The accompanying notes are an integral part of these unaudited consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2016
NOTE 1.
Description of Business
China Media Inc. (the “Company”, “China Media”) was incorporated in the State of Nevada.
The Company does not conduct any substantive operations of its own; rather, it conducts its primary business operations through Vallant Pictures Entertainment Co., Ltd., its wholly owned subsidiary incorporated under the laws of the British Virgin Islands, which in turn, conducts its business through Xi’an TV Media Co. Ltd. (“Xi’An TV”). Effective control over Xi’An TV was transferred to the Company through the series of contractual arrangements without transferring legal ownership in Xi’An TV. As a result of these contractual arrangements, the Company maintained the ability to approve decisions made by Xi’An TV and was entitled to substantially all of the economic benefits of Xi’An TV.
Xi’An TV was incorporated in Xi’An, Shaan’Xi Province, People’s Republic of China (“PRC”) and is in the business of producing and developing television programming for the Chinese market.
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, 2015. 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, 2015 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. 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 November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”. The amendments in ASU 2015-17 eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments in this ASU are effective for public business entities for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The amendments may be applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
5
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The amendments in ASU 2016-01, among other things, requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial
asset (i.e., securities or loans and receivables); Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. In addition, the new guidance permits early adoption of the provision that exempts private companies and not-for-profit organizations from having to disclose fair value information about financial instruments
measured at amortized cost. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities and all nonpublic business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for
leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
In March 2016, The FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”. The amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance. The effective date and transaction of these amendments is the same as the effective date and transition of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Public entities should apply the amendments in ASU 2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
In April 2016, The FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”. The amendments in this ASU clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
6
In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”. The amendments in this ASU, among other things: (1) clarify the objective of the collectibility criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The effective date of these amendments is at the same date that Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
NOTE 3. Related Party Transactions
From time to time, the Company borrowed loans from Dean, Li, the President and Chief Executive Officer of the Company. At June 30, 2015, Dean Li had advanced $1,012,703 to the Company, the Company repaid RMB 5 million (approximately $799,386) in July 2015 and received RMB 363,171 (approximately $57,456) in December 2015. As of March 31, 2016, the Company owed Dean Li $237,180. The loans borrowed from Mr. Dean Li are non-secured, free of interest with no specified 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.
On June 16, 2014, the Company and Hangzhou Yanse Advertising Production Company (“Hangzhou Yanse”) entered into an agreement in production and distribution of the film “Dan Ta”. In July 2015, the cooperation between the Company and Hangzhou Yanse was terminated. Hangzhou Yanse refunded RMB 10 million (approximately $1,643,466) to the Company for part of its investments on July 30, 2015. The remaining investment of RMB 5 million (approximately $791,402) was subsequently made to Mr. Dean Li on behalf of the Company and received by the Company in November 2015.
NOTE 4. Film Costs
Film costs consist of the following:
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|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
June 30, 2015
|
|
Completed and not released:
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|
|
|
|
|
In development - Film
|
|
$
|
775,446
|
|
$
|
2,463,540
|
|
Film costs
|
|
$
|
775,446
|
|
$
|
2,463,540
|
The decrease of film costs is primarily due to the termination of film “Dan Ta” that was discussed in Note 3.
In July 2015, the Company entered into an agreement to invested RMB 5 million (approximately $799,386 at the time of investment) in a film that is produced by Beijing Huaxia Star Media Co., Ltd. and the payment was made in August 2015.
NOTE 5. Prepaid and Other Assets
In November 2015, the Company entered into an agreement with Xi’an Lianying Network Culture Media Co., Ltd. to invest RMB 5 million (approximately $791,027 at the time of investment) in the advertising, promotion and publicizing of a new film that is in the preparation stage. The prepayment was made in November 2015 and is non-refundable pursuant to the agreement. The prepayment will be amortized within the period of promotion process which will begin once the production of the film starts.
7
NOTE 6. Notes Receivable
On March 20, 2013, the Company lent RMB 946,500 (approximately $155,000) in the form of an interest free loan to China Fengde Movie and TV Copyright Agency (“Zhongshi Fengde”), one of the Company’s business partners. The Company collected RMB 530,000 (approximately $86,305) as of June 30, 2014. No repayment was collected during the year ended June 30, 2015 and nine months ended March 31, 2016. The outstanding balance was RMB 416,500 (approximately $64,595) as of March 31, 2016.
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 Chief Executive Officer of the Company. 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. In July 2014, the Company received repayment of RMB 11M (approximately $1,786,410) and SHCC orally promised to pay off the remaining balance no later than March 31, 2016. On January 8, 2015, the Company received interest of RMB 455,000 (approximately $74,165) on the loan. The outstanding balance was RMB 7M (approximately $1,085,625) as of March 31, 2016.
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 SHCC orally promised to pay off the loan before March 31, 2016. On January 19, 2015, the Company received interest of RMB 360,000 (approximately $58,694) on the loan. The outstanding balance was RMB 3M (approximately $465,268) as of March 31, 2016.
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 RMB 18M (approximately $2.86M at the time of investment). 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. As a result, film costs of approximately $2.79 million were reclassified to notes receivable as of March 31, 2016. No collection has been received as of the filing date.
Interest income for the nine months ended March 31, 2016 and 2015 was $60,835 and $189,936, respectively, for the notes discussed above.
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including "could", "may", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential" and the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report.
Results of Operations
Comparison of the nine months ended March 31, 2016 and 2015:
9
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For the Nine Months Ended March 31,
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2016
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2015
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Revenues
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$
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-
|
|
$
|
-
|
|
Cost of revenues
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|
-
|
|
|
-
|
|
Gross profit
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
165,435
|
|
|
189,317
|
|
Depreciation and amortization expense
|
|
1,467
|
|
|
15,073
|
|
Total operating expenses
|
|
166,902
|
|
|
204,390
|
|
|
|
|
|
|
|
|
Other income (expenses):
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|
|
|
|
|
|
Interest income
|
|
61,062
|
|
|
190,178
|
|
Interest expense
|
|
(13,081)
|
|
|
(48,226)
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Total other income
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|
47,981
|
|
|
141,952
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|
|
|
|
|
|
|
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Net loss before income taxes
|
|
(118,921)
|
|
|
(62,438)
|
|
Income taxes
|
|
-
|
|
|
4,739
|
|
Net loss
|
$
|
(118,921)
|
|
$
|
(67,177)
|
Revenue and cost
We had no sales and cost for the nine months ended March 31, 2016 and 2015.
Operating expenses
During the nine months ended March 31, 2016 our total operating expenses were $166,902, a decrease of $37,488 as compared to $204,390 for the nine months ended March 31, 2015. The changes are relevant to payroll expenses, rent expenses, amortization expenses, etc.
Net loss
For the nine months ended March 31, 2016 we incurred a net loss of $118,921. During the same period in 2015, we incurred a net loss of $67,177. This increase was the result of decrease in interest income of notes receivable and decrease in interest expense of due to related party.
Comparison of the three months ended March 31, 2016 and 2015:
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|
|
For the Three Months Ended March 31,
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|
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2016
|
|
2015
|
|
|
|
|
|
|
Revenues
|
$
|
-
|
|
$
|
-
|
|
Cost of revenues
|
|
-
|
|
|
-
|
|
Gross profit
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
31,882
|
|
|
46,137
|
|
Depreciation and amortization expense
|
|
411
|
|
|
4,841
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|
Total operating expenses
|
|
32,293
|
|
|
50,978
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|
|
|
|
|
|
|
|
Other income (expenses):
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|
|
|
|
|
|
Interest income
|
|
(652)
|
|
|
62,785
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|
Interest expense
|
|
(2,025)
|
|
|
(15,352)
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|
Total other income (expenses)
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|
(2,677)
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|
|
47,433
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|
|
|
|
|
|
|
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Net loss before income taxes
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|
(34,970)
|
|
|
(3,545)
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|
Income taxes
|
|
-
|
|
|
4,739
|
|
Net loss
|
$
|
(34,970)
|
|
$
|
(8,284)
|
Revenue and cost
We had no sales and cost for the three months ended March 31, 2016 and 2015.
Operating expenses
During the three months ended March 31, 2016 our total operating expenses were $32,293, a slight decrease of $18,685 as compared to $50,978for the three months ended March 31, 2015.The changes are relevant to rent expenses, amortization expenses, etc.
Net loss
For the three months ended March 31, 206 we incurred a net loss of $34,970. During the same period in 2015 we incurred a net loss of $8,284.This increase was the result of decrease in interest income of notes receivable and decrease in interest expense of due to related party.
Liquidity and Capital Resources
The following table sets forth a summary of our cash flows for the periods indicated:
