The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
CHINA MEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2015
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 their equity interests 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:
5
| | |
·
| | 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 an equity pledge agreement executed by and between Vallant and Xi’An TV which guarantee all required payment;
|
| | |
·
| | 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
|
| | |
·
| | Vallant could exercise absolute influence over Xi’An TV through overseeing the board and senior executives of Xi’An TV.
|
|
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 year ended June 30, 2014. 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, 2014 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 products, 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.
6
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 made 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 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis”. The amendments in the ASU provide an additional requirement for a limited partnership or similar entity to qualify as a voting interest entity and also amend the criteria for consolidating such an entity. In addition, the new guidance amends the criteria for evaluating fees paid to a decision maker or service provider as a variable interest and amends the criteria for evaluating the effect of fee arrangements and related parties on a variable interest entity primary beneficiary determination. This standard is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
NOTE 3. Related Party Transactions
Mr. Dean Li, President and Shareholder of China Media Inc., had advanced $1,002,476 and $1,049,454 to the Company at March 31, 2015 and June 30, 2014, 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.
NOTE 4. Film Costs
Film costs consist of the following:
| | | | | | |
| | | | | | |
|
| March 31, 2015
|
| June 30, 2014
|
Completed and not released:
|
|
|
|
|
TV Series
|
| $
| 2,455,354
|
| $
| 3,736,378
|
Film costs
|
| $
| 2,455,354
|
| $
| 3,736,678
|
NOTE 5. Notes Receivable
On March 20, 2013, the Company lent RMB 946,500 (approximately $155,000) in the form of an interest free loan to Zhongshi Fengde (“Zhongshi Fengde”), one of the Company’s business partners. The Company collected RMB 530,000 ($86,305) as of June 30, 2014. No repayment was collected during the nine months ended March 31, 2015 and the outstanding balance was RMB 416,500 (approximately $68,177) as of March 31, 2015.
On June 13, 2014, the Company lent RMB 18M (approximately $2,931,119) to Shaan’Xi Hushi Culture Communication Company (SHCC), a company owned by a business friend of Dean Li, the President and Shareholder of China media Inc. Based on the agreement, the Company will waive interest on the loan if SHCC repays the loan within 30 days; the Company will charge interest rate at 200% of the prevailing PRC prime rate if SHCC repays the loan after 30 days. During the nine months ended March 31, 2015, the Company received repayment of RMB 11M (approximately $1,786,410) and Shaanxi Hushi orally promised to pay off the remaining balance no later than June 30, 2015. On January 8, 2015, the Company received interest of RMB 455,000 (approximately $74,165) on the loan.
On July 1, 2014, the Company lent an additional RMB 3M (approximately $487,203) to SHCC with three months term. Based on the agreement, the Company will waive interest on the loan if SHCC repays the loan within 30 days; the Company will charge interest rate at four times of the current bank loan rate if SHCC repays the loan after 30 days. No collection has been received as of the filing date and Shaanxi Hushi orally promised to pay off the loan before June 30, 2015. On January 19, 2015, the Company received interest of RMB 360,000 (approximately $58,694) on the loan.
7
On November 30, 2012, the Company entered into an agreement with Zhongshi Fengde to co-purchase copyrights of two TV series with the Company’s total investment is RMB18 million (approximately $2.86 million). On January 28, 2015, both parties agreed to transfer the Company’s payment in these two TV series to a short-term loan to Zhongshi Fengde as the copyrights purchase was not successfully completed. Zhongshi Fengde promised to pay off the loan no later than June 30, 2015.
NOTE 6. Commitments and Contingencies
On January 1, 2015, the Company renewed the lease for its main office for another three years with the rent remaining unchanged. The monthly rent is RMB 11, 167 (approximately $1,816) and the lease will expire on
December 31, 2017.
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.
8
Results of Operations
Comparison of the nine months ended March 31, 2015 and 2014:
| | | | | |
| For the Nine Months Ended March 31,
|
| 2015
| | 2014
|
|
| |
|
Revenues
| $
| -
|
| $
| -
|
Cost of revenues
|
| -
|
|
| 1,614
|
Gross profit
|
| -
|
|
| (1,614)
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
Selling, general and administrative expenses
|
| 189,317
|
|
| 221,296
|
Depreciation and amortization expense
|
| 15,073
|
|
| 15,382
|
Total operating expenses
| | 204,390
| | | 236,678
|
| | | | | |
Other income (expenses):
|
|
|
|
|
|
Government grant
| | -
| | | 79,145
|
Interest income
|
| 190,178
|
|
| 60,811
|
Interest expense
|
| (48,226)
|
|
| (7,278)
|
Total other income
|
| 141,952
|
|
| 132,678
|
|
|
|
|
|
|
Net loss before income taxes
|
| (62,438)
|
|
| (105,614)
|
Income taxes
|
| 4,739
|
|
| -
|
Net loss
| $
| (67,177)
|
| $
| (105,614)
|
Revenues
We had no revenue for the nine months ended March 31, 2015 and 2014.
Cost of revenues
We had $0 cost of sales for the nine months ended March 31, 2015, compared to $1,614 in the same period in 2014.
Gross profit
We had a negative gross profit for the nine months ended March 31, 2014, 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 nine months ended March 31, 2015 our total operating expenses were $204,390, a decrease of $32,288 as compared to $236,678 for the nine months ended March 31, 2014. The changes are relevant to payroll expenses, transportation fee, etc.
9
Net loss
For the nine months ended March 31, 2015 we incurred a net loss of $67,177. During the same period in 2014 we incurred a net loss of $105,614. This decrease was primarily due to the decrease in government subsidy income, offset by a net increase in interest income received.
Comparison of the three months ended March 31, 2015 and 2014:
| | | | | |
| For the Three Months Ended March 31,
|
| 2015
| | 2014
|
|
| |
|
Revenues
| $
| -
|
| $
| -
|
Cost of revenues
|
| -
|
|
| -
|
Gross profit
|
| -
|
|
| -
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
Selling, general and administrative expenses
|
| 46,137
|
|
| 51,021
|
Depreciation and amortization expense
|
| 4,841
|
|
| 5,142
|
Total operating expenses
| | 50,978
| | | 56,163
|
| | | | | |
Other income (expenses):
|
|
|
|
|
|
Non-operating income
|
| -
|
|
| 113
|
Interest income
|
| 62,785
|
|
| 21,027
|
Interest expense
|
| (15,352)
|
|
| (3,154)
|
Total other income
|
| 47,433
|
|
| 17,986
|
|
|
|
|
|
|
Net loss before income taxes
|
| (3,545)
|
|
| (38,177)
|
Income taxes
|
| 4,739
|
|
| -
|
Net loss
| $
| (8,284)
|
| $
| (38,177)
|
Revenues and cost of revenues
We had no revenue and cost of revenue for the three months ended March 31, 2015 and 2014.
Operating expenses
During the three months ended March 31, 2015 our total operating expenses were $50,978, a decrease of $5,185 as compared to $56,163 for the three months ended March 31, 2014.
Net loss
For the three months ended March 31, 2015 we incurred a net loss of $8,284. During the same period in 2014 we incurred a net loss of $38,177.
10
Liquidity and Capital Resources
The following table sets forth a summary of our cash flows for the periods indicated:
| | | | | | | | |
|
| For the nine months ended
|
|
|
| March 31,
|
|
|
| 2015
|
|
| 2014
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
| $
| (1,778,434
| )
|
| $
| (133,375
| )
|
Net cash provided by (used in) investing activities
|
|
| 1,299,207
| |
|
| -
| |
Net cash provided by (used in) financing activities
|
|
| (54,593)
| |
|
| 72,095
| |
| | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents
|
|
| 1,039
|
|
|
| 676
| |
NET CHANGE IN CASH
|
|
| (532,781)
| |
|
| (60,604)
| |
CASH AT BEGINNING OF PERIOD
|
|
| 633,246
|
|
|
| 184,746
|
|
CASH AT END OF PERIOD
|
| $
| 100,465
|
|
| $
| 124,142
|
|
As of March 31, 2015 we had cash of $100,465 in our bank accounts and a working capital surplus of $4,879,126.
For the nine months ended March 31, 2015, we used net cash of $1,778,434 in operating activities, compared to net cash used of $133,375 in operating activities during the same period in fiscal 2014. The increase in net of cash of $1,645,059 was mainly due to the decreases in cash paid for film costs.
During the nine months ended March 31, 2015, we received net cash of $1,299,207 from investing activities, including $1,786,410 collection of notes receivable and $487,203 loan made to other third party – Shann’Xi Hushi Culture Communication Company. During the nine months ended March 31, 2014, we collected $1,022,511 of notes receivable and paid $1,022,511 as a loan to others.
During the nine months ended March 31, 2015, we used net cash of $54,593 in financing activities, compared to net cash received of $72,095 in financing activities during the same period in fiscal 2014. The decrease was mainly due to decrease in short-term loan from a related party.
Our cash level decreased by $532,781 during the nine months ended March 31, 2015, compared to a decrease of $60,604 in the same period of 2014.
We anticipate that we will meet our ongoing cash requirements by retaining income as well as through equity or debt financing. We plan to cooperate with various individuals and institutions to acquire the financing required to produce and distribute our products and anticipate this will continue until we accrue sufficient capital reserves to finance all of our productions independently.
We intend to meet our cash requirements for the next 12 months through retaining income generated from daily operations and partnerships with finance groups on television and movie projects.
Critical Accounting Policies and Estimates
Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2014 10-K for disclosures regarding our critical accounting policies and estimates. The interim financial statements follow the same accounting policies and methods of computations as those for the year ended June 30, 2014.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Inflation
11
The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.
Audit Committee
The functions of the audit committee are currently carried out by our Board of Directors, who has determined that we do not have an audit committee financial expert on our Board of Directors to carry out the duties of the audit committee. The Board of Directors has determined that the cost of hiring a financial expert to act as a director and to be a member of the audit committee or otherwise perform audit committee functions outweighs the benefits of having a financial expert on the audit committee.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2015. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the evaluation performed, our management concluded that during the period covered by this report, our internal controls over financial reporting were effective.
During the nine months ended March 31,2015, we implemented the following measures to improve our internal control over financial reporting:
(1).
Engaged outside consultants to assist in our assessment of the effectiveness of the company’s internal controls over financial reporting; and
(2).
Developed and instituted new internal control procedures to strengthen our month-end close and financial reporting processes;
We believe these measures have strengthened our internal control over financial reporting and disclosure controls and procedures.
12
Changes in Internal Control
Except for the changes discussed above, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) that occurred during the quarterly period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not aware of any legal proceedings to which we are a party or of which our property is the subject. None of our directors, officers, affiliates, any owner of record or beneficially of more than 5% of our voting securities, or any associate of any such director, officer, affiliate or security holder are (i) a party adverse to us in any legal proceedings, or (ii) have a material interest adverse to us in any legal proceedings. We are not aware of any other legal proceedings that have been threatened against us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
| |
ExhibitNumber
| Exhibit Description
|
31.1
| Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
| |
31.2
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
| |
32.1
| Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
| |
32.2
| Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
| |
14
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
| China Media Inc.
|
| (Registrant)
|
|
|
| /s/ Dean Li
|
Date: May 14, 2015
| Dean Li
|
| President, Chief Executive Officer
|
| (Principal Executive Officer)
|
|
|
| /s/ Shuncheng Ma
|
Date: May 14, 2015
| Shuncheng Ma
|
| Chief Financial Officer
|
| (Principal Financial Officer and Principal Accounting Officer)
|
15