NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2013
NOTE 1. Description of Business
China Media Inc. (the “Company”, “China Media”) formerly Protecwerx Inc., was incorporated in the State of Nevada on October 16, 2007.
Vallant Pictures Entertainment Co., Ltd. (“Vallant”,) was incorporated in the British Virgin Islands on May 23, 2007.
Xi’An TV Media Co. Ltd. (“Xi’An TV”) was incorporated in Xi’An, Shaan’Xi Province, People’s Republic of China (“PRC”) on March 9, 2005. Xi’An TV is in the businesses of producing and developing television programming for the Chinese market.
On July 7, 2009, Fullead Overseas Limited, a company incorporated under the laws of the British Virgin Islands (the “Buyer”), entered into a share purchase agreement (the “Share Purchase Agreement”), pursuant to which the Buyer agreed to purchase a total of 32,500,000 shares of the Company’s common stock, representing 85% of the total issued and outstanding shares of common stock of the Company on a fully-diluted basis. Bin Li, the Company’s Director, is the owner and sole Director of the Buyer.
On September 16, 2009, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with Vallant and Bin Li, the Company’s Director and the former sole shareholder of Vallant. According to the terms of the Share Exchange Agreement, the Company agreed to acquire the sole issued and outstanding common share of Vallant from Bin Li in exchange for 7,000 shares of the Company’s common stock.
On November 30, 2009, the Company closed the transactions contemplated by the Share Exchange Agreement and acquired Vallant as its wholly owned subsidiary. Vallant has entered into a series of contractual obligations with Xi’An TV as well as the holders of 62.61% of the voting shares of Xi’An TV. In December 2009, the former shareholders of Xi’An TV transferred all of its equity interest in the entity to three individuals, as a result of this change of control, Vallant and the new shareholders amended the series of contractual obligations in December 2009.
On September 17, 2010, Vallant and the holders of 100% of the voting shares of Xi’An TV further amended the various consulting agreements and equity pledge agreement dated December 28, 2009. According to the amended agreements, Xi’An TV will provide Vallant with 100% of its income. Xi’An TV shareholders now pledged 100% of their equity interests in Xi’An TV to Vallant to guarantee Xi’An TV’s performance of its obligations under the Business Operations Agreement.
In compliance with the PRC’s laws and regulations, Vallant conducts all of the business in China through Xi’An TV, a domestic Variable Interest Entity (“VIE”). It does this by controlling Xi’An TV through various consulting agreements and equity pledge agreement dated June 20, 2007, as amended on December 28, 2009 and September 17, 2010, respectively.
According to the Business Services Agreement, Vallant has the exclusive right to provide services required in the regular course of business to Xi’An TV, effectively restricting and controlling the operations of Xi’An TV. In exchange, Xi’An TV will provide Vallant with 100% (62.61% prior to September 17, 2010) of its income. Furthermore, the Business Operations agreement also states that Vallant has the right to control the appointment of the board members and senior executives of Xi’An TV.
According to the Option Agreement, Vallant has the exclusive and irrevocable right to acquire 100% of the equity interests of Xi’An TV if permitted under the PRC law. In the Equity Pledge Agreement, Xi’An TV shareholders also pledged 100% (62.61% prior to September 17, 2010) of their equity interests in Xi’An TV to Vallant to guarantee Xi’An TV’s performance of its obligations under the Business Operations Agreement.
In light of the above, Vallant has a controlling interest in Xi’An TV based on the fact that:
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Vallant has the ability to absorb 100% (62.61% prior to September 17, 2010) of the expected residual return from Xi’An TV, which makes Vallant the primary beneficiary of Xi’An TV. In the event Xi’An TV fails to pay any required amounts, Vallant could exercise its right to acquire certain pledged shares in Xi’An TV pursuant to a equity pledge agreement executed by and between Vallant and Xi’An TV which guarantee all required payment;
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Vallant has the exclusive right to purchase all of the outstanding interests in Xi’An TV, which would make Xi’An TV a wholly-owned subsidiary of Vallant when it’s allowable under the PRC regulation; and
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Vallant could exercise absolute influence over Xi’An TV through overseeing the board and senior executives of Xi’An TV.
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Upon executing the above agreements, Xi’An TV is considered a VIE and Vallant is its primary beneficiary. Xi’An TV is consolidated into the Vallant under the guidance of FASB Accounting Standards Codification (ASC) 810, Consolidation.
The Company had 39,743,000 shares of our common stock issued and outstanding before the closing of the transactions contemplated by the Share Exchange Agreement. Upon the closing of the transactions, we issued 7,000 shares of our common stock to Bin Li, our Director and the former sole shareholder of Vallant. Mr. Li is the beneficial owner of 2,000,000 additional shares of our common stock. The 7,000 shares were issued in reliance upon an exemption from registration pursuant to Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”). Upon the closing of the Share Exchange, there were 39,750,000 shares of our common stock issued and outstanding.
The share exchange is being accounted for as a reverse merger, since the former sole shareholder of Vallant, Bin Li acquired the majority of the Company’s common stock with the aim of completing the share exchange with Vallant, and Vallant is deemed to be the accounting acquirer in the reverse merger. Consequently, the assets and liabilities and the historical operations that will be reflected in the consolidated financial statements for periods prior to the Share Exchange Agreement will be those of Vallant and will be recorded at the historical cost basis. After the completion of the Share Exchange Agreement, the Company’s consolidated financial statements will include the assets and liabilities of Vallant, the historical operations of Vallant and its subsidiaries from the closing date of the Share Exchange Agreement.
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited interim consolidated financial statements of China Media, Inc. (“We” or the “Company”), have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual financial statements for the years ended June 30, 2013. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented 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. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the year ended June 30, 2013 included in this document have been omitted.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of ultimate revenues and ultimate costs of film and television product, estimates of product sales that will be returned and the amount of receivables that ultimately will be collected, the potential outcome of future tax consequences of events that have been recognized in the Company’s financial statements and loss contingencies. Actual results could differ from those estimates. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or results of operations will be affected. Estimates are based on past experience and other assumptions that management believes are reasonable under the circumstances, and management evaluates these estimates on an ongoing basis.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The Company does not expect the adoption to have a material impact on its consolidated financial statements.
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In March 2013, the FASB issued
ASU
2013-05 “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.”
ASU
2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. For public entities, the ASU is effective prospectively for fiscal years, and interim periods, within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-05 is not expected to have a material impact on the Company’s consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. These amendments provide that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
NOTE 3. Related Party Transactions
Mr. Dean Li, President and Shareholder of Xi’An TV, had advanced $210,667 and $136,790 to the Company at December 31, 2013 and June 30, 2013, respectively. The shareholder loan discussed above is non-secured, free of interest with no maturity date. The imputed interests are assessed as an expense to the business operation and an addition to the paid-in-capital and calculated based on annual interest rate in the range of 5.94-6.56% with reference to one-year loan.
The Company also leased an office space from a former shareholder with a monthly rent of approximately $1,085 with lease termination date of May 7, 2014.
NOTE 4. Film Costs
Film costs consist of the following:
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December 31, 2013
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June 30, 2013
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Completed and not released:
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TV Series
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$
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3,436,764
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$
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3,401,802
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In development - TV Series
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53,631
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40,724
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Film costs
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$
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3,490,395
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$
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3,442,526
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NOTE 5. Notes Receivable
On April 22, 2011, the Company lent RMB10M (approximately $1.6M) to Shaan’Xi Railway Transportation Trade Company (SXRT), a company owned by a business friend of Dean Li, the President and Shareholder of China Media Inc. On June 30, 2013, the balance of notes receivable from SXRT was RMB9.2M (approximately $1.5M). In the three months ended September 30, 2013, the Company collected RMB6.3M (approximately $1M) from SXRT, and SXRT promised to pay back the remaining RMB2.9M (approximately $0.5M) no later than December 31, 2013. However, SXRT failed to repay the remaining RMB 2.9M (approximately $0.5M) as of December 31, 2013 and orally promised to pay off the borrowing once they get rid of the cash shortage. The loan has a specified interest rate of 3%.
On March 20, 2013, the Company lent RMB946,500 (approximately $155K) in the form of interest free loan to Zhongshi Fengde (“Zhongshi Fengde”), one of the Company’s business partners. In July 2013, the Company paid for a copyright transfer fee of one TV series on behalf of Zhongshi Fengde in the amount of RMB6.3M (approximately $1M). The parties agreed to treat the borrowing as an interest free loan and Zhongshi Fengde promised to repay the loan no later than December 31, 2013. However, Zhongshi Fengde did not pay back the loan as of December 31, 2013 and orally promised to pay off the loan once they get rid of the cash shortage.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including "could", "may", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential" and the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report.
Results of Operations
Comparison of the six months ended December 31, 2013 and 2012:
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For The Six Months Ended December 31,
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2013
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2012
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Revenues
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$
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-
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$
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7,798
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Cost of revenues
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1,612
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-
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Gross profit
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(1,612)
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7,798
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Operating expenses
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Selling, general and administrative expenses
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170,275
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161,380
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Depreciation and amortization expense
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10,240
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9,470
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Total operating expenses
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180,515
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170,850
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Other income (expenses):
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Government grant
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79,032
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-
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Interest income
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39,784
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22,030
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Interest expense
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(4,124)
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-
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Total other income (expenses)
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114,692
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22,030
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Net loss before income taxes
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(67,435)
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(141,022)
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Income taxes
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-
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176
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Net loss
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$
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(67,435)
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$
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(141,198)
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Revenues
We had no revenue for the six months ended December 31, 2013, compared to $7,798 in the same period in 2012. We reported our advertising revenue based on net amount retained as an agent.
Cost of revenues
We had $1,612 cost of sales for the six months ended December 31, 2013, compared to $0 in the same period in 2012.
Gross profit
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We had a negative gross profit for the six months ended December 31, 2013, mainly due to conversion from Business Tax to Value Added Tax (“VAT”) in Shaanxi province. The Company reported its advertising revenue based on net amount retained as an agent, which is after VAT deduction.
Operating expenses
During the six months ended December 31, 2013 our total operating expenses were $180,515, an increase of $9,665 as compared to $170,850 for the six months ended December 31, 2012.
Net loss
For the six months ended December 31, 2013 we incurred a net loss of $67,435. During the same period in 2012 we incurred a net loss of $141,198. This decrease was the result of increase in government subsidy income, which recorded in other income.
Comparison of the three months ended December 31, 2013 and 2012:
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For The Three Months Ended December 31,
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2013
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2012
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Revenues
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$
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-
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$
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2,871
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Cost of revenues
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1,612
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-
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Gross profit
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(1,612)
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2,871
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Operating expenses
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Selling, general and administrative expenses
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115,355
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105,396
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Depreciation and amortization expense
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5,136
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4,694
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Total operating expenses
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120,491
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110,090
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Other income (expenses):
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Government grant
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79,032
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-
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Interest income
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25,129
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11,125
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Interest expense
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(2,068)
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-
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Total other income (expenses)
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102,093
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11,125
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Net loss before income taxes
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(20,010)
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(96,094)
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Income taxes
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-
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176
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Net loss
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$
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(20,010)
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$
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(96,270)
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Revenues
We had no revenue for the three months ended December 31, 2013, compared to $2,871 in the same period in 2012. We reported our advertising revenue based on net amount retained as an agent.
Cost of revenues
We had $1,612 cost of sales for the three months ended December 31, 2013, compared to $0 in the same period in 2012.
Gross profit
We had a negative gross profit for the three months ended December 31, 2013, mainly due to conversion from Business Tax to Value Added Tax (“VAT”) in Shaanxi province. The Company reported its advertising revenue based on net amount retained as an agent, which is after VAT deduction
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Operating expenses
During the three months ended December 31, 2013 our total operating expenses were $120,491, an increase of $10,401 as compared to $110,090 for the three months ended December 31, 2012.
Net loss
For the three months ended December 31, 2013 we incurred a net loss of $20,010. During the same period in 2012 we incurred a net loss of $96,270.
Liquidity and Capital Resources
The following table sets forth a summary of our cash flows for the periods indicated: