NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
China New Media Corp., (“the Company”), formerly known as Golden Key International Inc., is a corporation organized under the laws of the State of Delaware in 1999.
On December 8, 2009, Golden Key International Inc. acquired all of the outstanding capital stock of HongKong Fortune-Rich Investment Co., Ltd., a Hong Kong corporation (“Fortune-Rich ”), through China New Media Corp., a Delaware corporation (the “Merger Sub”) wholly owned by the Company. Fortune-Rich is a holding company whose only asset, held through a subsidiary, is 100% of the registered capital of Dalian Guo-Heng Management & Consultation Co., Ltd. (“Dalian Guo-Heng”), a limited liability company organized under the laws of the People’s Republic of China. Substantially all of the Fortune-Rich’s operations are conducted in China though Dalian Guo-Heng, and through contractual arrangements with several of Dalian Guo-Heng’s consolidated affiliated entities in China, including Dalian Vastitude Media Group Co., Ltd. (“V-Media”) and its subsidiaries. V-Media is a fast-growing out-door advertising company with dominant operation in Dalian, the commercial center of Northeastern China. As a result of these contractual arrangements, which obligate the Company to absorb a majority of the risk of loss from V-Media’s activities and entitle it to receive a majority of its residual returns. In addition, V-Media Group 's shareholders have pledged their equity interest in V-Media Group to Dalian Guo-Heng, irrevocably granted Dalian Guo-Heng an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in V-Media Group and agreed to entrust all the rights to exercise their voting power to the person(s) appointed by Dalian Guo-Heng. Through these contractual arrangements, the Company and Dalian Guo-Heng hold all the variable interests of V-Media Group, and the Company and Dalian Guo-Heng have been determined to be the most closely associated with V-Media Group. Therefore, the Company is the primary beneficiary of V-Media Group. Based on these contractual arrangements, the Company believes that V-Media Group should be considered as a Variable Interest Entity (“VIE”) under Accounting Standards Codification (“ASC”) 810, because the equity investors in V-Media Group do not have the characteristics of a controlling financial interest and the Company through Dalian Guo-heng is the primary beneficiary of V-Media Group.
In connection with the acquisition, Merger Sub issued 10 shares of the common stock of the Merger Sub which constituted no more than 10% ownership interest in the Merger Sub and 1,000,000 shares of Series A Preferred Stock of the Company to the shareholders of Fortune-Rich, in exchange for all the shares of the capital stock of Fortune-Rich (the “Share Exchange” or “Merger”). The 10 shares of the common stock of the Merger Sub were converted into approximately 26,398,634 shares of the common stock of the Company so that upon completion of the Merger, the shareholders of Fortune-Rich own approximately 96 % of the common stock of the Company;
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CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1- BASIS OF PRESENTAION (Continued)
As a result of the above-mentioned transactions, the shareholders of Fortune-Rich and persons affiliated with V-Media now own securities that represent 96% of the equity in the Company.
The acquisition was accounted for as a reverse merger since there was a change of control. Accordingly, Hong Kong Fortune-Rich Investment Co., Ltd. and its subsidiaries will be treated as the continuing entity for accounting purposes.
As part of the merger, the Company’s name was changed from “Golden Key International, Inc.” to “China New Media Corp.” to more effectively reflect our business and communicate our brand identity to customers.
The Company, along with its subsidiaries and VIEs, is engaging in sales, construction and operations of outdoor advertising displays and other alternative media business.
The condensed interim financial statements contain unaudited information as of March 31, 2011 and June 30, 2010 and for the nine months ended March 31, 2011 and 2010. The unaudited condensed consolidated financial statements of China New Media Corp., (the “Company”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying unaudited condensed financial statements do not include complete footnotes and financial statement presentations. As a result, these unaudited condensed financial statements should be read along with the audited financial statements and notes thereto for the year ended June 30, 2010, included in our form 10-K filed with the SEC. In our opinion, the unaudited condensed financial statements reflect all adjustments, including normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for those periods presented. The preparation of financial statements in conformity with United States (U.S.) generally accepted accounting principles requires management to make estimates and assumptions that affect reported assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities. Actual results could differ from those estimates and assumptions. Moreover, the results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the entire year.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the financial statements of China New Media Corp., its subsidiary, Fortune-Rich and its wholly-owned subsidiary Dalian Guo-Heng, as well as Dalian Guo-Heng’s variable interest entity, V-Media Group.
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CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
China New Media Corp. established a new subsidiary Shanghai Vastitude Advertising & Media Co., Ltd on July 5, 2010. V-Media Group holds 80% of the new subsidiary’s equity, and Ni, Huiwei holds 20% of its equity.
The noncontrolling interests represent the minority stockholders’ interest in V-Media Group’s majority owned subsidiaries.
All significant inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates
In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting years. Significant estimates, required by management, include the recoverability of long-lived assets and allowance of doubtful accounts. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand deposits with a bank with an original maturity of less than three months.
Accounts Receivables
Accounts receivables are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible amounts, as needed.
The Company uses the aging method to estimate the allowance for anticipated uncollectible receivable balances. Under the aging method, bad debt percentages are determined by management and based on historical experience as well as current economic climate are applied to customers’ balances categorized by the number of months the underlying invoices have remained outstanding. The allowance is adjusted to the amount computed as a result of the aging method.
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CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, Equipment and Construction in Progress, net
Property and equipment are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to earnings as incurred while additions, renewals and betterments are capitalized. When property and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property, plant and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:
| | Estimated Useful Life | | Residual value |
| Advertising equipment | 4-15 years | | | 5% | |
| Automobile | 7 years | | | | |
| Computer, office equipment and furniture | 5 years | | | | |
| Corporate Boats | 7 years | | | | |
Construction in progress represents direct costs of construction or acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until a project is completed and ready for intended use.
Advance to suppliers
The Company periodically makes advance payments to certain vendors for purchases of advertising materials and equipment.
Intangible asset
The Company reviews intangible assets and billboard use right for impairment in accordance with the provisions of ASC 360-10, “Plant, Property and Equipment.”
There was no impairment of intangible assets and billboards use right at the balance sheet dates. Although management believes the assumptions used in testing for impairment are reasonable, changes in any one of the assumptions could produce a significantly different result.
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CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment of long-lived assets
Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the assets. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. No impairment loss has been recorded for the nine months ended March 31, 2011 and 2010.
Revenue recognition
The Company recognizes revenues when advertisements are posted over respective contractual terms based on the schedules agreed with customers and collections are reasonably assured. Payments received in advance of services provided are recorded as deferred revenues.
Foreign currency translation
The Company and Fortune-Rich use the United States dollar (“US Dollars”) for financial reporting purposes. The Company, Dalian Guo-Heng and Dalian Vastitute Group maintain their books and records in the currency of Renminbi (“RMB”), being the primary currency of the economic environment in which their operations are conducted.
For financial reporting purposes, RMB has been translated into United States dollars ("USD") as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income". Gains and losses resulting from foreign currency translations are included in accumulated other comprehensive income. There is no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.
8
CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company recognizes deferred tax assets and liabilities based upon the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, whenever necessary, against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Earnings per Share
The Company computes earnings per share (“EPS’) in accordance with ASC 260, “Earnings per share.” ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
NOTE 3 - MAJOR SUPPLIERS
During the three months ended March 31, 2011, two major suppliers provided approximately 36% and 9% of the Company’s purchase of raw materials.
For the nine months ended March 31, 2011, one major supplier provided approximately 16% of the Company’s purchase of raw materials. For the nine months ended March 31, 2010, two major supplier provided 88.4% of the Company’s purchase of raw materials, with each supplier individually accounted for 50.5% and 37.9%, respectively.
NOTE 4–PROPERTY, EQUIPMENT AND CONSTRUCTION IN PROGRESS, NET
Property, equipment and construction in progress consist of the following:
| | | March 31, 2011 | | | June 30, 2010 | |
| Advertising equipment | | $ | 16,100,505 | | | $ | 14,857,020 | |
| Office equipment and furniture | | | 330,997 | | | | 234,428 | |
| Office building | | | 314,258 | | | | - | |
| Transportation | | | 1,248,667 | | | | 912,093 | |
Subtotal | | | 17,994,427 | | | | 16,003,541 | |
| Less: Accumulated depreciation | | | (5,717,004 | ) | | | (4,362,006 | ) |
| Construction in progress | | | 4,983,364 | | | | 1,478,698 | |
| | | | | | | | | |
| Total | | $ | 17,260,787 | | | $ | 13,120,233 | |
Depreciation expense was $428,454 and $231,496 for the three months ended March 31, 2011 and 2010, respectively, and totaled $1,178,254 and $713,039, for the nine months ended March 31, 2011 and 2010 respectively. Approximately $11.22 million advertising equipment was pledged for short term loans as of March 31, 2011. For the construction in progress, the future estimated expenditures before the assets are placed in service are approximately $3.1 million.
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CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 –SECURITY DEPOSIT
Security deposit is mainly comprised of deposits made to third parties to guaranty the Company’s outstanding loans (see Note 10 and 11).
NOTE 7 - INTANGIBLE ASSETS
Intangible assets consist of computer software acquired. The Company amortizes the intangible assets on a straight-line basis over 3 to 10 years. Amortization expense for the three months ended March 31, 2011 and 2010 amounted to $5,118 and $1,629, respectively, and totaled $14,845 and $4,888 for the nine months period ended March 31, 2011 and 2010, respectively.
The projected amortization expense attributed the following:
| Twelve months ending March 31, | | Amount | |
| 2012 | | $ | 20,584 | |
| 2013 | | | 11,784 | |
| 2014 | | | 8,857 | |
| 2015 | | | 8,857 | |
| 2016 | | | 8,857 | |
| Thereafter | | | 35,401 | |
| | | $ | 94,340 | |
NOTE 8 - BILLBOARDS USE RIGHT
The Company makes advance payments for the right to construct advertising equipment and post advertisements in certain locations based on long-term contracts with local government authorities or other business entities. These payments are recorded as billboards use right and amortized on a straight-line basis over the contract terms of 2 to 15 years.
Amortization of billboards use right for the three months ended March 31, 2011 and 2010 was $277,701, and $85,088, respectively, and totaled $762,081 and $ 255,222 for the nine months ended March 31, 2011 and 2010, respectively.
The projected amortization expense attributed to the following:
| Twelve months ending March 31, | | Amount | |
| 2012 | | $ | 1,255,171 | |
| 2013 | | | 969,492 | |
| 2014 | | | 648,881 | |
| 2015 | | | 555,348 | |
| 2016 | | | 418,179 | |
| Thereafter | | | 1,177,158 | |
| | | $ | 5,024,229 | |
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CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - TAXES
a) Corporate Income Tax
United States
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
China New Media Corp., a Delaware corporation, has incurred a net operating loss for income tax purposes for the year ended June 30, 2010. There are no net operating losses for the nine months ended March 31, 2011. The Company had loss carry forwards of approximately $125,000 for U.S. income tax purposes available for offset against future taxable U.S. income expiring in 2030. Management believes that the realization of the benefits from these losses appears uncertain due to the Company's limited operating history. Accordingly, a full deferred tax asset valuation allowance has been provided. The valuation allowance as of March 31, 2011 was $42,500.
Hong Kong
Fortune-Rich was incorporated in Hong Kong and is not subject to income taxes under the current laws of Hong Kong.
PRC
Dalian Guo-heng and V-Media Group are governed by the Income Tax Law of the People’s Republic of China concerning the private-run enterprises, which are currently subject to tax at a statutory rate of 25% on net income reported after appropriated tax adjustments. Because of different tax jurisdictions’ restriction, V-Media Group’s subsidiaries of Beijing, Tianjin, Shenyang, Engineering and Network have loss carryover that can only be used to offset their own future taxable income. The loss carry forward for those subsidiaries amounted to $327,520 as of March 31, 2011.
The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of the deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience, expectation of future income, the carryforward periods available for tax reporting purposes, and other relevant factors. For the nine months ended March 31, 2011, management concluded that it was more likely than not those additional deferred tax assets would be realized. This determination was based upon actual and projected future operating results in our business. Accordingly, the Company recorded a deferred income tax benefit of $46,504 for the nine months ended March 31, 2011.
Aggregate undistributed earnings of the Company's subsidiary and VIE in the PRC that are available for distribution to the Company are considered to be indefinitely reinvested under FASB ASC 740, and accordingly, no provision has been made for the PRC dividend withholding taxes or US income taxes that would be payable upon the distribution of such amount to the Company.
11
CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - TAXES (Continued)
Significant components of the income tax provision were as follows for the nine months ended March 31, 2011 and 2010:
| | | For nine months ended March 31, | |
| | | 2011 | | | 2010 | |
| Current tax provision | | | | |
| Federal | | $ | - | | | $ | - | |
| State | | | - | | | | - | |
| Foreign | | | 1,409,685 | | | | 1,256,564 | |
| | | | | | | | | |
| | | | 1,409,685 | | | | 1,256,564 | |
| | | | | | | | | |
| Deferred tax provision, net | | | | | |
| Federal | | | - | | | | - | |
| State | | | - | | | | - | |
| Foreign | | | (46,504 | ) | | | - | |
| | | | | | | | | |
| | | | (46,504 | ) | | | - | |
| | | | | | | | | |
| Income tax provision | | $ | 1,363,181 | | | $ | 1,256,564 | |
Income from continuing operations before income taxes were allocated between the United States and Foreign components for the nine months ended March 31, 2011 and 2010 as follows:
| | | For nine months ended March 31, | |
| | | 2011 | | | 2010 | |
| United States | | $ | - | | | $ | - | |
| Foreign | | | 5,191,114 | | | | 4,893,859 | |
| | | | | | | | | |
| | | $ | 5,191,114 | | | $ | 4,893,859 | |
b) Business Tax
Dalian Guo-heng, Dalian Vastitude Media Group Co., Ltd. and its five subsidiaries are also subject to 5% business tax and related surcharges levied on advertising services in China, which are approximately 3% of revenues from providing advertising services. Dalian V-Media’s other subsidiary is only subject to 3% business tax. Total business tax expense for the three months ended March 31, 2011 and 2010 was $262,417 and $205,815, respectively, and totaled $702,977 and $553,600 for the nine months ended March 31, 2011 and 2010, respectively
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CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - TAXES (Continued)
c) Taxes payable at March 31, 2011 and June 30, 2010 consisted of the following:
| | | March 31, | | | June 30, | |
| | | 2011 | | | 2010 | |
| Business tax payable | | $ | 334,716 | | | $ | 187,826 | |
| Corporate income tax payable | | | 1,930,160 | | | | 1,199,227 | |
| Other | | | 280,275 | | | | 8,156 | |
| | | | | | | | | |
| Total taxes payable | | $ | 2,545,151 | | | $ | 1,395,209 | |
The Company recognizes interest and penalties accrued related to unrecognized tax benefits and penalties, if any, as income tax expense. The Company files income tax returns with U.S. Federal Government, as well as Delaware State and the Company files returns in foreign jurisdictions of Hongkong and PRC China. With few exceptions, the Company is subject to U.S. federal and state income tax examinations by tax authorities for years on or after 2007.
The Company’s foreign subsidiaries and VIEs also file income tax returns with both the National Tax Bureau and the Local Tax Bureaus. The Company is subject to income tax examinations by these foreign tax authorities. The Company has passed all tax examinations by both National and Local tax authorities since the inception of the Company in 2000.
NOTE 10 - SHORT TERM LOANS
The short term loans include the following:
| | | March 31, 2011 | | | June 30, 2010 | |
| a) Loan payable to Harbin Bank | | $ | 916,226 | | | $ | 884,768 | |
| | | | | | | | | |
| b) Loan payable to Shanghai Pudong Development Bank | | | 916,226 | | | | 884,768 | |
| | | | | | | | | |
| c) Loan payable to Dalian Bank Xigang Branch | | | 1,527,044 | | | | 1,474,613 | |
| | | | | | | | | |
| d) Loan payable to Industrial and Commercial Bank of China | | | 274,868 | | | | 265,430 | |
| | | | | | | | | |
| e) Loan payable to Jinzhou Bank | | | 2,290,566 | | | | 2,211,920 | |
| | | | | | | | | |
| f) Loan payable to Industrial Bank | | | 2,595,975 | | | | 1,474,613 | |
| | | | | | | | | |
| g) Loan payable to Jilin Bank | | | 763,522 | | | | | |
| | | | | | | | | |
| Total short term loans | | $ | 9,284,427 | | | $ | 7,196,112 | |
a) Loan payable to Harbin Bank had an original one-year term from April 14, 2009 to April 13, 2010 at a fixed interest rate of 5.31% per year. The loan has been renewed for another year to April 26, 2011 at afixed interest rate of 6.37% per year. This loan has been guaranteed by an unrelated company, Union Chuangye Guaranty Company.
13
CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SHORT TERM LOANS (Continued)
b) Loan payable to Shanghai Pudong Development bank. This loan has been renewed from November 23, 2010 to November 15, 2011 at a fixed interest rate of 6.37% per year. The loan has been guaranteed by the Company’s major Stockholders Mr. Guojun Wang and Ms. Ming Ma using their personal properties as collaterals.
c) Loan payable to Dalian Bank Xigang Branch with a one year term from March 14, 2011 to March 11, 2012 at a fixed interest rate of 6.67% per year. The loan has been guaranteed by an unrelated company, Dalian Huanbohai Development Credit Guaranty Company. In the guaranty contract, the Company pledged part of its advertising equipment with the approximate value of RMB13, 000,000 (approximately $1.99 million) to Dalian Huanbohai Development Credit Guaranty Company.
d) Loan payable to Industrial and Commercial Bank of China due June 21, 2011 at a fixed interest rate of 6.90% per year. This loan is guaranteed by an unrelated company, Dalian Baifute Xianlan Manufacture Company.
e) Loan payable to Jinzhou Bank is a one-year term loan from April 21, 2010 to April 20, 2011 at a fixed interest rate of 6.90% per year. This loan has been guaranteed by the Company’s major Stockholders Mr. Guojun Wang and Ms. Ming Ma. The Company pledged part of its advertising equipment with the value of RMB17,000,000 (approximately $2.6 million).
f) Loan payable to Industrial Bank consists of two loans. One loan is a one-year term loan from June 25, 2010 to June 24, 2011 with the amount of RMB 10,000,000 (approximately $1.5 million) at a fixed interest rate of 6.10% per year. This loan has been guaranteed by the Company’s major Stockholders Mr. Guojun Wang and Ms. Ming Ma. The other loan is a one-year term loan from July 20, 2010 to July 19, 2011 with the amount of RMB 7,000,000 (approximately $1.0 million) at a fixed interest rate of 6.10% per year. This loan has been guaranteed by the Company’s major Stockholders Mr. Guojun Wang and Ms. Ming Ma and also has been guaranteed by an unrelated company, Union Chuangye Guaranty Company.
g) Loan payable to Jilin Bank is a one-year term loan from January 30, 2011 to January 29, 2012 at a fixed interest rate of 7.55% per year. This loan has been guaranteed by an unrelated company, Dalian Enterprise Credit Guaranty Co., Ltd. In the guaranty contract, the Company pledged part of its advertising equipment with the approximate value of RMB43,408,300 (approximately $6.63 million) to Dalian Enterprise Credit Guaranty Co., Ltd.
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CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - LONG TERM DEBT
The long term debt consists of the following:
| | | March 31, 2011 | | | June 30, 2010 | |
| a) Loan payable to China Development Bank | | $ | - | | | $ | 294,923 | |
| | | | | | | | | |
| b) Loan payable to Dalian Bank | | $ | 916,226 | | | $ | 884,768 | |
| | | | | | | | | |
| Total long term loans | | $ | 916,226 | | | $ | 1,179,691 | |
| | | | | | | | | |
| Less: current portion | | $ | 458,113 | | | | 737,307 | |
| | | | | | | | | |
| Total long term loans noncurrent portion | | $ | 458,113 | | | $ | 442,384 | |
a) Loan payable to China Development Bank was repaid on December 27, 2010.
b) Loan payable to Dalian Bank has a three-year term from May 31, 2009 to June 25, 2012 at a fixed interest rate of 5.94% per year. Repayment in equal installments of RMB 3,000,000 (approximately $458,113) are required on June 23, 2011 and June 25, 2012. This loan has been guaranteed by an unrelated company, Dalian Enterprise Credit Guaranty Company.
NOTE 12 - RELATED PARTY TRANSACTIONS
Amounts due to related parties are as follows:
| | | March 31, | | | June 30, | |
| | | 2011 | | | 2010 | |
| | | | | | | |
| Ma, Ming | | $ | 3,818 | | | $ | 97,562 | |
| Modern Trailer Company | | | 30,541 | | | | 309,669 | |
| Wang, Mingyi | | | 2,087 | | | | - | |
| Meng, Zhaohui | | | 1,959 | | | | - | |
| Wang, Guojun | | | 92,658 | | | | 29,890 | |
| Total | | $ | 131,063 | | | $ | 437,121 | |
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CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – EARNINGS PER SHARE
GAAP requires presentation of basic and diluted earnings per share in conjuction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock using the treasury method.
Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents are considered dilutive based upon the Company’s net income position at the calculation date.
As of March 31, 2011, the Company had 1,000,000 shares of preferred stock, that have not been included in diluted weighted average shares calculation because pursuant to the Merger agreement, no preferred shares can be converted to any securities as of March 31, 2011.
The Company has outstanding warrants to acquire 3,298,760 shares of common stock. All the outstanding warrants were considered antidilutive and weren’t included in the weighted average shares-diluted calculation using the treasury stock method in 2011.
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CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – EARNINGS PER SHARE (Continued)
The following table sets forth earnings per share calculation:
| | | For nine months ended | | | For three months ended | |
| | | March 31, | | | March 31, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Basic earning per share | | | | | | | | | | | | |
| Net income attributable to China New Media Corp. | | $ | 3,733,481 | | | $ | 3,367,292 | | | $ | 1,390,863 | | | $ | 1,326,243 | |
| | | | | | | | | | | | | | | | | |
| Weighted average number of common shares outstanding - Basic | | | 27,550,701 | | | | 26,856,238 | | | | 27,550,701 | | | | 27,510,145 | |
| | | | | | | | | | | | | | | | | |
| Earnings per share-Basic | | $ | 0.14 | | | $ | 0.13 | | | $ | 0.05 | | | $ | 0.05 | |
| | | | | | | | | | | | | | | | | |
| Diluted earnings per share | | | | | | | | | | | | | | | | |
| Net income attributable to China New Media Corp. | | $ | 3,733,481 | | | $ | 3,367,292 | | | $ | 1,390,863 | | | $ | 1,326,243 | |
| | | | | | | | | | | | | | | | | |
| Weighted average number of common shares outstanding - Basic | | | 27,550,701 | | | | 26,856,238 | | | | 27,550,701 | | | | 27,510,145 | |
| Effect of dilutive securities-warrant | | | 0 | | | | 962,901 | | | | 0 | | | | 2,045,232 | |
| Weighted average number of common shares outstanding - Diluted | | | 27,550,701 | | | | 27,819,139 | | | | 27,550,701 | | | | 29,555,377 | |
| | | | | | | | | | | | | | | | | |
| Earnings per share-Diluted | | $ | 0.14 | | | $ | 0.12 | | | $ | 0.05 | | | $ | 0.04 | |
| | | | | | | | | | | | | | | | | |
Note 14 – SEGMENT INFORMATION
ASC 280, "Segment Reporting", establishes standards for reporting information about operating segments on a basis consistent with the Company's internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company's business segments.
The Company is an outdoor advertising company in China which provides a full range of integrated outdoor advertising services including art design, advertising publishing, daily maintenance and technical upgrading. The Company's chief operating decision maker ("CODM") has been identified as the CEO who reviews the financial information of separate operating segments when making decisions about allocating resources and assessing performance of the group. Based on management's assessment, the Company has determined that its operating segments can be categorized by geographic locations as well as the format of the outdoor media platforms.
17
CHINA NEW MEDIA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 – SEGMENT INFORMATION (Continued)
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The CODM evaluates performance based on each reporting segment's revenues, cost of revenues, and gross profit. Selling expenses and G&A expenses are not separated reviewed to each segment. The CODM does not review balance sheet information to measure the performance of the reportable segments, nor is this part of the segment information regularly provided to the CODM.
Revenue and cost of revenues by segment were as follows:
| | | For three months ended March 31, 2011 | |
| | | | | | | | | | | | | | | |
| | | Dalian District | | Shenyang District | | Beijing District | | Tianjin District | | Shanghai District | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 4,983,472 | | | $ | 110,840 | | | | | | $ | 57,184 | | | $ | 251,230 | | | $ | 5,402,726 | |
| Cost of Revenue | | | (2,072,982 | ) | | | ( 9,497 | ) | | | (15,281 | ) | | | (40,579 | ) | | | (144,231 | ) | | | (2,342,570 | ) |
| Gross Profit | | $ | 2,910,490 | | | $ | 41,343 | | | | (15,281 | ) | | $ | 16,605 | | | $ | 106,999 | | | $ | 3,060,156 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For three months ended March 31, 2010 | |
| | | | | | | | | | | | | | | |
| | | Dalian District | | Shenyang District | | Beijing District | | Tianjin District | | Shanghai District | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 3,862,665 | | | $ | 254,776 | | | | | | | | | | | | | | | $ | 4,117,441 | |
| Cost of Revenue | | | (1,414,562 | ) | | | (116,684 | ) | | | | | | | | | | | | | | | (1,531,246 | ) |
| Gross Profit | | $ | 2,448,103 | | | $ | 138,092 | | | | | | | | | | | | | | | $ | 2,586,195 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For nine months ended March 31, 2011 | |
| | | | | | | | | | | | | | | |
| | | Dalian District | | Shenyang District | | Beijing District | | Tianjin District | | Shanghai District | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 13,122,311 | | | $ | 477,851 | | | | | | | $ | 124,139 | | | $ | 846,963 | | | $ | 14,571,264 | |
| Cost of Revenue | | | (5,427,579 | ) | | | (281,497 | ) | | | (45,788 | ) | | | (68,580 | ) | | | (481,164 | ) | | | (6,304,608 | ) |
| Gross Profit | | $ | 7,694,732 | | | $ | 196,354 | | | | ( 45,788 | ) | | $ | 55,559 | | | $ | 365,799 | | | $ | 8,266,656 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For nine months ended March 31, 2010 | |
| | | | | | | | | | | | | | | |
| | | Dalian District | | Shenyang District | | Beijing District | | Tianjin District | | Shanghai District | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 10,801,460 | | | $ | 514,141 | | | | | | | | | | | | | | | $ | 11,315,601 | |
| Cost of Revenue | | | (4,168,236 | ) | | | (254,823 | ) | | | | | | | | | | | | | | | (4,423,059 | ) |
| Gross Profit | | $ | 6,633,224 | | | $ | 259,318 | | | $ | - | | | $ | - | | | $ | - | | | $ | 6,892,542 | |
Note 15 - SUBSEQUENT EVENT
On April 25, 2011, the Company granted its independent director, Stephen Monticelli a warrant to purchase up to 50,000 shares of the Company’s common stock at an exercise price of $1.80 per share. The Warrant Shares for the first year (up to an aggregate total of 16,666 shares) will vest following a full year of service as a Non-Executive Director. The Warrant Shares for the second year (up to an aggregate total for years one and two of 33,333 shares) will vest following a second full year of service as a Non-Executive Director. The Warrant Shares for years three through five (up to an aggregate total for all five years of 50,000 shares) will vest following the third full year of service as a Non-Executive Director.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
We are a fast-growing outdoor advertising company in China. We provide a full range of integrated outdoor advertising services, including art design, advertising publishing, daily maintenance and technical upgrading. We believe our well-diversified outdoor advertising media network and our ability to provide advertising services on an integrated basis allow us to target and satisfy client needs at all levels. Founded in 2000, we have grown steadily and expanded our media network into Shenyang, Tianjin, Beijing and Shanghai from our headquarters in Dalian.
Our principal executive offices are located at Golden Name Commercial Tower 8th floor, 68 Renmin Road, Zhongshan District, Dalian, P.R. China. Our telephone number is 86-411-82728168.
Our Corporate History
We were originally incorporated as Golden Key International, Inc. under the laws of the State of Delaware on February 18, 1999. Prior to a reverse merger transaction effected on December 8, 2009, we were a development stage company with no revenues or profits. On December 8, 2009, we acquired all of the outstanding capital stock of Hongkong Fortune-Rich Investment Co., Limited, a Hong Kong corporation (“Fortune-Rich”), through China New Media Corp., a Delaware corporation (the “Merger Sub”) wholly owned by us (the “Acquisition”). Fortune-Rich is a holding company whose only asset, held through a subsidiary, is 100% of the registered capital of Dalian Guo-Heng Management and Consultation Co., Ltd. (“Dalian Guo-Heng”), a limited liability company organized under the laws of the People’s Republic of China. Substantially all of Fortune-Rich’s operations are conducted in China through Dalian Guo-Heng, and through contractual arrangements with several of Dalian Guo-Heng’s consolidated affiliated entities in China, including Dalian Vastitude Media Group Co., Ltd. (“V-Media”) and its subsidiaries. V-Media is a fast-growing outdoor advertising company with major operations in Dalian, the commercial center of Northeastern China. In connection with the Acquisition, the Merger Sub issued 10 shares of the common stock of the Merger Sub, which constituted no more than 10% ownership interest in the Merger Sub, and 1,000,000 shares of Series A Preferred Stock of the Company to the shareholders of Fortune-Rich in exchange for all of the shares of capital stock of Fortune-Rich (the “Share Exchange” or “Merger”). The 10 shares of the common stock of the Merger Sub were converted into approximately 26,398,634 shares of the common stock of the Company, so that upon completion of the Merger, the shareholders of Fortune-Rich owned approximately 96% of the common stock of the Company. Effective December 28, 2009, our trading symbol on the OTC Bulletin Board is CMDI.OB.
Through the contractual arrangements between Dalian Guo-Heng and V-Media, we operate one of the largest outdoor advertising networks in northeast China with a strong market presence in Dalian and Shenyang, the two most popular commercial cities in Northeast China. We provide clients with advertising opportunities through our diverse media platforms, which include four major proprietary channels: (1) Street Fixture and Display Network, which includes bus and taxi shelters; (2) Mobile Advertisement displayed on mass city transit systems, which includes displays on city buses, metro-trains and train stations; (3) Billboard and Large LED displays along the city’s streets and highways; and (4) our proprietary and patented multi-media system, “City Navigator.”
We have experienced sustainable business growth in recent years. The size of our network has grown significantly over the years since the commercial launch of our advertising network. From December 31, 2010 to March 31, 2011, the number of bus and taxi shelters on which we operate and carry our advertisements increased from 785 to 789. For the same period, the number of buses that carry our mobile advertisements changed from 324 to 331; the number of mobile displays through Dalian metro-trains is 32. We also operate 52 City Navigators and 3 mega-screen (126 M2 to 400 M2, approximately 1,356 square feet to 4,306 square feet) LED screens and 7 metal billboards across Dalian urban area, 1 mega-screen (88 M2, approximately 947 square feet) LED screen in the business district in Shenyang, 1 indoor LED screen (22 M2, approximately 237 square feet) in Tianjin Railway Station and 5 billboards in Shanghai.
19
Subsidiaries of V-Media
The following table sets forth information concerning V-Media’s subsidiaries:
| Name of Subsidiary | V-Media’s Ownership Percentage | | Region of Operations | | Primary Business |
Shenyang Vastitude Media Co., Ltd. | | | | | |
Tianjin Vastitude AD Media Co., Ltd. | | | | | |
Dalian Vastitude Network Technology Co., Ltd. | | | | | Computer exploitation, technical service and domestic advertisement |
Dalian Vastitude Engineering & Design Co., Ltd. | | | | | Engineering, design and construction |
Dalian Vastitude & Modern Transit Media Co., Ltd. | | | | | |
Vastitude (Beijing) Technology Co. | | | | | |
Shanghai Vastitude Advertising & Media Co., Ltd. | | | | | |
Factors Affecting Our Results of Operations
The increase in our operating results during the period included in the accompanying condensed consolidated unaudited financial statements is attributable to a number of factors, including our steady expansion of outdoor media network in Dalian, our headquarter and other selected cities, our technical innovation and outdoor media system upgrading. We expect our business to continue to be driven by the following factors:
Increasing Domestic Spending in Outdoor Advertising
The demand for our advertising time slots is directly related to the outdoor advertising spending in northeast China. The increase in advertising spending is largely determined by the economic conditions in our region. According to the “Statistical Communiqué of the PRC on 2008 National Economic and Social Development” released by National Bureau of Statistics of China on February 26, 2009, China’s economy has experienced rapid growth in the last five years. The annual growth rate has been in the range of 9% to 13%. The domestic retail sales have been growing even faster than any other sectors, with an average annual growth rate of 15.5% in the last 5 years. The latest government’s economic stimulus plan is aimed at building a domestic consumer-driven economy, which, we believe, is going to generate more demand for outdoor advertising. We expect the outdoor advertising spending in our regional market will maintain its double-digit growth in the years to come.
Expansion of Our Market Presence by Launching City Navigator ® Networks in Other Major Commercial Cities
We believe our proprietary multi-media advertising system – City Navigator ® Network is one of the most advanced outdoor advertising platforms available in China. This system combines the latest LED displaying technology, internet and WI-FI technology, and has proven to be very effective in our competition to get access to top tier cities such as Shanghai and Beijing.
By using wireless access technology, our LED displays at bus and taxi shelters are able to display real time programs at the control of our centralized computer systems. It consists of a Wi-Fi receiver, large-screen LED display, and web-based touch-screen kiosk which provide the public with information on all aspects of the city life, including travel, traffic, restaurants, shopping, hotels, business, medical and education. In addition, every City Navigator is equipped with Bluetooth, wireless access and printing technology. Users can either print the information or send the information to their cell phones or computers. As City Navigator® Network adopts Wi-Fi technology, users can enjoy its service from any area covered by its Wi-Fi signals. We intend to aggressively expand our media platform by launching City Navigator ® Networks in our target cities such as, Tianjin, Qingdao and Shanghai, to create our own cross-region advertising network and enhance our advertising distribution capacity.
Promotion of Our Brand Name to Attract a Wider Client Base and Increase Revenues
We plan to promote our brand name, [国域无疆]TM, through both our own media channels and public channels in North China. We believe that the enhancement of public awareness to our brand name will help to broaden our client base, especially in the new marketplace such as Shenyang and Tianjin. As we expand our advertising client base and promote public’s awareness to our brand, we believe demand for time slots and advertising space on our network will continue to grow.
20
Upgrade of Our Outdoor Billboard Network with New Digital Display Technology
We intend to capitalize recent advances in digital display technology, especially mega-screen LED displays, to meet major institutional clients’ needs. Because the LED displays can be linked through centralized computer systems to instantaneously change static advertisements, and it is highly visible even during bright daylight, it improves the advertising effectiveness and efficiency markedly. We plan to build more mega-screen (100 M2 to 500 M2, approximately 1,076.4 square feet to 5,382 square feet) LED displays at premier locations in our marketplace.
As we continue to expand our network, we expect to face a number of challenges. We have expanded our network rapidly, and we, as well as our competitors, have occupied many of the most desirable locations in Dalian. In order to continue expanding our network in a manner that is attractive to potential advertising clients, we must continue to identify and occupy desirable locations and to provide effective channels for advertisers. In addition, we must react to continuing technological innovations in the use of wireless and broadband technology in our network, and changes in the regulatory environment, such as the regulations allowing 100% foreign ownership of PRC advertising companies and new regulations governing cross-border investment by PRC persons.
We believe that our business model and success in our regional market give us a considerable advantage over our competitors. Our future growth will depend primarily on the following factors:
| · | Overall economic growth in China, which we expect to contribute to an increase in advertising spending in major urban areas in China where consumer spending is concentrated; |
| · | Our ability to expand our network into new locations and additional cities; |
| · | Our ability to expand our sales force and engage in increased sales and marketing efforts; |
| · | Our ability to expand our client base through promotion of our services; and |
| · | Our ability to expand our new systems, including large-screen LED display networks and City Navigator® Networks. |
Results of Operations
Comparison of Three-Month Periods ended March 31, 2011 and March 31, 2010
The following table shows the operations of the Company on a consolidated basis for the three months ended March 31, 2011 and 2010:
| REVENUES | | Three Months Ended March 31, | |
| | | 2011 | | | 2010 | | | Difference | | | % Change | |
| Dalian District | | | | | | | | | | | | |
| Street Fixture and Display Network | | $ | 1,799,705, | | | $ | 1,324,835 | | | $ | 474,870 | | | | 35.84 | % |
City Transit system Display Network | | | | | | | | | | | | | | | | |
| Outdoor Billboards | | | 1,478,201 | | | | 1,020,987 | | | | 457,214 | | | | 44.78 | % |
| | | | | | | | | | | | | | | | |
| Other Service Income (a) | | | 134,135 | | | | 249,687 | | | | -115,552 | | | | -46.28 | % |
Subtotal for Dalian District | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Street Fixture and Display Network | | $ | 12,044 | | | $ | 178,711 | | | $ | -166,667 | | | | -93.26 | % |
| | | | | | | | | | | | | | | | |
| Other Service Income(a) | | | - | | | | | | | | -- | | | | | % |
| Subtotal for Shenyang District | | $ | 110,840 | | | $ | 254,776 | | | $ | -143,936 | | | | -56.50 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Outdoor Billboards | | $ | 57,184 | | | $ | - | | | $ | 57,184 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| Shanghai District | | | | | | | | | | | | | | | | |
| Outdoor Billboads | | $ | 251,230 | | | $ | - | | | $ | 251,230 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| Total Revenues | | $ | 5,402,726 | | | $ | 4,117,441 | | | $ | 1,285,285 | | | | 31.22 | % |
(a) Other service income generated by Construction & Design service provided by V-Media Engineering & Design Company and technique service provided by V-Media Engineering & Design Company to outside customers.
21
Sales revenue
During the three months ended March 31, 2011, we had revenues of $ 5,402,726 as compared to revenues of $4,117,441 during the three months ended March 31, 2010, an increase of $1,285,285, or 31.2%. Revenue growth was driven by the demand for our outdoor advertising platforms as the Company continues to expand its advertising network in Dalian, Shenyang, Tianjin and Shanghai. Geographically, for the three months ended March 31, 2011, sales in Dalian, Shenyang, Tianjin and Shanghai district accounted for 92.2% , 2.1%, 1.0% and 4.7% of total sales, compared with 93.8%, 6.2%, 0%, and 0% same period in 2010. Revenue was increased in Dalian, Tianjin and Shanghai district, and partially offset by the decrease in sales through the Street Fixture and Display Network in Shenyang. This decrease was due to the Company’s focus on sales through billboard platforms in Shenyang city.
Having recognized that the billboard platforms have significant growth potential and attractive profit margin, we will continue to focus our resources on the billboard segment going forward in cities outside of Dalian, in which we are headquartered.
Cost of revenues.
Our cost of revenues for the three months ended March 31, 2011 increased by $811,324 to $2,342,570,representing an increase of 52.98%. The increase mainly resulted from the increased sales during the period. Cost of revenue as a percentage of sales revenue for the three months ended March 31, 2011 and 2010 were 43.4% and 37.2%, respectively. The increase was largely due to the price increase in raw material and the increase of depreciation expense as the Company added new fixed assets.
The breakdown of the cost of revenue is as follows:
| COST OF REVENUES | | Three Months Ended March 31, | |
| | | 2011 | | | 2010 | | | Difference | | | % Change | |
| Dalian District | | | | | | | | | | | | |
| Street Fixture and Display network | | $ | 691,827 | | | $ | 429,837 | | | $ | 261,990 | | | | 60.95 | % |
City Transit system Display network | | | | | | | | | | | | | | | | |
| Outdoor Billboards | | | 493,528 | | | | 286,912 | | | | 206,616 | | | | 72.01 | % |
| | | | | | | | | | | | | | | | |
| Other service cost (b) | | | 119,415 | | | | 131,919 | | | | -12,504 | | | | -9.48 | % |
Subtotal for Dalian District | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Street Fixture and Display network | | $ | 5,907 | | | $ | 91,302 | | | $ | -85,395 | | | | -93.53 | % |
| | | | | | | | | | | | | | | | |
| Other service cost (b) | | | -- | | | | 0 | | | | | | | | | % |
| Subtotal for Shenyang District | | $ | 69,497 | | | $ | 116,684 | | | $ | -47,187 | | | | -40.44 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Outdoor Billboards | | $ | 15,282 | | | $ | | | | $ | 15,282 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Outdoor Billboards | | $ | 40,579 | | | $ | | | | $ | 40,579 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Outdoor Billboards | | $ | 144,231 | | | $ | | | | $ | 144,231 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
(b) Other service cost attribute to V-Media Engineering & Design Company and to V-Media Network Technology Company when they provide Construction & Design service and technique service to outside customers, respectively.
22
Gross Profit
Our gross profit for the three months ended March 31, 2011 grew by $473,961 or 18.3% to $3,060,156 from $2,586,195 for the same period in 2010. The increase in gross profit was in line with our growth in revenue as we acquired more advertising contracts during the three months ended by March 31, 2011. Our gross margin during the three months ended March 31, 2011 and 2010 were 56.6% and 62.8%, respectively. The decrease is mainly due to the increase in depreciation expense and the billboard construction cost in our Shenyang subsidiary.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, totaled $1,046,951 during the three months ended March 31, 2011, an increase of $472,634 or 82.3%, compared to $574,317 for the same period ended March 31, 2010. Our selling, general and administrative expenses were consistent with growth in revenue and during this quarter, the increase in our operating expenses was mainly attributed to an increase in our payroll, electricity expense, office expense and fees paid for professional services.
Other Income (Expenses)
For the three months ended March 31, 2011, we had net other expense of $126,592 compared with net other expense of $100,789 for the same period of 2010. Other expenses mainly consist of the interest expense.
Total interest expense on the bank loans for the three months ended March 31, 2011 and 2010, amounted to $175,950 and $99,400, respectively.
Net Income Attributable to the Company
Net income attributable to the Company was $1,390,863 for the three months ended March 31, 2011, as compared with $1,326,243 for the three months ended March 31, 2010, representing an increase of 4.9%. The increase in net income was mainly attributed to our increase in revenue and our efforts to control the costs.
Comprehensive Income
Our business operates primarily in Chinese Renminbi (“RMB”), but we report our results in U.S. Dollars. The conversion of our accounts from RMB to U.S. Dollars results in translation adjustments. As a result of a currency translation adjustment gain, our comprehensive income was $1,495,852 during the three months ended March 31, 2011, as compared with $1,327,714 during the three months ended March 31, 2010, an increase of 12.7%. The increase is due to significant currency exchange fluctuation of Chinese RMB to US Dollar for the periods.
23
Operation Results of the Nine months Ended March 31, 2011 and 2010
Revenues
We generate revenues from the sale of outdoor advertising on our advertising network. The following table sets the revenues generated from each of our advertising categories for the periods indicated.
| | | Nine Months Ended March 31, | |
| | | 2011 | | | 2010 | | | Difference | | | % Change | |
| Dalian District | | | | | | | | | | | | |
| Street Fixture and Display network | | $ | 4,764,126 | | | $ | 3,786,081 | | | $ | 978,045 | | | | 25.83 | % |
City Transit system Display network | | | | | | | | | | | | | | | | |
| Outdoor Billboards | | | 3,664,880 | | | | 2,545,597 | | | | 1,119,283 | | | | 43.97 | % |
| | | | | | | | | | | | | | | | |
| Other service income (a) | | | 591,149 | | | | 1,107,270 | | | | -516,121 | | | | -46.61 | % |
Subtotal for Dalian District | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Street Fixture and Display network | | $ | 145,439 | | | $ | 394,424 | | | $ | -248,985 | | | | -63.13 | % |
| | | | | | | | | | | | | | | | |
| Other service income(a) | | | 9,296 | | | | | | | | 9,296 | | | | 100 | % |
| Subtotal for Shenyang District | | $ | 477,851 | | | $ | 514,141 | | | $ | -36,290 | | | | -7.06 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Outdoor Billboards | | $ | 124,139 | | | $ | - | | | $ | 124,139 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| Shanghai District | | | | | | | | | | | | | | | | |
| Outdoor Billboards | | $ | 846,963 | | | $ | - | | | $ | 846,963 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| Total Revenues | | $ | 14,571,264 | | | $ | 11,315,601 | | | $ | 3,255,663 | | | | 28.77 | % |
(a) Other service income generated by Construction & Design service provided by V-Media Engineering & Design Company and technique service provided by V-Media Network Technology Company to outside customers.
During the nine months ended March 31, 2011, we had revenues of $14,571,264, as compared to $11,315,601 during the nine months ended March 31, 2010, an increase of approximately $3,255,663, or 28.77% due to our increased and expanded sales to the existing and new customers in the nine month period. Our advertising network has been expanded quickly. We obtained more desirable locations in Dalian, Shenyang and Shanghai for advertisements, created new media platforms and continued our efforts to expand our client base in all subsidiaries.
24
Cost of Revenue
| | | Nine Months Ended March | |
| | | 2011 | | | 2010 | | | Difference | | | % Change | |
| Dalian District | | | | | | | | | | | | |
| Street Fixture and Display network | | $ | 1,784,068 | | | $ | 1,255,974 | | | $ | 528,094 | | | | 42.05 | % |
City Transit system Display network | | | | | | | | | | | | | | | | |
| Outdoor Billboards | | | 1,279,094 | | | | 801,831 | | | | 477,263 | | | | 59.52 | % |
| | | | | | | | | | | | | | | | |
| Other service cost (b) | | | 478,370 | | | | 539,982 | | | | -61,612 | | | | -11.41 | % |
Subtotal for Dalian District | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Street Fixture and Display network | | $ | 89,666 | | | $ | 201,532 | | | $ | -111,865 | | | | -55.51 | % |
| | | | | | | | | | | | | | | | |
| Other service cost (b) | | | 1,544 | | | | 0 | | | | 1,544 | | | | 100 | % |
| Subtotal for Shenyang District | | $ | 281,498 | | | $ | 254,823 | | | $ | 26,676 | | | | 10.47 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Outdoor Billboards | | $ | 45,788 | | | $ | | | | $ | 45,788 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Outdoor Billboards | | $ | 68,580 | | | $ | | | | $ | 68,580 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Outdoor Billboards | | $ | 481,164 | | | $ | | | | $ | 481,165 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
(b) Other service cost attribute to V-Media Engineering & Design Company and by V-Media Network Technology Company when they provide Construction & Design service and technique service to outside customers, respectively.
During the nine months ended March 31, 2011, we had cost of revenue of $6,304,608, as compared with cost of revenue of $4,423,059, an increase of approximately $1,881,549, or 42.54%, reflecting the increase in revenues. Gross profit rose to $8,266,656 for the nine months ended March 31, 2011, increased 19.94% compared with the nine months ended March 31, 2010. The main reasons for the increase of gross profit from 2010 to 2011 are as following: 1) Increased occupancy of advertising space as we have been able to secure more popular locations and have raised more brand awareness among our customers; and, 2) we are able to realize more profits on some of our new advertising channels, such as large-screen LED billboards, which have lower maintenance costs and higher profitability.
Selling, General and Administrative Expenses
Our operating expenses were $2,738,538 for the nine months ended March 31, 2011, compared with $1,853,733 during the nine months ended March 31, 2010, an increase of $884,805 or approximately 47.7%. The increase was mainly due to the increase of salaries, electricity expense, office expense and professional services expenses.
Other Income (Expenses)
For the nine months ended March 31, 2011, we had a total other expenses of $337,004 compared with total other expenses of $144,950 during the same period of 2010. Other expenses mainly consist of the interest expense during the period.
Total interest expense on the bank loans for the nine months ended March 31, 2011 and 2010, amounted to $491,507 and $180,844, respectively.
Net Income attributable to the Company
As a result of the factors described above, we had net income attributable to the Company in the amount of $3,733,481 for the nine months ended March 31, 2011, compared with $3,367,292 for the nine months ended March 31, 2010, which represents an increase of 10.87%. The increase in net income was mainly attributed to our increase in revenue and our efforts to control the costs.
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Comprehensive Income
Also, as a result of a currency translation adjustment gain, our comprehensive income was $4,093,496 for the nine months ended March 31, 2011, compared with $3,371,714 for the nine months ended March 31, 2010, an increase of 21.41%. The difference between Net Income and Comprehensive Income is due to the significant currency exchange fluctuation.
Liquidity and Capital Resources
We have historically funded our working capital needs from operations, advance payments from customers, bank borrowings, and capital from shareholders. Presently, our principal sources of liquidity were generated from our operations and through bank loans. Our working capital requirements are influenced by the level of our operations, the numerical and dollar volume of our sales contracts, the progress of our contract execution and the timing of accounts receivable collections.
Based on our current operating plan, we believe that our existing resources, including cash generated from operations as well as the bank loans, will be sufficient to meet our working capital requirement for our current operations. In order to fully implement our business plan and continue our growth, however, we will require additional capital either from our shareholders or from outside sources.
As of March 31, 2011, cash and cash equivalents were $ 1,591,672, a decrease of $80,345 from $ 1,672,017 as of June 30, 2010.
Cash Flow from Operating Activities
Net cash provided by operating activities was $3,813,778 for the nine months ended March 31, 2011, compared with net cash provided by operating activities of $2,421,762 for the nine months ended March 31, 2010. The major components of cash provided in operations were related to the increased net income, accounts payable and taxes payable, and a decrease in advance to suppliers, offset by an increase in accounts receivable, and an increase in other current assets
Cash Used in Investing Activities
For the nine months ended March 31, 2011, our net cash used in investing activities was $5,602,690 as compared to net cash used in investing activities of $5,164,370 for the nine months ended March 31, 2010. Net cash used in investing activities was mainly attributable to the acquisition of billboards use rights and the acquisition of property and equipment.
Cash Provided by Financing Activities
For the nine months ended March 31, 2011, net cash provided by financing activities was $1,658,295 as compared to cash provided by financing of $4,527,709 for the same period ended March 31, 2010. The decrease was mainly attributable to the net proceeds from the private placement of common stock taken place in December 2009.
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Critical Accounting Policies
Our most critical accounting policies are described in Note 2 to our consolidated financial statements.
Impact of Accounting Pronouncements
None.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company,” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
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 the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). The evaluation of our disclosure controls and procedures included a review of our processes and the effect on the information generated for use in this Quarterly Report on Form 10-Q. In the course of this evaluation, we sought to identify any material weaknesses in our disclosure controls and procedures and to confirm that any necessary corrective action, including process improvements, was taken. The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures were operating effectively such that the information, required to be disclosed in our reports with the Securities and Exchange Commission (“SEC”) (i) was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Based upon, and as of the Evaluation Date, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures contained significant deficiencies and material weaknesses. Therefore, our management concluded that our disclosure controls and procedures were not effective. We believe that the deficiencies and weaknesses in our disclosure controls and procedures result from weaknesses in our internal control over financial reporting, which are described under Item 9A – “Controls and Procedures – Management’s Annual Report on Internal Control Over Financial Reporting” in the Company’s Annual Report on Form 10-K filed with the SEC on October 13, 2010.
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Changes in Internal Control over Financial Reporting
During the most recent quarter ended March 31, 2011, the Company continued to implement the following changes to its internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, its internal control over financial reporting.
| · | We began evaluating the roles of our existing accounting personnel in an effort to realign the reporting structure of our internal auditing staff in China that will test and monitor the implementation of our accounting and internal control procedures. |
| · | We initiated in the process of completing a review and revision of the documentation of the Company’s internal control procedures and policies. |
| · | We continually implement the training in China to ensure the importance of internal controls and compliance with established policies and procedures are fully understood throughout the organization and plan to provide additional US GAAP training to all employees involved to ensure the performance of and compliance with those procedures and policies. |
The remedial measures being undertaken may not be fully effectuated or may be insufficient to address the significant deficiencies we identified, and there can be no assurance that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified or occur in the future. If additional significant deficiencies (or if material weaknesses) in our internal controls are discovered or occur in the future, among other similar or related effects: (i) the Company may fail to meet future reporting obligations on a timely basis, (ii) the Company’s consolidated financial statements may contain material misstatements and (iii) the Company’s business and operating results may be harmed.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS.
| Exhibit Number | Description of Exhibit |
| 31.1* | Certification of Principal Executive Officer pursuant to Rule 13a-14(a). |
| | |
| 31.2* | Certification of Principal Financial Officer pursuant to Rule 13a-14(a). |
| | |
| 32.1* | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350. |
| | |
| 32.2* | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350. |
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 15, 2011
| | CHINA NEW MEDIA CORP. | |
| | | | |
| | By: | /s/ Guojun Wang | |
| | | Name: Guojun Wang | |
| | | Title: Chief Executive Officer and Chairman (principal executive officer and duly authorized officer) | |
| | | | |
| | | |
| | | | |
| | By: | /s/ Hongwen Liu | |
| | | Name: Hongwen Liu | |
| | | Title: Chief Financial Officer and Treasurer (principal financial officer) | |
| | | | |
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Exhibit Index
| Exhibit Number | Description of Exhibit |
| 31.1* | Certification of Principal Executive Officer pursuant to Rule 13a-14(a). |
| | |
| 31.2* | Certification of Principal Financial Officer pursuant to Rule 13a-14(a). |
| | |
| 32.1* | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350. |
| | |
| 32.2* | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350. |
* Filed herewith
