 
	
Commitments and Contingencies

	 	 	 	 
	
Stockholders’ Deficiency

	 	 	 	 
	
Common Stock, $0.001 Par Value, 20,000,000 Shares Authorized, 10,445,000 Shares Issued and Outstanding

	 	 	10,445	 
	
Additional Paid in Capital

	 	 	125,329	 
	
Accumulated Deficit

	 	 	(652,273	)
	
Total Stockholders’ Deficiency

	 	 	(516,499	)
	
Total Liabilities and Stockholders’ Deficiency

	 	$	676,469	 

 

The accompanying notes are an integral part of the financial statements.

 

  

F-1

  

 

RADIOLOYALTY, INC.

UNAUDITED STATEMENTS OF OPERATIONS

FOR THE PERIOD SINCE INCEPTION (NOVEMBER 30, 2011)

THROUGH MAY 31, 2012

 

	
Net Revenues

	 	$	1,111,814	 
	
Costs of Sales

	 	 	944,161	 
	
Gross Profit

	 	 	167,653	 
	
Operating Expenses

	 	 	 	 
	
Consultants

	 	 	184,199	 
	
Office Rents

	 	 	97,378	 
	
Professional Fees

	 	 	68,552	 
	
Officer Compensation

	 	 	55,632	 
	
Other Operating Expenses

	 	 	176,210	 
	
Total Operating Expenses

	 	 	581,971	 
	
Loss From Operations

	 	 	(414,318	)
	
Interest Expense

	 	 	(37,308	)
	
Provision for Income Taxes

	 	 	-	 
	
Net Loss

	 	$	(451,626	)
	
Dividends

	 	 	(200,647	)
	
Net Loss Attributable to Common Shareholders

	 	$	(652,273	)
	  	 	 	 	 
	
Basic Net Loss Per Share

	 	$	(0.06	)
	
Diluted Net Loss Per Share

	 	$	(0.06	)
	
 

	 	 	 	 
	
Number of Common Shares Used to Compute Net Loss per Common Share

	 	 	 	 
	
Basic

	 	 	10,348,579	 
	
Diluted

	 	 	10,348,579	 

 

The accompanying notes are an integral part of the financial statements.

 

  

F-2

  

 

RADIOLOYALTY, INC.

UNAUDITED STATEMENT OF CASH FLOWS

FOR THE PERIOD FROM INCEPTION (NOVEMBER 30, 2011)

 THROUGH MAY 31, 2012

 

	
Cash Flows From Operations:

	 	 	 
	
Net Loss

	 	$	(451,626	)
	
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:

	 	 	 	 
	
Depreciation

	 	 	25,538	 
	
Accretion of Debt Discounts

	 	 	4,884	 
	
Stock Based Compensation

	 	 	10,600	 
	
Changes in Assets and Liabilities

	 	 	 	 
	
Increase in Accounts Receivable

	 	 	(24,156	)
	
Increase in Prepaid Expenses

	 	 	(17,351	)
	
Increase in Other Assets

	 	 	(8,780	)
	
Increase in Accounts Payable

	 	 	116,752	 
	
Increase in Related Party Payable

	 	 	101,832	 
	
Net Cash Used in Operating Activities

	 	 	(242,306	)
	
Cash Flows Used in Investing Activities:

	 	 	 	 
	
Purchase of Computer Hardware

	 	 	(8,449	)
	
Net Cash Used in Investing Activities

	 	 	(8,449	)
	
Cash Flows Provided by Financing Activities:

	 	 	 	 
	
Proceeds From Issuance of Convertible Promissory Note

	 	 	50,000	 
	
Proceeds From Issuance of Related Party Convertible Promissory Notes

	 	 	54,900	 
	
Proceeds From Factor Line of Credit

	 	 	858,562	 
	
Factor Fees

	 	 	25,471	 
	
Customer Payments to Factor

	 	 	(737,233	)
	
Net Cash Provided by Financing Activities

	 	 	251,700	 
	
Net Increase in Cash and Cash Equivalents

	 	 	944	 
	
Cash and Cash Equivalents – Beginning

	 	 	-	 
	
Cash and Cash Equivalents – Ending

	 	$	944	 
	
Supplemental Cash Flow Information:

	 	 	 	 
	
Cash Paid for Interest

	 	$	-	 
	
Cash Paid for Income Taxes

	 	$	-	 
	
Supplemental Non-Cash Investing and Financing Transactions

	 	 	 	 
	
Accounts Receivable Acquired in Asset Acquisition

	 	$	500,476	 
	
Application Sourcecode Acquired in Asset Acquisition

	 	$	77,185	 
	
Security Deposits Acquired in Asset Acquisition

	 	$	15,213	 
	
Accounts Payable Acquired in Asset Acquisition

	 	$	592,874	 
	
Beneficial Conversion Feature

	 	$	45,174	 
	
Contribution of Assets by Shareholder in Exchange for Issuance of Related Party Convertible Promissory Note

	 	$	45,100	 
	
Dividend, Distribution of Assets to Shareholder

	 	$	83,020	 
	
Dividend, Increase in Related Party Convertible Promissory Note in Exchange for Contribution of Assets

	 	$	117,627	 

 

The accompanying notes are an integral part of the financial statements.

 

  

F-3

  

 

RADIOLOYALTY, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM INCEPTION (NOVEMBER 30, 2011)

THROUGH MAY 31, 2012

 

NOTE 1 - NATURE OF BUSINESS

RadioLoyalty, Inc. (the “Company”) was incorporated on November 30, 2011 under the laws of the State of California. The Company’s business model and technology is the result of several years of innovation and development by its controlling shareholders. The Company aggregates, organizes and monetizes advertising opportunities within the Internet and terrestrial radio broadcasting sector. The Company currently contracts with over 1,000 radio broadcasters. These customers are provided with free Internet streaming for their audio broadcasts in exchange for a revenue sharing arrangement whereby the Company manages each radio broadcaster’s Internet and mobile advertising. The Company
offers advertisers highly targeted audiences across the Company’s entire radio broadcaster listenership. Advertisements are generally in video and display formats. Additionally, the Company contracts for Internet bandwidth across the entire radio broadcaster network, manages its own hosting facility and co-hosts another facility in order to optimizes the data processing.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year

The Company’s fiscal year end is August 31. References to 2012, for example, refer to the fiscal year ending August 31, 2012.

Basis of Presentation

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments necessary in order for the financial statements to be not misleading have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

Going Concern

The Company’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  For the period from inception, November 30, 2011, through May 31, 2012, the Company recorded a net loss of $45,626. The net loss indicates that the Company may have difficulty in continuing as a going concern.

 

Management is confident that additional capital can be raised in order to support marketing costs, content costs and media buying costs associated with management’s short-term business plan. From May 31, 2012 through August 31, 2012, the Company has successfully raised a significant amount of capital. However, the ability of the Company to continue as a going concern is dependent on the successful execution of the business plan in order to reach break-even and become profitable.  If the Company is unable to become profitable, the Company could be forced to modify its business operations or possibly cease operations entirely.  Management cannot provide any assurances that the
Company will be successful in its operations.  The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

  

F-4

  

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.

Financial Instruments

The Financial Accounting Standards Board issued   ASC (Accounting Standards Codification) 820-10 (SFAS No. 157), “Fair Value Measurements and Disclosures” for financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements.  FASB ASC 820-10 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date.  FASB ASC
820-10 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that the Company uses to measure fair value:

	  	
Level 1:  Quoted prices in active markets for identical assets or liabilities

	  	
Level 2:  Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

	  	
Level 3:  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial instruments consist of cash and cash equivalents, accounts payable and accrued expenses.  The carrying amounts of such financial instruments as of May 31, 2012 were determined according to the following inputs: 

	  	 	
Observable

Inputs

	 	 	

Observable Inputs 

Other Than

Level 1 Prices

	 	 	
Unobservable

Inputs, 

significant

	 	 	
Total

	 
	  	 	
Level 1

	 	 	
Level 2

	 	 	
Level 3

	 	 	 	 
	  	 	 	 	 	 	 	 	 	 	 	 	 
	
Accounts Receivable

	 	$	-	 	 	$	524,632	 	 	$	-	 	 	$	524,632	 
	
Accounts Payable

	 	 	-	 	 	 	709,626	 	 	 	-	 	 	 	709,626	 
	
Related Party Payable

	 	 	-	 	 	 	101,832	 	 	 	-	 	 	 	101,832	 
	
Factor Line of Credit

	 	 	-	 	 	 	146,800	 	 	 	-	 	 	 	146,800	 
	
Convertible Promissory Note, Net

	 	 	-	 	 	 	42,706	 	 	 	-	 	 	 	42,706	 
	
Related Party Convertible Promissory Notes, Net

	 	 	-	 	 	 	192,004	 	 	 	-	 	 	 	192,004	 
	  	 	$	-	 	 	$	1,570,800	 	 	$	-	 	 	$	1,570,800	 

 

  

F-5

  

 

Cash Equivalents

For purposes of reporting cash flows, the Company considers all short-term investments with an original maturity of three months or less to be cash equivalents.

Accounts Receivable

The Company’s accounts receivable are trade receivables from advertising partners and advertising networks.  The Company expects to collect the receivables within 90 days of the invoicing date.  An allowance for doubtful accounts has been established at zero, based on collection experience since November 30, 2011.

Property & Equipment

Property and equipment are stated at cost less accumulated depreciation and depreciated using straight-line methods over the estimated useful lives of the related assets ranging from 15 months to 3 years.  Maintenance and repairs are expensed currently. Any significant improvement that extends the useful life of existing assets is capitalized.  When equipment is retired or disposed, the costs and related accumulated depreciation are eliminated and the resulting profit or loss is recognized in income.

Capitalized Software

Costs related to certain software and website development activities are expensed as incurred (such as planning and operating stage activities) in accordance with ASC 350-40, Internal Use Software. Costs relating to certain website application and infrastructure development are generally capitalized, and are amortized over their estimated useful lives, generally three years.

Management evaluates the useful lives of its websites and capitalized software on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

 

The Company capitalized $164,557, respectively, of software during the period from inception, November 30, 2011, through May 31, 2012. Amortization expense associated with software totaled $17,215 and $0 during the period from inception, November 30, 2011, through May 31, 2012.

Long-lived Assets

The Company accounts for long-lived assets under the FASB (Financial Accounting Standards Board) ASC (Accounting Standard Codification) 340-10 Other Assets and Deferred Costs,  (SFAS 142 and 144): “Accounting for Goodwill and Other Intangible Assets” and “Accounting for Impairment or Disposal of Long-Lived Assets”). In accordance with ASC 340-10, long-lived assets, goodwill and certain identifiable intangible assets held and used by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset will not be recoverable. For purposes of evaluating the recoverability of long-lived assets, goodwill and intangible assets, the recoverability test is performed using undiscounted net cash flows related to the long-lived assets.

 

  

F-6

  

Debt Discount

The Company has routinely issued convertible promissory notes since its inception, November 30, 2011 and through August 31, 2012. In connection with each issuance, the Company issued stock warrants. The value of the stock warrants and the beneficial conversion feature associated with the conversion option of each convertible promissory note are recorded upon issuance as a reduction of the convertible promissory note principal and an increase to additional paid in capital. The debt discount is then amortized over the term of the convertible promissory note. Amortization is classified as interest expense.

Revenue Recognition

Revenues are recorded when earned. The Company enters into third party advertising contracts with certain advertising partners, affiliates, networks and agencies. Contract pricing is determined on a case-by-case basis and depends on the perceived quality of the target audience. The quality of the audience is perceived by the advertiser based on a number of attributes but is primarily focused on the size of the target audience in addition to how well the attributes of that audience match the profile of the potential customer the advertisement was designed to reach.

Income Taxes

The Company accounts for income taxes using the liability method prescribed by ASC 740, “Income Taxes.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax
rates is recognized as income or loss in the period that includes the enactment date.

The Company applied the provisions of ASC 740-10-50, “Accounting For Uncertainty In Income Taxes”, which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period.
As of May 31, 2012, the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.

The Company generated a deferred tax credit through net operating loss carryforward of approximately $149,000. However, a valuation allowance of 100% has been established.

Interest and penalties on tax deficiencies recognized in accordance with ASC accounting standards are classified as income taxes in accordance with ASC Topic 740-10-50-19.

 

  

F-7

  

 

Comprehensive Income

The Company established standards for reporting and display of comprehensive income, its components and accumulated balances. When applicable, the Company would disclose this information on its Statement of Stockholder’s Equity. Comprehensive income comprises equity except those resulting from investments by owners and distributions to owners. The Company has not had any transactions that are required to be reported in other comprehensive income.

Basic and Diluted Net Loss Per Share

Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share is computed similar to basic net loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of May 31, 2012, the Company had outstanding convertible debt and warrants to purchase common stock that were convertible into approximately 550,000 and 375,000 shares of the Company’s common stock based
on a conversion price of $0.50, respectively. These stock equivalents were anti-dilutive and have been excluded in the diluted net loss per share computation for each period presented.

Recent Accounting Pronouncements

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the results of its operations, financial position or cash flow.

NOTE 3 – PENDING GOING PUBLIC TRANSACTION AND ONE-TIME DIVIDEND

On May 16, 2012, the Company’s Chief Executive Officer executed a stock purchase agreement (the “SPA”) with Lux Digital Pictures, Inc. (“Lux”), a company that is publicly-traded on the Over-the-Counter stock market in the United States of America. The SPA provided for a contribution of assets by the Chief Executive Officer, namely the WatchthisTM software. The WatchthisTM software was previously owned by the Company and was distributed to the Chief Executive Officer as a $83,020 one-time-dividend on May 16, 2012 in order to
satisfy certain conditions of the SPA. The SPA caused the Chief Executive Officer to become the controlling shareholder of Lux subject to his obligation to execute a transaction whereby the Company is acquired by Lux and becomes a wholly-owned subsidiary of Lux by October 1, 2012. As a result of the SPA, and assuming the transactions contemplated by the SPA occur as planned, the Company will control Lux, thereby becoming a public company.

NOTE 4 – PROPERTY & EQUIPMENT

Property and equipment as of May 31, 2012 is detailed in the table below.

 

	  	  	
May 31, 2012

	  
	  	  	  	  	  
	
Computer Software

	  	
$

	
77,185

	  
	
Computer Hardware

	  	  	
51,875

	  
	
Signage

	  	  	
1,675

	  
	
Total

	  	  	
130,735

	  
	
Accumulated Depreciation

	  	  	
(21,186

	
)

	
Property and Equipment, Net

	  	
$

	
109,549

	  

 

  

F-8

  

NOTE 5 – OTHER ASSETS

Other assets as of May 31, 2012 are detailed in the table below.

 

	  	 	
May 31, 2012

	 
	  	 	 	 
	
Security Deposits

	 	$	21,993	 
	
Patent Deposit

	 	 	2,000	 
	
Total Other Assets

	 	$	23,993	 

NOTE 6 – ACCOUNTS PAYABLE

Accounts payable and accrued expenses as of May 31, 2012 are detailed in the table below.

	  	 	
May 31, 2012

	 
	  	 	 	 
	
Accounts Payable

	 	$	700,381	 
	
Rental Liability

	 	 	5,602	 
	
Accrued Interest

	 	 	3,643	 
	
Total Other Assets

	 	$	709,626	 

NOTE 7 – RELATED PARTY PAYABLE

The related party payable as of May 31, 2012 consists of unpaid compensation and non-interest bearing cash advances and charges on personal credit lines made on behalf of the Company by the Company’s Chief Executive Officer and Chief Operating Officer. The balances owed to the Chief Executive Officer and Chief Operating Officer are non-interest bearing, not secured and are due on demand.

NOTE 8 – FACTOR LINE OF CREDIT

On January 26, 2012 the Company executed a contract with an unrelated party (the “Factor”) to provide financing to the Company in the form of a factoring line of credit. The Company utilizes the factoring line of credit to take cash advances on its accounts receivable balances prior to its customers paying the balances owed to the Company. The Factor charges a variety of fees totaling approximately 3% of the funds advanced by the Factor. Transactions involving the Factor for the period from inception, November 30, 2011, through May 31, 2012 are detailed in the table below.

 

	
Advances From Factor

	  	
$

	
858,562

	  
	
Fees Charged by Factor

	  	  	
25,471

	  
	
Total

	  	  	
884,033

	  
	
Payments Received From Customers

	  	  	
(737,233

	
)

	
Balance, May 31, 2012

	  	
$

	
146,800

	  

 

  

F-9

  

NOTE 9 – PROMISSORY NOTES

On December 1, 2011, the Company issued a convertible promissory note for $100,000 to an entity controlled by the Company’s Chief Executive Officer and Chief Operating Officer, respectively. In exchange for the issuance of the convertible promissory note, the Company received $54,900 in cash and computer hardware valued at $45,100. The convertible promissory note bears 4% interest, is convertible into the Company’s common stock at a $0.50 conversion price and matures on December 1, 2014. The Company recorded a beneficial conversion feature of $11,213 in connection with this financing. A total of 50,000 warrants were issued in connection with this financing. The warrants were valued at $5,213,
have a three-year term, and are exercisable at a price of $0.50.

On January 27, 2012, the Company issued a convertible promissory note for $50,000 to an unrelated party (the “Creditor”). The convertible promissory note bears 4% interest, is convertible into the Company’s common stock at a $0.50 conversion price and matures on January 27, 2015. The Company recorded a beneficial conversion feature of $5,607 in connection with this financing. A total of 25,000 warrants were issued in connection with this financing. The warrants were valued at $2,607, have a three-year term, and are exercisable at a price of $0.50.

On March 22, 2012, the Company issued a convertible promissory note for $125,000 to an entity controlled by the Company’s Chief Executive Officer and an unrelated party, respectively. In exchange for the issuance of the convertible promissory note, the Company acquired the software and sourcecode for the WatchthisTM computer software. As a result of this transaction being completed with an entity controlled by the Chief Executive Officer, the WatchthisTM software and sourcecode were recorded in the Company’s books at historical cost. Costs
consisted of software development fees, domain purchase costs and legal fees associated with patent filings. The convertible promissory note bears 4% interest, is convertible into the Company’s common stock at a $0.50 conversion price and matures on March 22, 2015. The Company recorded a beneficial conversion feature of $14,017 in connection with this financing. A total of 62,500 warrants were issued in connection with this financing. The warrants were valued at $6,517, have a three-year term, and are exercisable at a price of $0.50.

The valuation of the stock warrants and the beneficial conversion feature associated with each issuance of convertible promissory notes utilized valuation inputs and related figures provided by a professional and independent valuation firm.

The conversion feature associated with the convertible promissory notes provide for a rate of conversion that is below market value. This conversion feature is accounted for as a beneficial conversion feature. A beneficial conversion feature was recorded by the Company and classified as a debt discount on the balance sheet at the time of issuance of each convertible promissory note with a corresponding credit to additional paid-in capital. The value is amortized over the three-year term of the convertible promissory. The amortized value for each period is recorded as an offset against the debt discount on the balance sheet, classified as interest expense in the statement of operations and as accretion of
debt discount within the statement of cashflows. The following table reflects the balance in convertible promissory notes as of May 31, 2012:

	
Convertible Promissory Notes, Principle Balance

	  	
$

	
275,000

	  
	
Less: Unamortized Portion of Debt Discount

	  	 	
(40,290

	
)

	
Convertible Promissory Notes Balance, May 31, 2012

	  	
$

	
234,710

	  

 

  

F-10

  

Future maturities of the promissory notes, in the aggregate, are as follows for the years ending August 31,

	
2012

	 	$	-	 
	
2013

	 	 	-	 
	
2014

	 	 	100,000	 
	
Thereafter

	 	 	175,000	 
	  	 	$	275,000	 

As of May 31, 2012, the amounts of long-term and short-term convertible promissory notes payable are stated at contract amounts that approximate fair value based on current interest rates available in the United States of America.

The following table summarizes the charges to interest and amortization for the period from inception (November 30, 2011) through May 31, 2012 totaled:

	
Factor Fees

	 	$	25,471	 
	
Other Interest Charges

	 	 	3,310	 
	
Interest Expense on Convertible Promissory Note

	 	 	686	 
	
Interest Expense on Related Party Convertible Promissory Notes

	 	 	2,957	 
	
Accretion of Debt Discount

	 	 	4,884	 
	
 Total

	 	$	37,308	 

 

NOTE 10 - STOCKHOLDERS’ EQUITY

 

The Company is authorized to issue 20,000,000 shares, in aggregate, consisting of 20,000,000 shares of common stock, $0.001 par value. The Company's Certificate of Incorporation authorizes the Board of Directors (the "Board") to determine the preferences, limitations and relative rights of any class or series of Company preferred stock prior to issuance and each such class or series must be designated with a distinguishing designation prior to issuance. As of May 31, 2012, 10,445,000 shares of the Company’s common stock were issued and outstanding.

The Company accounts for the issuance of equity instruments to acquire goods and services based on the fair value of the goods and services or the fair value of the equity instrument at the time of issuance, whichever is more reliably measurable.

On December 1, 2011, upon organization of the Company, the initial Board issued 5,000,000 shares of common stock to its Chief Executive Officer and Chief Operating Officer, respectively, and 300,000 shares to the Company’s Director of Advertising Operations. Each of these common stock issuances were considered founder’s shares.

On March 22, 2012, the Company issued 125,000 shares of common stock, valued at $62,250, to an entity controlled by the Company’s Chief Executive Officer and an unrelated individual in exchange for the WatchthisTM assets. The aggregate value of the common stock and the convertible promissory note exceeded the value of the WatchthisTM assets by $117,627. The Company accounted for this excess value issued to the entity as a one-time dividend.

On May 24, 2012, the Company issued 20,000 shares of common stock valued at $10,600 to a financial consultant to assist with the Company’s pending going public transaction with Lux.

 

  

F-11

  

NOTE 11 – DETACHABLE STOCK WARRANTS

The following is a summary of the Company’s stock warrant activity from inception, November 30, 2011, through May 31, 2012:

	  	  	
Stock

Warrants

	  	  	
Weighted Average Exercise Price

	  
	 	 	 	 	 	 	 	 	 
	
Exercisable – November 30, 2011

	  	  	
-

	  	  	
$

	
 -

	  
	
Granted

	  	  	
137,500

	  	  	
$

	
0.50

	  
	
Exercised

	  	  	
-

	  	  	
$

	
-

	  
	
Forfeited/Cancelled

	  	  	
-

	  	  	
$

	
 -

	  
	
Outstanding – May 31, 2012

	  	  	
137,500

	  	  	
$

	
0.50

	  
	
Exercisable – May 31, 2012

	  	  	
-

	  	  	
$

	
0.50

	  

 

	Warrants Outstanding	  	  	
Warrants Exercisable

	  
	 	
Range of

exercise price

	  	
Number

Outstanding

	  	
Weighted Average Remaining Contractual 

Life (in years)

	  	
Weighted Average

Exercise Price

	  	  	
Number

Exercisable

	  	  	
Weighted Average

Exercise Price

	  
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	$	0.50 	  	  	
137,500

	  	
2.50 years

	  	
$

	
0.50

	  	  	  	
137,500

	  	  	
$

	
0.50

	  
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

NOTE 12 – INCOME TAXES

The components of the provision for income tax expense (benefit) are as follows:

	  	 	
For the Period From Inception,

November 30, 2011

Through

May 31, 2012

	 
	
Current:

	 	 	 
	
Federal Corporate Income Tax (20%)

	 	$	-	 
	
State Corporate Income Tax (13%)

	 	 	-	 
	
Total

	 	 	-	 
	
Deferred:

	 	 	 	 
	
Federal Corporate Income Tax

	 	 	-	 
	
State Corporate Income Tax

	 	 	-	 
	
Less: valuation allowance

	 	 	-	 
	
Total

	 	 	-	 
	  	 	 	 	 
	
Total Provision (Benefit) for Income Taxes

	 	$	-	 

 

  

F-12

  

NOTE 13 – COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company rents office space in Santa Barbara, California. These facilities house the Company’s executives, employees, consultants and its hosting and networking facilities. The operating lease agreements generally contain renewal options that may be exercised at the Company's discretion after the completion of the base rental terms. In addition, many of the rental agreements provide for regular increases to the base rental rate at specified intervals, which usually occur on an annual basis. On May 15, 2012, the Company executed four lease agreements to extend the lease term at its current facilities through May 15, 2014. The lessor agreed to provide the Company with an option to extend each lease an
additional two years. The following table summarizes the Company’s future minimum lease payments under operating lease agreements for the period from May 31, 2012 through August 31, 2012 and for the years ended August 31, 2013 and 2014, respectively:

	
2012

	  	
$

	
52,686

	  
	
2013

	  	  	
180,636

	  
	
2014

	  	  	
127,951

	  
	  	  	
$

	
361,272

	  

The Company recognizes lease expense on a straight-line basis over the life of the lease agreement. Contingent rent expense is recognized as it is incurred.

Litigation

 

From time to time, the Company may be involved in ordinary litigation that will not have a material effect on the Company’s operations or finances. The Company is not aware of any pending or threatened litigation against the Company or the Company’s officers and directors in their capacity as such that could have a material impact on the Company’s operations or finances.

 

NOTE 14 – SUBSEQUENT EVENTS

In accordance with ASC Topic 855-10, the Company has analyzed its operations subsequent to May 31, 2012 and through August 31, 2012, and has determined that the following transactions were the only material subsequent events to disclose in these financial statements other than the events discussed above.

During the period from May 31, 2012 through August 31, 2012, the Company’s Chief Operating Officer provided financing to the Company of approximately $35,000. Repayment terms associated with this financing have yet to be established.

During the period from May 31, 2012 through August 31, 2012, Lux, an entity controlled by the Company’s Chief Executive Officer during this period, provided financing to the Company of approximately $70,000. Repayment terms associated with this financing have yet to be established.

During the period from May 31, 2012 through August 31, 2012, the Factor provided additional financing to the Company of approximately $266,000. Payments to the Factor from the Company’s customers exceeded the total value of the additional financings. The balance owed to the Factor as of August 31, 2012 was approximately $128,000.

 

  

F-13

  

 

On June 1, 2012, the Company and the Chief Executive Officer entered into an agreement whereby the Chief Executive Officer would be compensated for the Company’s exclusive use of his available credit with a lender. The compensation will be calculated based on the total advances from the lender or charges on the credit account for verified business expenses each month (“Total Usage”). The charge on the Total Usage will be calculated at an annualized interest rate of 5%.

 

On June 14, 2012, the Company entered into an agreement with an entity (“Finder”) to identify potential investors in connection with the Company’s convertible promissory note offering. The agreement provided for payment of cash fees for successful introduction of investors to the Company equal to 10% of the capital raised. Additionally, the Finder would receive an equity issuance of 10% of the securities or underlying securities issued or issuable in connection with the issuance of convertible debt or any similar financial instrument. Through the date of these financials, the Finder has not successfully introduced the Company to any investors.

 

On June 15, 2012, the Company awarded a consultant a total of 50,000 shares of common stock valued at $26,500. The shares of common stock were issued with vesting conditions such that the consultant will earn the shares of common stock awarded to him over a six-month term.

 

On June 20, 2012, the Company issued a convertible promissory note for $50,000 to an unrelated party. The convertible promissory note bears 4% interest, is convertible into the Company’s common stock at a $0.50 conversion price and matures on June 20, 2015. A total of 25,000 warrants were issued in connection with this financing. The warrants have a three-year term, are exercisable at a price of $0.50 and include a cashless exercise option

 

On July 1, 2012, the Company executed an asset purchase agreement to acquire certain domains, affiliate marketing contracts and advertising contracts owned by Rightmail Marketing, LLC, a Delware limited liability company (“Rightmail”), in exchange for a one-time issuance of 300,000 shares of common stock valued at $159,000.

 

On July 9, 2012, the Company awarded thirteen consultants working for the Company a total of 1,400,000 shares of common stock valued at $742,000. The shares of common stock were issued with vesting conditions such that the consultants will earn the shares of common stock awarded to them over a three-year term.

 

On August 22, 2012, the Company issued a convertible promissory note for $150,000 to an unrelated party. The convertible promissory note bears 4% interest, is convertible into the Company’s common stock at a $0.50 conversion price and matures on August 22, 2015. A total of 75,000 warrants were issued in connection with this financing. The warrants have a three-year term, are exercisable at a price of $0.50 and include a cashless exercise option.

 

On August 31, 2012, the Company issued a convertible promissory note for $250,000 to an unrelated party. The convertible promissory note bears 4% interest, is convertible into the Company’s common stock at a $0.50 conversion price and matures on August 31, 2015. A total of 125,000 warrants were issued in connection with this financing. The warrants have a three-year term, are exercisable at a price of $0.50 and include a cashless exercise option

 

On August 31, 2012, the Company and StreamTrack Media, Inc. (“StreamTrack”), a subsidiary of Lux, executed an asset purchase agreement whereby StreamTrack acquired substantially all of the assets and liabilities of the Company.

 

 

F-14segway_ex41.htm

EXHIBIT 4.1

 

	
COMMON STOCK

 

	  	  	
COMMON STOCK

 

	  
	  	
 

Number

---

 

	
SegwayCity, Inc.

	  	
 

Shares

***0***

 

 

	
INCORPORATED UNDER THE LAWS        

OF THE STATE OF NEVADA     

	  	
SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT AS TO THE POWERS, DESIGNATIONS, PREFERENCES, RESTRICTIONS, AND RIGHTS OF SHARES

	  	  	  	  
	  	  	  	
CUSIP  _________________

 

	
THIS CERTIFIES THAT

	
SPECIMEN

	 
	  	  	  
	
IS THE RECORD OWNER OF

	
ZERO

	  

 

FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON SHARES, $0.0001 PAR VALUE OF

 

----------------------SegwayCity, Inc. ----------------------

 

transferable on the books of the  by the registered holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar.

 

In Witness Whereof the Company has caused this certificate to be signed in facsimile by it authorized officers and its facsimile seal to be affixed.

 

	
Dated

	  	  	  	  	
  

	  
	  	  	  	  	  
	

/s/ David Hunter

	  	  	
SegwayCity, Inc. 

 

CORPORATE SEAL  

	  	
  

	

/s/ David Hunter

	
Secretary

	  	  	  	
  

	
President and

	  	  	  	  	
  

	
Chief Executive Officer

	  	  	  	  	
  

	  

 

	  	
TRANSFER AGENT AND REGISTRAR,

	  	  
	  	
By

	VOID	  
	  	  	
AUTHORIZED SIGNATURE

 

 

SegwayCity, Inc.

 

  

1

  

 

The Company is authorized to issued Common Stock and Preferred Stock. The Board of Directors of the Company has the authority to fix the number of shares and the designations of Preferred Stock and to determine or amend the preferences, privileges, and restrictions granted to or imposed upon any unissued shares of Preferred Stock.

 

The  shall furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock of the  or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights so far as the same shall have been fixed, and of the authority of the Board of Directors to designate and fix any preferences, rights and limitations of any wholly unissued series. Such requests shall be made to the Secretary at the principal office of the Company.

 

	  	  	  	  	  	  	  	  	  	  	  
	
 

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

	  	  	  	  	  	  	  	  	  	  	  
	  	  	  	  	
UNIF GIFT MIN ACT – __________Custodian ___________

	
TEN COM

	  	
as tenants in common

	  	  	  	
(Cust)                           (Minor)            

	  	  	  
	
TEN ENT

	  	
as tenants by entireties

	  	
                            under Uniform Gifts to Minors Act______________  

	  	  	  	  	  	  	  	  	  	  	
(State)                    

	
JT TEN

	  	
as joint tenants with right of

	  	
UNIF TRF MIN ACT – ___________ Custodian (until age____________ )

	  	  	
survivorship and not as

	  	
(Cust)                                                       

	  	  	
tenants in common

	  	
___________________ under Uniform Transfers

	  	  	  	  	  	  	
(Minor)                  

	  	  
	  	  	  	  	  	  	
to Minors Act ______________________________ 

	  	  	  	  	  	  	  	  	
                (State)

	
Additional abbreviations may also be used though not in the above list.

 

 

For value received,                                                                                                                    hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER

    IDENTIFYING NUMBER OF ASSIGNEE

 

	  	
  

	  

 

 

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)

 

 

	  	
Shares

 

	  	  
	
of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint

	  

 

	  	  
	  	
Attorney to

 

transfer the said stock on the books of the within named  with full power of substitution.

 

Dated:                     

 

	  	  	
X

	
  

	  
	  	  	  
	  	  	
X

	
  

	  
	  	  	
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.

 

2

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