Item 1. Business
This annual report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors”, that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.
In this annual report, unless otherwise specified, all dollar amounts are expressed in United States Dollars and all references to “common shares” refer to the common shares in our capital stock.
As used in this annual report, the terms “we”, “us”, “our company”, mean China Media Inc., a Nevada corporation and our subsidiaries, unless otherwise indicated.
Share Exchange
On September 16, 2009, we entered into a share exchange agreement (the “Share Exchange Agreement”) with Vallant Pictures Entertainment Co., Ltd., a company incorporated under the laws of the British Virgin Islands (“Vallant”) and Bin Li, our Director and the former sole shareholder of Vallant. According to the terms of the Share Exchange Agreement, we agreed to acquire the sole issued and outstanding common share of Vallant from Bin Li in exchange for 7,000 shares of our common stock.
On November 30, 2009, we closed the transactions contemplated by the Share Exchange Agreement and acquired Vallant as our wholly owned subsidiary. Vallant has entered into a series of contractual obligations with Xi’An TV Media Co., Ltd., a company incorporated under the laws of the People’s Republic of China (“Xi’An TV”) that is engaged in the business of producing and developing television programming for the Chinese market, as well as the holders of 62.61% of the voting shares of Xi’An TV. A full description of these contractual arrangements is included under the heading “Organization”, below.
We 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 of our common stock were issued to Mr. Li in reliance upon an exemption from registration pursuant to Regulation S under the Securities Act.
Prior to our entry into the Share Exchange Agreement, Bin Li was our Director and the sole officer, director and beneficial owner of Vallant. Further details on the transactions contemplated by the Share Exchange Agreement can be found in our Current Report on Form 8-K filed with the SEC on September 18, 2009.
Organization
Our relationship with Xi’An TV and its shareholders is governed by a series of contractual arrangements between Vallant, Xi’An TV and the holders of 100% (62.61% until September 17, 2010) of the share capital of Xi’An TV (the “Xi’An TV Shareholders”). Under the laws of China, the contractual arrangements constitute valid and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of China. Other than pursuant to the contractual arrangements between Vallant and Xi’An TV described below, Xi’An TV cannot transfer 100% (62.61% until September 17, 2010) of the funds generated from their operations.
On June 20, 2007 Vallant entered into the following contractual arrangements with Xi’An TV and the Xi’An TV Shareholders:
Business Operations Agreement. Pursuant to this agreement between the Xi’An TV Shareholders, Xi’An TV and Vallant, the Xi’An TV Shareholders must designate the candidates recommended by Vallant as their representatives on the Board of Directors of Xi’An TV, and Vallant acquired the right to appoint the senior executives of Xi’An TV. In addition, Vallant must guarantee Xi’An TV’s performance under any agreements or arrangements relating to Xi’An TV’s business arrangements with any third party, and upon request from Xi’An TV, Vallant must provide loans to support the operational capital requirements of Xi’An TV and loan guarantees if third party loans are necessary. In return, Xi’An TV must pledge its accounts receivable and all of its assets to Vallant. This agreement is effective for an indefinite term and may be terminated by Vallant with 30 days notice.
Business Services Agreement. Pursuant to this agreement among Vallant and Xi’An TV, Vallant acquired the exclusive rights to provide Xi’An TV with all services required by Xi’An TV in the regular course of business, including services pertaining to administration, human resources, production, screenplay drafting and marketing. As part of this agreement, Vallant must also undertake to:
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develop business opportunities on behalf of Xi’An TV;
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provide relevant market information research;
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receive payments from customers on behalf of Xi’An TV;
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administer staff training and human resources for Xi’An TV; and
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provide daily accounting and financial services.
In exchange, Xi’An TV must provide Vallant with 62.61% (now 100%) of its income. This agreement is effective for an indefinite term and may be terminated by Vallant at any time with no notice.
Option Agreement. Pursuant to this agreement between the Xi’An TV Shareholders, Xi’An TV and Vallant, the Xi’An TV Shareholders irrevocably granted Vallant or its designees the exclusive option to purchase, to the extent permitted under the laws of China, all or part of their equity interest in Xi’An TV for the cost of their initial contributions to the registered capital of Xi-An TV or the minimum amount of consideration permitted by applicable Chinese law. The proceeds of the exercise of the option will be applied to repay loans extended by the Xi’An TV Shareholders to Xi’An TV, unless otherwise agreed. Vallant or its designees have sole discretion to decide when to exercise the option, whether in part or in full. This agreement is effective for an indefinite term and may be terminated by Vallant at any time with no notice.
Equity Pledge Agreement. Pursuant to this agreement between Xi'An TV, the Xi’An TV Shareholders and Vallant, the Xi’An TV Shareholders pledged all 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 described above. If Xi’An TV or the Xi’An TV Shareholders breach their respective contractual obligations, Vallant, as the pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The Xi’An TV Shareholders also agreed that upon the occurrence of any event of default, Vallant will acquire an exclusive, irrevocable power of attorney to take the place and stead of the Xi’An TV Shareholders to carry out the security provisions of this agreement and take any action and execute any instrument that Vallant may deem necessary or advisable to accomplish the purposes of this agreement. The Xi’An TV Shareholders must not dispose of their pledged equity interests or take any actions that would prejudice Vallant’s interests. This agreement is effective for an indefinite term and may be terminated by Vallant at any time with no notice.
On September 17, 2010, the shares of Xi’An TV changed ownership and we entered into a new set of agreements with the new holders of 100% of Xi’An TV’s shares.
Since the Xi’An TV Shareholders do not have the characteristics of a controlling financial interest and do not have sufficient equity at risk for Xi’An TV to finance its activities without additional subordinated financial support from other parties, Xi’An TV’s financial
statements become consolidated as our own. As such, and due to the interest we hold in Xi’An TV through Vallant, the following business description describes the business and operations of Xi’An TV as our own.
Business Overview:
For the year ended June 30, 2017, our business and operation remained virtually the same as the year ended June 30, 2016.
Products and Services
Since our incorporation we have produced one feature-length film, eleven television series and one documentary. Television series in China are similar to those in the North American market, but they do not operate on the basis of seasons. Each series has a definite lifetime of anywhere from 10 to 50 episodes, at which point the series ends and a new one is developed. The new series may be based on previous ones, but the development of a new series does not follow the same type of recurring seasonal structure as in North America.
In 2007, our television series Special Mission received a viewership rating of 4% of the entire Chinese market when it was broadcast on China Central Television (“CCTV”), Channel 8. In the same year Invisible Wingsreceived the Outstanding Children’s Film and Outstanding Young Actress awards during the 12th Film Ornamental Column Awards, the Golden Elephant Award during the Indian International Film Festival, the Golden Angel Award during the Hollywood China-USA Film Festival, and was featured as the opening film of Beijing International Sport Film Week.
Below is a summary of some of our more successful programming that we have already released:
Invisible Wings - A 90 minute feature film, this motivational drama describes the story of a 15-year old Chinese girl who lost her arms in an accident, and whose mother was diagnosed with schizophrenia and anxiety. The young girl’s love for her mother motivates her to apply herself diligently to her studies and athletics. She also takes care of her mother while battling her disabilities. The girl overcomes all odds and wins a medal in the Chinese national games for the disabled and represents her country at the Paralympics.
In 2007, Invisible Wings received the Outstanding Children’s Film and Outstanding Young Actress awards during the 12th Film Ornamental Column Awards, the Golden Elephant Award during the Indian International Film Festival, the Golden Angel Award during the Hollywood China-USA Film Festival, and was featured as the opening film of Beijing International Sport Film Week.
Special Mission - A 40-episode television series with each episode lasting 40 minutes, Special Mission is a war drama that focuses on the actions of members of the Chinese military intelligence community as they fight against the Japanese army which invaded China. The series describes various characters who sacrificed their lives in order to protect their country and uncover the plans of the Japanese forces.
Lotus Lantern Prequel - A 46 episode television series with each episode lasting 52 minutes, Lotus Lantern Prequel is a drama based on traditional Chinese mythology that describes the story of God Erlang, a popular mythological figure, who battles through adversity and many enemies to reunite with his mother and younger sister.
After being broadcast on CCTV-8 in April 2009, Lotus Lantern Prequel achieved a first-run audience rating of 3.9% during prime time and was syndicated on many Chinese regional television stations.
We plan to invest approximately $7,990,000 in producing and distributing six new television series over the next two years. We anticipate raising sufficient capital for these expenditures through debt or equity financing as well as engaging in joint venture productions with other established production companies.
We plan to undertake the development and production of our programming through a series of different stages from development to post-production. The process can be summarized as follows:
Development Stage
This is the initial stage during which we develop and research a concept. We undertake market research and hold focus groups to establish whether demand exists for a particular type of programming. Once we receive positive feedback on a concept we instruct our writers to produce a plot of the program based on suggestions from the focus groups and the results of our market research. Alternatively, we can acquire original works or rights to adapt classic works, both from China and abroad, that we believe will be marketable to the Chinese market. If we complete any such acquisition, we generally produce a plot based on the work which may be further revised as we
continue developing the project. The plot provides a basic outline of the program and provides a foundation upon which our writers can produce a screenplay or script.
Our plot is then reviewed by our development committee. This committee is made up of recognized television and film professionals in China as well as members of our local Shaan’Xi Province Administration of Radio, Film and Television (“ARFT”) agency, who are responsible for approving the programming for distribution to television stations. By having a development committee in place, we hope to avoid producing works that will either not be granted government approval for distribution, will be too difficult to produce or will not be attractive to television stations and viewers.
Once we have decided upon the basic plot for a project, we determine its production schedule, a rough budget and terms of financing. We may provide the financing directly or through a joint venture with one or more third parties interested in participating in the project. Potential investors include advertisers and distributors, home video publishers and private investors. Currently, we partner primarily with such investors to provide the financing required to develop our television programming, but we also plan on raising capital through the sale of our debt or equity securities.
The development stage usually takes six months to several years, subject to our market research, co-production negotiations and script judgment from focus groups and the development committee.
Pre-Production Stage
The next stage involves developing a detailed script or screenplay based on the basic plot outline produced in the first stage of the process. The script generally incorporates all of the themes and major characteristics of the outline while taking into account production scenarios. Our scripts and screenplays are based on our own original work as well as adaptations of books, musical works, folklore and classic Chinese or international stories.
We hire part-time writers who work out of our offices to create the screenplays and scripts for our television series and films. Occasionally, we also purchase completed screenplays and scripts from suppliers such as professional writers, other film producers or the general public.
After the screenplay or script is finalized, our financial department plans the investment budget and our film and television series production center prepares a detailed production plan and searches for a suitable director, production manager and executive producer, as well as actors and crew. The production manager is responsible for executing all facets of production, the executive producer supervises the production process and the director is responsible for the actors, crew and cinematography.
This part of the process generally takes one to two months depending on the complexity of the script and the production.
Production Stage
This stage deals with the actual filming of the television series or film. The director, actors and crew gather at a studio at our offices, at a sound stage we rent out or that is provided by one of the production partners, or at another location to film a particular scene or scenes. Our involvement in this stage is minimal unless modifications to the script or screenplay must be made. Currently, we outsource the principal photography and filming of the various scenes to the Xi’An Television Production Center. We do not directly employ any directors, actors or crew.
Depending on the complexity of the project, the production stage can last up to six months for a television series and up to three months for a film.
Post-Production Stage
Once production has wrapped up, we are responsible for coordinating all of the tasks required to produce a finished product for television or the cinema. We assign an editor to assemble the various pieces of film and determine scene transitions, and we add musical elements, subtitles, visual and/or digital effects to the television series or film. Once the editing process is complete, which takes up to three months, the director provides input on any changes and a final version of the program or film is produced.
Markets
According to an article titled “China Film Industry Development Status” on www.chinafilm.com, the Chinese film industry generated revenues of approximately $1.2 billion from film sales during 2008. This represents an increase of 25% over sales numbers in 2007 and
includes 7.15 million film screenings to an audience of 1.6 billion people. Sixty percent of the films were produced domestically in China.
During early 2009, the television series department of the State Administration of Radio, Film and Television (“SARFT”) agency completed a review of the television series industry in China. They found that Chinese television stations invested approximately $800 million into the production and purchase of television series in 2008. This represents an increase of 38% compared to the amounts spent in 2007.
Additionally, according to www.people.com.cn, Chinese film and television series producers generated revenue of approximately $440 million by exporting their productions outside of China.
The major purchasers of television series are regional and national television stations. The demand for such programming from other media providers, such as internet television stations who distribute programs through an internet connection or directly onto a client’s mobile phone, is limited, and as such we have not considered producing programs intended for these types of media.
Since the major regional and national television networks are subject to heavy government influence, we develop our television series and films with this consideration in mind. Generally, we plan to focus on topics that the government supports, such as revolutionary history or modern Chinese culture, which will make our programming more attractive for networks such as CCTV to broadcast and release through their stations.
Distribution Methods
After we complete the production and editing of a film or television series, we must file an application for approval to broadcast the program with the SARFT agency. Once we are granted approval and provided with a broadcasting permit for the film or series, we are free to distribute the program, which, in the case of a television series, we normally begin following the completion of one or two episodes.
Our main customers include the following networks:
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CCTV;
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Hunan Satellite Television;
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Jiangsu Satellite Television;
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Zhejiang Satellite Television;
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Jiangxi Satellite Television;
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Anhui Satellite Television; and
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all other provincial broadcast television networks in China.
CCTV is the major state television broadcaster in mainland China. It has a network of 19 channels that broadcast different programs and is accessible to more than one billion viewers. The programming on Channels 1 and 8 of the CCTV network is most closely aligned with the characteristics of our films and television series. Once our programming is televised on CCTV, regional television networks regularly purchase the same programming to use for their television stations.
We distribute our films and television series primarily through our direct sales channel. Occasionally, we may also use the services of an outside distributor to facilitate sales to a wider range of customers. However, even though we devote a significant amount of our resources to ensuring that the programming we produce appeals to our customers and have had success distributing it in the past, there can be no assurance that any film or television series we produce will be purchased by any distributors or television networks.
Competition
We face competition from various television and film production companies ranging from small, private businesses to large, state-sponsored enterprises. Some of our major competitors include China Film Group, Huayi Brothers Media Group and PolyBona Film Distribution Co.
Many of our competitors have longer operating histories, better brand recognition and greater financial resources than we do. In order for us to successfully compete in our industry we will need to:
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develop highly marketable programming;
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continue developing our relationships with major television networks; and
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increase our financial resources.
However, there can be no assurance that even if we do these things we will be able to compete effectively with the other companies in our industry.
As of June 2010, there were approximately 3000 film and television producers registered in China. Among these, approximately one-third had not produced any films or television series between 2006 and 2008, and the majority of the others only produced an average of two to three films or series per year. The film and television industry in China is highly de-centralized and there are no truly dominant producers with whom we must compete.
We believe that we will be able to compete effectively in our industry because of a successful product development strategy that we have already used to produce profitable programming. Our past productions have been successful due to the detailed production process and strategy described above as well as the strong relationships we have forged with television networks.
We also attempt to increase the probability that our programming will be profitable and will be purchased by television networks by having all of our concepts vetted by our programming committee. This committee is comprised of established professionals in the Chinese film and television industry as well as members of the examination team of the Shaan’Xi Province ARFT agency, which provides approval for programming to be distributed to television networks. We believe that having our programming vetted by this committee increases our competitiveness in the industry and the chance that any television series or film we produce will be approved by the government and subsequently purchased by one or more television networks.
Additionally, we have established relationships with actors, directors and production agencies through previous collaborations, and have created cooperative relationships with the major television station in the city of Xi’An and the Xi’An Television Production Center that have provided us with access to partners of theirs as well as major television networks throughout the country. This resulted in our television series, Special Mission, being distributed to over 90% of the television stations throughout China.
Intellectual Property
We have not filed for any protection of our name or trademark. Since we produce film and television scripts and screenplays, we develop and sell intellectual property regarding these productions. Our intellectual property rights are protected to the fullest extent permitted by Chinese law. The following is a list of films and television series in which we hold, or used to hold, intellectual property rights:
Name
Programming Type
Current Intellectual Property Income Rights
Special Mission
TV Series
Yes
Invisible Wings
Film
No (Sold)
Doctor County Mayor
TV Series
Yes
Lotus Lantern Prequel
TV Series
Yes
Fox-Hunting
TV Series
No (Sold)
Lucky Chicken
TV Series
Yes
Hard Corps
TV Series
Yes
Tianshan Urgency Action
TV Series
Yes
Drive Dragon Gate
TV Series
Yes
Lover’s Grief
TV Series
Yes
Desert Love Story
TV Series
No (Sold)
Gongtan Ancient Town of China
Documentary
Yes
Six Men’s Disasters in Tang Dynasty
TV Series Script
Yes
Lady Shexiang
TV Series
Yes
Xia Hai
TV Series
Yes
Huang Tu Nv Nv
TV Series
Yes
Xiao Lao Xiang Jin Cheng
TV Series
Yes
Guo Men Ying Xiong
TV Series
Yes
The love of the Hawthron Tree
TV Series
Yes
Zhu De
TV Series
Yes
Qiang Xia
TV Series
Yes
We also own the copyright of our logo and all of the contents of our website, www.xatvm.com.
Research and Development
We did not incur any research and development expenses during the years ended June 30, 2017 and 2016.
Reports to Security Holders
The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.
Government Regulations
Regulation on Screenplay (Outline) Keeping On Record and Film Management enacted by the SARFT on April 3, 2006
This regulation affects the following two procedures we undertake:
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before producing a film, the producer of the film is required to submit the screenplay to the local Provincial AFRT for backup and record keeping, and if the film deals with subjects pr themes of historical or revolutionary importance, the screenplay must be supervised and approved by the SARFT; and
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each film produced in China must be submitted to the examination committee of SARFT, which examines the film’s content and decides whether the film should be allowed to be broadcast in China. Films that receive approval receive a Film Public Show Permit and Film Examination Written Decision designation, and without this designation, a film cannot be aired on television in China and will therefore not be distributed.
Effect on our operations. We need to submit any films we produce to the SARFT for approval prior to their distribution and broadcasting. It generally takes approximately two or three months to complete the examination, and it may take longer if we receive comments that we must revise the film in some way. Since we work with a number of individuals who form part of the SARFT examination group, we limit the risk of not receiving broadcast approval or being required to revise our scripts and screenplays. However, if revisions are required or a screenplay is rejected, this could increase our costs of production and impact our profitability.
Regulations on Radio and Television Program Production and Operation Management enacted by the SARFT on June 15, 2004
This regulation states that all Chinese enterprises operating in the business of radio and television program production must acquire a Permit Certificate of Radio and Television Program Production and Operation. The regular term of this license is two years and it may
be renewed every two years. Additionally, the regulation specifies that television series may only be produced by companies or entities that have received a Permit Certificate distributed by the SARFT.
Effect on our operations. We currently hold the appropriate Permit Certificate, and as such we are qualified to operate a film and television program production business in China. Renewing the Permit Certificate is a very straightforward process and we do not anticipate that it will cost us much or have a significant effect on our operations.
Regulation on Radio Television Management enacted by the State Council on August 1, 1997
This regulation was enacted to provide guidance on establishing Chinese radio and television stations as well as planning and constructing radio and television networks under the supervision of the SARFT. The regulation also states that radio and television programs may not be produced by companies or entities that do not hold the relevant Permit Certificate, that radio and television programs may not be broadcasted without the approval of the SARFT and that any companies or entities that act in violation of these regulations will face regulatory action.
Effect on our operations. This is a general administrative regulation relating to all radio and television programming companies. We currently comply with all of the requirements of the regulation and if at any time we do not possess any specific permits that may be required, we plan to locate cooperative companies that do and partner with them to produce of our films and television series.
Environmental Regulations
We are not aware of any material violations of environmental permits, licenses or approvals that have been issued with respect to our operations. We expect to comply with all applicable laws, rules and regulations relating to our business, and at this time, we do not anticipate incurring any material capital expenditures to comply with any environmental regulations or other requirements.
While our intended projects and business activities do not currently violate any laws, any regulatory changes that impose additional restrictions or requirements on us or on our potential customers could adversely affect us by increasing our operating costs or decreasing demand for our products or services, which could have a material adverse effect on our results of operations.
Employees
We currently have 42 employees including our Chief Financial Officer and Chief Executive Officer. We engage seven of the employees on a full-time basis and 35 on a part-time basis.
Item 1A.
Item 1A. Risk Factors
As a “smaller reporting company”, we are not required to provide the information required by this Item.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
We currently rent one office space for the following business purpose:
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Corporate Office: Room 10128, No. 269-5-1 Taibai South Road, Yanta District, Xi’An, Shaan'Xi Province, China, with an area of 319.07 square meters. Lease term: from January 1, 2015 to December 31, 2017. The rent is approximately $20,844 per year.
Item 3.
Item 3. Legal Proceedings
We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our company.
Item 4.
Item 4. [Removed and Reserved]
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
Our common stock is not traded on any exchange. Our common stock is quoted on OTC Pink under the trading symbol “CHND”. We cannot assure you that there will be a market in the future for our common stock.
OTC Pink securities are not listed nor traded on the floor of an organized national or regional stock exchange. Instead, OTC Pink securities transactions are conducted through a telephone and computer network connecting dealers. OTC Pink issuers are traditionally smaller companies that do not meet the financial and other listing requirements of a national or regional stock exchange.
The range of high and low bid quotations by quarters from July 1, 2015 through June 30, 2017 is listed below. The quotations are taken from the OTC Pink. They reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
Holders
As of September 26, 2017 there were 255 holders of record of our common stock.
Dividends
To date, we have not paid dividends on shares of our common stock and we do not expect to declare or pay dividends on shares of our common stock in the foreseeable future. The payment of any dividends will depend upon our future earnings, if any, our financial condition, and other factors deemed relevant by our Board of Directors.
Equity Compensation Plans
For the year ended June 30, 2017 and as of September 26, 2017 we did not have any equity compensation plans.
Outstanding Equity Awards at Fiscal Year-End
There were no outstanding equity awards for our executive officers and directors as of June 30, 2017.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our shares of common stock or other securities during the year ended June 30, 2017.
Recent Sales of Unregistered Securities
We did not have any sales of unregistered securities which have not been previously disclosed.
Item 6.
Item 6. Selected Financial Data
As a “smaller reporting company”, we are not required to provide the information required by this Item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this annual report. The discussion of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily continue into the future. All references to currency in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section are to U.S. dollars, unless otherwise noted.
Liquidity and Capital Resources
For the years ended June 30, 2017 and 2016
As of June 30, 2017, we had $13,199 in cash, current assets of $27,941, current liabilities of $702,022 and working capital deficit of $674,081. As of June 30, 2016, we had $37,190 in cash, current assets of $2,936,024, current liabilities of $568,060 and working capital of $2,367,964. As of June 30, 2017, we had total assets of $1,519,763, compared to total assets of $4,459,420 as of June 30, 2016.
During the year ended June 30, 2017, we used net cash of $191,828 in operating activities, compared to net cash earned of $687,453 in operating activities during the year ended June 30, 2016. The decrease of net cash provided by operating activities of $879,281 was mainly due to the decrease in cash received from the refund of film costs.
During the year ended June 30, 2017, we received net cash of $30,004 from investing activities. The $30,004 was from collection of notes receivables. During the year ended June 30, 2016, there was no cash generated from investing activities.
During the year ended June 30, 2017, we received net cash of $139,365 from financing activities, compared to net cash used of $698,209 in financing activities during the year ended June 30, 2016. The increase in net cash provided by financing activities was mainly due to the increase in proceeds from related party.
Our net cash level decreased by $23,991 during the year ended June 30, 2017, compared to a decrease of $38,422 during the year ended June 30, 2016. The changes in cash were results of the factors described above.
In assessing its liquidity, management monitors and analyzes the Company’s cash on-hand, its ability to generate sufficient revenue sources in the future and its operating and capital expenditure commitments. The Company plans to fund working capital through cooperation with other film and television producers and obtaining shareholders’ loans to meet our cash requirements. The President and Chief Executive Officer of the Company, Mr. Dean Li, has pledged to provide personal loans whenever necessary to the Company as working capital for next twelve months.
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 films and television series and anticipate this will continue until we accrue sufficient capital reserves to finance all of our productions independently.
We estimate that our expenses over the next 12 months (beginning October 2017) will be approximately $11,650,000 as described in the table below. These estimates may change significantly depending on the nature of our future business activities and our ability to raise capital from shareholders or other sources.
We intend to meet our cash requirements for the next 12 months through a combination of debt financing and equity financing by way of private placements. There is good potential for the development of our business in China. If we get more liquidity, it will be best way to expand our business and improve profit. We currently do not have any arrangements in place to complete any private placement financings and there is no assurance that we will be successful in completing any such financings. If we are not able to successfully
complete any private placement financings, we plan to cooperate with film and television producers or obtain shareholder loans to meet our cash requirements. However, there is no assurance that any such financing will be available or if available, on terms that will be acceptable to us. We may not raise sufficient funds to fully carry out our business plan.
Results of Operations
The following table sets forth information from our statements of operations for the years ended June 30, 2017 and 2016:
Revenues and cost
We had no sales and cost for the years ended June 30, 2017 and 2016.
Operating Expenses
During the year ended June 30, 2017 our total operating expenses were $2,985,952, a decrease of $62,183 as compared to $3,048,135 for the year ended June 30, 2016. The main decrease was relevant to decrease in bad debt expenses.
Net loss
For the year ended June 30, 2017 we incurred a net loss of $2,995,959, as compared to a net loss of $3,064,447 for the year ended June 30, 2016, a decrease of $68,488. This decrease was primarily due to the decrease in operating expenses.
Contractual Obligations
As a “smaller reporting company”, we are not required to provide tabular disclosure obligations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our audited financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of
accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials.
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 based on past experience and other assumptions that management believes are reasonable under the circumstances, and management evaluates these estimates on an ongoing basis.
Fair Value of Financial Instruments
The fair value of financial instruments, which consist of cash, accounts receivable, notes receivable, prepaid and other assets, accounts payable, accrued liabilities and other payables, were estimated to approximate their carrying values due to the immediate or relatively short maturity of these instruments.
Earnings (loss) Per Share
The Company calculates net income (loss) per share in accordance with ASC 260, Earnings Per Share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. As of June 30, 2017 and 2016, respectively, the Company had no common stock equivalents that could potentially dilute future earnings (loss) per share.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company”, we are not required to provide the information required by this Item.
Item 8.
Item 8. Financial Statements and Supplementary Data
CHINA MEDIA INC.
Consolidated Financial Statements
(Expressed in US dollars)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of China Media Inc.
Xi’An, People’s Republic of China
We have audited the accompanying consolidated balance sheets of China Media Inc. and its subsidiaries (collectively, the “Company”) as of June 30, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Media Inc. and its subsidiaries as of June 30, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has a working capital deficit that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
September 28, 2017
CHINA MEDIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Description of Business
China Media Inc. (“our”, the “Company”, “China Media”), formerly Protecwerx Inc., was incorporated in the State of Nevada on October 16, 2007.
The Company does not conduct any substantive operations of its own; rather, it conducts its primary business operations through Vallant Pictures Entertainment Co., Ltd.(“Vallant”), 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 investing, producing and developing film and television programming for the Chinese market.
NOTE 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and Xi’An TV, which is a variable interest entity with the Company as the primary beneficiary. In accordance with United States generally accepted accounting principles (“U.S. GAAP”) regarding “Consolidation of Variable Interest Entities”, the Company identifies entities for which control is achieved through means other than through voting rights (a "variable interest entity" or "VIE") and determines when and which business enterprise, if any, should consolidate the VIE. The Company evaluated its participating interest in Xi’An TV and concluded it is the primary beneficiary of Xi’An TV, a variable interest entity. The Company consolidated Xi’An TV and all significant intercompany transactions and balances have been eliminated.
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 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.
Concentration of Credit Risk
The Company maintains cash balances at various financial institutions in the PRC which do not provide insurance for amounts on deposit. The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk in this area.
The Company operates principally in the PRC and grants credit to its customers in this geographic region. Although the PRC is economically stable, it is always possible that unanticipated events in foreign countries could disrupt the Company’s operations.
Fair Value of Financial Instruments
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Authoritative literature provides a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement as follows:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The fair value of financial instruments, which consist of cash and cash equivalents, accounts receivable, notes receivable, prepaid and other receivable, accounts payable, accrued liabilities and other payables, were estimated to approximate their carrying values due to the immediate or relatively short maturity of these instruments.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated. It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related party nature.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits with banks and liquid investments with an original maturity of three months or less.
Accounts and Notes Receivable
Accounts and notes receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollected amounts through a charge to earnings and a credit to an allowance for bad debts based on its assessment of the current status of individual accounts. Balances are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for bad debts and a credit to accounts and notes receivable.
Fixed Assets
Fixed assets are recorded at cost and depreciated using the straight-line method, with an estimated 5% salvage value of original cost, over the estimated useful lives of the assets as follows:
Asset Category
Estimated Useful Life
Electronic Equipment
5 years
Communication Equipment
3 years
Machinery Equipment
5 years
Automobiles
10 years
Office Furniture
5 years
Film Costs
The Company capitalizes film costs in accordance with ASC 926. Film costs are stated at the lower of cost, less accumulated amortization, or fair value. Production overhead, a component of film costs, includes allocable costs of individuals or departments with exclusive or significant responsibility for the production of films. Substantially all of the Company’s resources are dedicated to the production of its films. Capitalized production overhead does not include selling, general and administrative expenses. Interest expense on funds invested in production is capitalized into film costs until production is completed. In addition to the films being produced, costs of productions in development are capitalized as development film costs in accordance with the provisions of the ASC and are transferred to film production costs when a film is set for production. In the event a film is not set for production within three years from the time the first costs are capitalized or the film is abandoned, all such costs are generally expensed.
Once a film is released, film costs are amortized and participations and residual costs are accrued on an individual film basis in the proportion that the revenue during the period for each film (“Current Revenue”) bears to the estimated remaining total revenue to be
received from all sources for each film (“Ultimate Revenue”) as of the beginning of the current fiscal period as required by the ASC. The amount of film costs that is amortized each period will depend on the ratio of Current Revenue to Ultimate Revenue for each film for such period. The Company makes certain estimates and judgments of Ultimate Revenue to be received for each film based on information received from its distributor and its knowledge of the industry. Ultimate Revenue does not include estimates of revenue that will be earned beyond ten years of a film’s initial theatrical release date.
Unamortized film costs are evaluated for impairment each reporting period on a film-by-film basis in accordance with the requirements of the ASC. If estimated remaining net cash flows are not sufficient to recover the unamortized film costs for that film, the unamortized film costs will be written down to fair value determined using a net present value calculation.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets used in operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets.
Income Taxes
The Company accounts for income tax under the provisions of ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns. Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities. Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company adopted the accounting standard for uncertainty in income taxes which requires a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return (including a decision whether to file or not file a return in a particular jurisdiction).
Comprehensive Income (Loss)
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of stockholders’ equity but are excluded from net income (loss). During the years presented, other comprehensive income (loss) includes changes in cumulative translation adjustment from foreign currency translation.
Foreign Currency Translation
The Company uses United States dollars (“U.S. dollar” or “US$” or “$”) for financial reporting purposes. The subsidiary, Xi’An TV, within the Company maintains its books and records in Renminbi (“RMB”), the currency of China, the economic environment in which the Company’s primary subsidiary conducts its operations. Transactions denominated in foreign currencies are translated into U.S. dollar at exchange rate in effect on the date of the transactions. Exchange gains or losses on transactions are included in earnings.
The financial statements of the Company are translated into United States dollars in accordance with U.S. GAAP, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for equity. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.
The exchange rates used for foreign currency translation were as follows (US$1 = RMB):
Earnings (Loss) Per Share
The Company calculates net income (loss) per share in accordance with ASC 260, Earnings Per Share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. As of June 30, 2017 and 2016, the Company had no common stock equivalents that could potentially dilute future earnings per share.
Recent Accounting Pronouncements
In October 2016, the FASB issued ASU No. 2016-17, “Consolidation (Topic 810): Interest Held through Related Parties That Are under Common Control”. These amendments change the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of a variable interest entity), the amendments require that reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable interests in a variable interest entity and, on a proportionate basis, its indirect variable interests in a variable interest entity held through related parties, including related parties that are under common control with the reporting entity. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity adopts the pending content that links to this
paragraph in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
In December 2016, the FASB issued ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”. The amendments in ASU 2016-20 affect narrow aspects of the guidance issued in ASU 2014-09 including Loan Guarantee Fees, Contract Costs, Provisions for Losses on Construction-Type and Production-Type Contracts, Disclosure of Remaining Performance Obligations, Disclosure of Prior Period Performance Obligations, Contract Modifications, Contract Asset vs. Receivable, Refund Liability, Advertising Performance Obligations, Contract Modifications, Contract Asset vs. Receivable, Refund Liability, Advertising Costs, Fixed Odds Wagering Contracts in the Casino Industry, and Costs Capitalized for Advisors to Private Funds and Public Funds. The amendments in this ASU is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted under certain circumstances. The amendments should be applied prospectively as of the beginning of the period of adoption. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323)”. This pronouncement amends the SEC’s reporting requirements for public filers in regard to new accounting pronouncements or existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented an accounting standards update. Companies should disclose if they are unable to estimate the impact of a specific pronouncement, and provide disclosures including a description of the effect on accounting policies that the
registrant expects to apply. These provisions apply to all pronouncements that have not yet been implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements. The Company has incorporated language into other recently issued accounting pronouncement notes, where relevant for the corrections in FASB ASU 2017-03. The Company is implementing the updated SEC requirements on not yet adopted accounting pronouncements with these consolidated financial statements.
Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has suffered recurring losses from operations and has a working capital deficit as of June 30, 2017. The Company also generated negative operating cash flows for the year ended June 30, 2017.
These matters, among others, raise substantial doubt about our ability to continue as a going concern. While the Company's cash position may not be significant enough to support the Company's daily operations, management intends to raise additional funds by way of cooperation with other film and television producers, obtaining loans from shareholders and borrowing from Dean Li, the President and Chief Executive Officer of the Company, to fund operations. The consolidated financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern.
NOTE 3. Accounts Receivable
The bad debt expense recorded for the years ended June 30, 2017 and 2016 was $590,187 and $625,438, respectively.
NOTE 4. 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 since then. The Company reserved an allowance of RMB 416,500 (approximately $61,459) and RMB 208,250 (approximately $32,400) for the years ended June 30, 2017 and 2016, respectively, leaving net balance of RMB 0 and RMB 208,250 (approximately $32,400) as of June 30, 2017 and 2016, respectively.
On June 13, 2014, the Company lent RMB 18 million (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 related lending 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 11 million (approximately $1,786,410). On January 8, 2015, the Company received interest of RMB 455,000 (approximately $74,165) on the loan. The outstanding balance was RMB 7 million (approximately $1,032,920) as of June 30, 2017 and 2016, and an allowance of RMB 7 million (approximately $1,032,920) and RMB 3.5 million (approximately $544,535) was reserved by the Company against the note receivable as of June 30, 2017 and 2016, respectively.
On July 1, 2014, the Company lent an additional RMB 3 million (approximately $487,203) to SHCC with three months term. Based on the related lending 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. On January 19, 2015, the Company received interest of RMB 360,000 (approximately $58,694) on the loan. In September 2016, the Company received repayment of RMB 100,000 (approximately $15,002) from SHCC. An allowance of RMB 2.9 million (approximately $427,924) and RMB 1.5 million (approximately $233,372) was reserved by the Company against the note receivable as of June 30, 2017 and 2016, respectively. As of June 30, 2017 and 2016, the Company had interest receivable of RMB 740,726 (approximately $109,302) associated with the note from SHCC and recorded as prepaid and other receivable in the accompanying consolidated balance sheets. An allowance of RMB 740,726 (approximately $109,302) and RMB 0 was reserved by the Company against the interest receivable as of June 30, 2017 and 2016, respectively.
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 18 million (approximately $2.86 million 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 $2.8 million were reclassified to notes receivable. In September 2016, the Company received repayment of RMB 100,000 (approximately $15,002) from Zhongshi Fengde. As of June 30, 2017, the Company reserved full allowance of RMB 17.9 million (approximately $2,641,326) against the notes receivable. As of June 30, 2016, the Company reserved RMB 9 million (approximately $1,400,234) against the notes receivable.
NOTE 5. Fixed Assets
Fixed assets consist of the following:
Depreciation expense for the years ended June 30, 2017 and 2016 was $1,555 and $1,880, respectively.
NOTE 6. Film Cost
Film cost consists of the following:
In July 2015, the Company entered into an agreement to invest RMB 5 million (approximately $752,627 at the time of investment) in a film that is produced by Beijing Huaxia Star Media Co., Ltd., a related party, and the payment was made in August 2015. Also see Note 8.
NOTE 7. Prepaid and Other Assets, Non-current
In November 2015, the Company entered into an agreement with Xi’an Lianying Network Culture Media Co., Ltd. to invest RMB 5 million (approximately $752,627) 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. As of June 30, 2017, the production of the film did not start.
The Company prepaid another RMB 190,000 (approximately $28,036) for the writing of one film script which was not completed as of June 30, 2017. Of the total RMB 190,000, RMB 160,000 (approximately $23,500) was paid in 2010 and remaining RMB 30,000 (approximately $4,536) was paid in 2011. An allowance of RMB 190,000 (approximately $28,036) and RMB 0 was reserved by the Company against the prepayment as of June 30, 2017 and 2016, respectively.
NOTE 8. Related Party Transactions
From time to time, the Company borrowed loans from Dean Li, the President and Chief Executive Officer of the Company. As of June 30, 2017 and 2016, the Company owed Dean Li $407,208 and $272,501, respectively. The loans borrowed from 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 4.67%-6.56% with reference to one-year loan.
In July 2015, the Company entered into an agreement to invest RMB 5 million (approximately $752,627 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. As of June 30, 2017, the film was still in preparation stage. Dean Li, the President and Chief Executive Officer of the Company, holds 13% equity interest in Beijing Huaxia Star Media Co., Ltd.
NOTE 9. Income Taxes
China Media is incorporated in the State of Nevada and is subject to the United States Federal and state income tax at a statutory rate of 34%. No provision for the U.S. Federal income taxes has been made as the Company had no taxable income in this jurisdiction for the reporting periods.
Vallant is incorporated in the British Virgin Islands (“BVI”) and under the current laws of the BVI, and is not subject to income taxes.
Xi’An TV is incorporated in the PRC and is subject to PRC Enterprise Income Tax (“EIT”) on the taxable income in accordance with the relevant PRC income tax laws. Before December 31, 2012, Xi’An TV’s taxable income was assessed at 10% of its taxable revenue. Starting from January 1, 2013, the tax authority determined that Xi’An TV should be taxed at 25% of its taxable income until further notice. No provision for income taxes has been made as Xi’An TV had no taxable income for the years ended June 30, 2017 and 2016.
The following table reconciles the Company’s statutory tax rates to its effective tax rate as a percentage of income before income taxes:
The components of the Company’s deferred income tax assets are set forth below:
June 30, 2017
June 30, 2016
Deferred tax assets
Net operating losses
$ 161,751
$ 126,491
Total deferred income tax assets
161,751
126,491
Less: valuation allowance
(161,751)
(126,491)
Net deferred income tax assets
$ -
$ -
The Company has net taxable operating loss carry forwards of approximately $673,091 for the year ended June 30, 2017. The PRC income tax laws allow the enterprises to offset their future taxable income with taxable operating losses carried forward in a 5-year period. The management is uncertain whether the Company will generate sufficient taxable PRC statutory income in the near future and it is more likely than not that none of the deferred income tax assets will be realized. Therefore, a full valuation allowance has been established for deferred income tax assets as of June 30, 2017.
The tax authority of the PRC conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises have completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings which may lead to additional tax liabilities.
NOTE 10. Commitments and Contingencies
In November 2011, the Company entered into a lease agreement to lease its main office for a monthly rent of RMB 11,167 (approximately $1,737). The lease had a term of one year and expired on December 31, 2012. On January 1, 2013 and 2014, the Company renewed the lease for another year with the lease term remaining unchanged. On January 1, 2015, the Company renewed this lease for another three years with the lease term remaining unchanged.
The Company has minimum lease payment of $9,837 under a non-cancelable operating lease for the year ending June 30, 2018.
Rent expense for the years ended June 30, 2017 and 2016 was $26,411 and $27,887, respectively.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
We have not had any disagreements with, or changes in, our independent accounting firm during the year ended June 30, 2017.
Item 9A.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, 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 president and chief executive officer (who is acting as our principal executive officer) and our chief financial officer (who is acting as our principal financial officer and principle accounting officer) to allow for timely decisions regarding required disclosure.
As of June 30, 2017, the year end covered by this report, we carried out an evaluation, under the supervision and with the participation of our president and chief executive officer (who is acting as our principal executive officer) and our chief financial officer (who is acting as our principal financial officer and principle accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our president and chief executive officer (who is acting as our principal executive officer) and our chief financial officer (who is acting as our principal financial officer and principle accounting officer) concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this annual report.
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 there are two material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such as that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses relate to 1) the lack of control procedures designed to ensure all the related parties and relationships and the transactions with related parties are identified and properly authorized and approved, 2) the lack of control in place to review the collectability of receivables and to access the necessity to reserve any uncollected amounts.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the SEC that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
Except as discussed above there were no significant changes in our internal controls over financial reporting identified in connection with this evaluation that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our Company’s internal controls over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Officers
Our Bylaws state that our authorized number of directors shall be not less than one and shall be set by resolution of our Board of Directors. Our Board of Directors has fixed the number of directors at three, and we currently have three directors.
Our current directors and officers are as follows:
Our Directors will serve in that capacity until our next annual shareholder meeting or until their successors are elected and qualified. Officers hold their positions at the will of our Board of Directors. There are no arrangements, agreements or understandings between non-management security holders and management under which non-management security holders may directly or indirectly participate in or influence the management of our affairs.
Dean Li, President, Chief Executive Officer, Secretary and Director
Dean Li has served as our President, Chief Executive Officer, Secretary and Director since July 7, 2009. Mr. Li has significant experience in China’s capital markets and corporate management. He received his Bachelor’s degree in radio engineering technology from the Chinese People’s Liberation Military Academy in 1985, and was awarded the military rank of Technical Captain in 1987. After ending his military career in 1993, Mr. Li was appointed as the General Manager of the Shanghai Branch Company of Shaan’Xi Province International Trust Investment Holding Co., where he remained until 1998.
From 1998 to 2001, Mr. Li worked as the Assistant to the General Manager of Wuhan International Financial Leasing Co., and he also held the position of General Manager of Wuhan Zhongnan Securities Corp. From 2001 to 2005, Mr. Li served as the Northern Area General Manager of Wuhan Securities Co. Ltd. From 2000 to 2001, he also served as a Director in a Chinese publicly listed company, Dalian Thermoelectricity Holding Ltd.
Mr. Li earned a Master’s degree of enterprise culture from the Central China Normal University in 2004. Since 2005 he has served on the board of directors of Xi’An TVMEDIA Co., Ltd. and Shaan’Xi Western Capital Investment Management Co., Ltd.
Ruijuan Hou, Financial Officer, Principal Accounting Officer and Treasurer
Ms. Ruijuan Hou graduated from Xi’an Science and Technology University in 2013 and received an accounting degree. From August 2013 to July 2014, she was the accounting staff at Shaanxi Hengtai Mingji Trade Co, Ltd. From August 2014 to July 2015, she was the head of the accounting department of Shaanxi Hengtai Mingji Trade Co, Ltd, in charge of the general accounting matters of the company.
Bin Li, Director
Bin Li has served as our Director since July 7, 2009. Mr. Li has 18 years of experience in the movie and TV industry in China. In 2006, Mr. Li invested in Xi’An TVMEDIA Co., Ltd. and became one of its major shareholders. From 1987 to 1990, he served in the 77th unit of the Chinese People’s Liberation Army, and from 1991 to the present he has worked in production for Xi’An Movie Studio, one of the most famous movie studios in China.
Other Directorships
None of our directors hold any other directorships in any company with a class of securities registered pursuant to section 12 of the Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
Family Relationships
There are no family relationships among our directors or officers.
Board of Directors and Director Nominees
Since our Board of Directors does not include a majority of independent directors, the decisions of the Board regarding director nominees are made by persons who have an interest in the outcome of the determination. The Board will consider candidates for directors proposed by security holders, although no formal procedures for submitting candidates have been adopted. Unless otherwise
determined, at any time not less than 90 days prior to the next annual Board meeting at which the slate of director nominees is adopted, the Board will accept written submissions from proposed nominees that include the name, address and telephone number of the proposed nominee; a brief statement of the nominee’s qualifications to serve as a director; and a statement as to why the security holder submitting the proposed nominee believes that the nomination would be in the best interests of our security holders. If the proposed nominee is not the same person as the security holder submitting the name of the nominee, a letter from the nominee agreeing to the submission of his or her name for consideration should be provided at the time of submission. The letter should be accompanied by a résumé supporting the nominee's qualifications to serve on the Board, as well as a list of references.
The Board identifies director nominees through a combination of referrals from different people, including management, existing Board members and security holders. Once a candidate has been identified, the Board reviews the individual's experience and background and may discuss the proposed nominee with the source of the recommendation. If the Board believes it to be appropriate, Board members may meet with the proposed nominee before making a final determination whether to include the proposed nominee as a member of the slate of director nominees submitted to security holders for election to the Board.
Some of the factors which the Board considers when evaluating proposed nominees include their knowledge of and experience in business matters, finance, capital markets and mergers and acquisitions. The Board may request additional information from each candidate prior to reaching a determination. The Board is under no obligation to formally respond to all recommendations, although as a matter of practice, it will endeavor to do so.
Conflicts of Interest
Our directors are not obligated to commit their full time and attention to our business and, accordingly, they may encounter a conflict of interest in allocating their time between our operations and those of other businesses. In the course of their other business activities, they may become aware of investment and business opportunities which may be appropriate for presentation to us as well as other entities to which they owe a fiduciary duty. As a result, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. They may also in the future become affiliated with entities, engaged in business activities similar to those we intend to conduct.
In general, officers and directors of a corporation are required to present business opportunities to a corporation if:
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the corporation could financially undertake the opportunity;
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the opportunity is within the corporation’s line of business; and
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it would be unfair to the corporation and its stockholders not to bring the opportunity to the attention of the corporation.
We plan to adopt a code of ethics that obligates our directors, officers and employees to disclose potential conflicts of interest and prohibits those persons from engaging in such transactions without our consent.
Significant Employees
Other than as described above, we do not expect any other individuals to make a significant contribution to our business.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
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been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
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had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
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been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
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been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
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been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Except as set forth in our discussion below in “Certain Relationships and Related Transactions, and Director Independence - Transactions with Related Persons,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Audit Committee
We do not currently have an audit committee or a committee performing similar functions. The Board of Directors as a whole participates in the review of financial statements and disclosure.
Code of Ethics
We have not adopted a code of ethics that applies to our officers, directors and employees. When we do adopt a code of ethics, we will disclose it in a Current Report on Form 8-K.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during the year ended June 30, 2015, all filing requirements applicable to our officers, directors and greater than 10% percent beneficial owners were complied with, though some were filed late.
Item 11.
Item 11. Executive Compensation
The following summary compensation table sets forth the total annual compensation paid or accrued by us to or for the account of our principal executive officer during the last completed fiscal year and each other executive officer whose total compensation exceeded $100,000 in either of the last two fiscal years:
(1)
We have omitted certain columns in the summary compensation table pursuant to Item 402(a)(5) of Regulation S-K as no compensation was awarded to, earned by, or paid to any of the executive officers or directors required to be reported in that table or column in any fiscal year covered by that table.
Compensation Plans
As of June 30, 2017, we did not have any compensation plans in place. However, we may issue stock options to our directors, officers and employees in the future, upon adoption of a stock option plan.
Management Agreements
We have not yet entered into any consulting or management agreements with any of our current executive officers or directors.
Stock Options/SAR Grants
During the period from inception to June 30, 2017, we did not grant any stock options to our executive officers.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values
There were no options exercised during our fiscal years ended June 30, 2017 and June 30, 2016 by any officer or director of our company.
Outstanding Equity Awards at Fiscal Year End
No equity awards were outstanding as of the year ended June 30, 2017.
Compensation of Directors
Our directors did not receive any compensation for their services as directors from our inception to June 30, 2017. We have no formal plan for compensating our directors for their services in the future in their capacity as directors, although such directors are expected in the future to receive options to purchase shares of our common stock as awarded by our Board of Directors or by any compensation committee that may be established.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits to our directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board of Directors or a committee thereof.
Compensation Committee
We do not currently have a compensation committee of the Board of Directors or a committee performing similar functions. The Board of Directors as a whole participates in the consideration of executive officer and director compensation.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth the ownership, as of September 26, 2017, of our common stock by each of our directors, by all of our executive officers and directors as a group and by each person known to us who is the beneficial owner of more than 5% of any class of our securities. As of September 26, 2017 there were 39,750,000 shares of our common stock issued and outstanding. All persons named have sole or shared voting and investment control with respect to the shares, except as otherwise noted. The number of shares described below includes shares which the beneficial owner described has the right to acquire within 60 days of the date of this registration statement.
(1)
Bin Li is our Director.
(2)
Dean Li is our President, Chief Executive Officer, Secretary and Director.
(3) Based on 39,750,000 issued and outstanding shares of our common stock as of September 26, 2017.
Changes in Control
We are unaware of any contract or other arrangement or provisions of our Articles or Bylaws the operation of which may at a subsequent date result in a change of control of our company. There are not any provisions in our Articles or Bylaws, the operation of which would delay, defer, or prevent a change in control of our company.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
From time to time, the Company borrowed loans from Dean Li, the President and Chief Executive Officer of the Company. As of June 30, 2017 and 2016, the Company owed Dean Li $407,208 and $272,501, respectively. The loans borrowed from 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 4.67%-6.56% with reference to one-year loan.
In July 2015, the Company entered into an agreement to invest RMB 5 million (approximately $752,627 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. As of June 30, 2017, the film was still in preparation stage. Dean Li, the President and Chief Executive Officer of the Company, holds 13% equity interest in Beijing Huaxia Star Media Co., Ltd.
Director Independence
Our securities are quoted on the OTC Pink which does not have any director independence requirements. At the moment, none could be considered an independent director under most definitions of “independence”. Once we engage further directors and officers, we plan to develop a definition of independence and scrutinize our Board of Directors with regard to this definition.
Item 14.
Item 14. Principal Accountants Fees and Services
The aggregate fees billed for the most recently completed fiscal year ended June 30, 2017 and for fiscal year ended June 30, 2017 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
Our board of directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the board of directors either before or after the respective services were rendered.
Our board of directors has considered the nature and amount of fees billed by our independent auditors and believes that the provision of services for activities unrelated to the audit is compatible with maintaining our independent auditors’ independence.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
Exhibits required by Item 601 of Regulation S-K
*Filed herewith.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA MEDIA INC.
Date: September 28, 2017
/s/Dean Li
Dean Li
Chief Executive Officer