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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-QSB
(Mark one)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly period ended September 30, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______ to _______
Commission file number 000-50193
CHINA MEDIA1 CORP.
(Exact name of small business issuer as specified in its charter)
Nevada 46-0498798
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2020 Main Street, Suite 500, Irvine, CA 92614
(Address of principal executive offices)
(949) 757-0890
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports require to be filed by sections
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorten
period that the registrant was required to file such report), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). |_| Yes |X| No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Common shares outstanding as of November 14, 2005: 33,920,000
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
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EXPLANATORY NOTE:
The accompanying consolidated financial statements are required to be reviewed
by the Company's independent auditors in accordance with Statement of Auditing
Standard No. 100. The Company's auditors have been unable to complete their
review procedures in a timely manner and prior to the filing of this Quarterly
Report on Form 10-QSB. Management expects the review to be completed in five (5)
business days. We will file an amendment to this Form 10-QSB when our
independent accountants complete their review.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following is the interim unaudited consolidated financial statements
included in this Quarterly Report on Form 10-QSB:
Consolidated balance sheet as of September 30, 2005 (unaudited) 3
Consolidated statements of operations for the three and nine
months ended September 30, 2005 and 2004 (unaudited) 4
Statement of stockholders' equity (unaudited) 5
Consolidated statements of cash flows for the nine months
ended September 30, 2005 and 2004 (unaudited) 6
Notes to the consolidated financial statements (unaudited) 7
CHINA MEDIA1 CORP.
(formerly Eagle River Mining Corp.)
CONSOLIDATED BALANCE SHEETS
September 30, 2005 December 31, 2004
(Unaudited)
September 30, December 31,
Stated in U.S. dollars 2005 2004
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ASSETS (Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 1,572 $ 3,267
Accounts receivable 701,555 --
Demand note receivable from related party -- 181,208
Production costs 1,600 --
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Total current assets 704,727 184,475
Deferred cost on advertising projects 1,181,541 --
Leasehold improvements, net of accumulated amortization of $5,906 33,463 --
Deposits 891,720 --
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Total Assets $ 2,811,451 $ 184,475
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payables $ 136,325 $ 5,830
Customer deposits 642,038 --
Due to related parties 1,739,757 153,760
Convertible note due to related party -- 20,000
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Total current liabilities 2,518,120 179,590
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Commitments and Contingencies -- --
Stockholders' Equity (Deficiency):
Common Stock, 1,500,000,000 shares authorized, par value of $0.00005 per share,
33,920,000 shares issued and outstanding 1,696 1,507
Additional paid in capital 1,116,707 112,696
Accumulated other comprehensive loss (6,423) --
Accumulated deficit (818,649) (109,318)
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Total Stockholders' Equity (Deficiency) 293,331 4,885
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Total Liabilities and Stockholders' Equity $ 2,811,451 $ 184,475
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(See condensed notes to the consolidated financial statements)
CHINA MEDIA1 CORP.
(formerly Eagle River Mining Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three-month and nine-month periods ended September 30, 2005 and 2004
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
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Stated in U.S. dollars 2005 2004 2005 2004
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Revenues $ 554,765 $ -- $ 1,219,457 $ --
Cost of revenues 98,151 -- 250,963 --
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Gross profit 456,614 -- 968,494 --
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Operating expenses:
Sales commissions 83,214 -- 182,918 --
General and administrative, excluding
management fees to related party 25,675 4,344 369,907 14,526
Management fees to related party 375,000 -- 1,125,000 --
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Total operating expenses 483,889 4,344 1,677,825 14,526
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Net Loss $ (27,275) $ (4,344) $ (709,331) $ (14,526)
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Net Loss per share- basic and diluted $ (0.00) $ (0.00) $ (0.02) $ (0.00)
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Weighted average number of common shares outstanding:
- - basic and diluted 33,920,000 30,140,000 33,494,872 30,140,000
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(See condensed notes to the consolidated financial statements)
CHINA MEDIA1 CORP.
(formerly Eagle River Mining Corp.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the
Nine-month periods ended September 30, 2005 and 2004
(Unaudited)
Accumulated Total
Additional other stockholders'
Common stock paid-in comprehensive Accumulated Equity
Stated in U.S. dollars Shares Amount capital loss Deficit (deficiency)
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Balance, December 31, 2003 30,140,000 $1,507 $73,177 $ -- $(41,975) $32,709
Imputed interest calculated on
advances from stockholders -- -- 9,519 -- -- 9,519
Fair vlaue of services provided by
officers and directors -- -- 30,000 -- -- 30,000
Comprehensive income (loss)-
Net loss for the year -- -- -- -- (67,343) (67,343)
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Balance, December 31, 2004 30,140,000 $1,507 $112,696 $ -- $(109,318) $4,885
Issuance of common stock upon the conversion of
loan 80,000 4 19,996 -- -- 20,000
Issuance of common stock for acquisition of
Airport and MTR projects 3,700,000 185 984,015 -- -- 984,200
Comprehensive income (loss)-
Foreign translation adjustment -- -- -- (6,423) -- (6,423)
Net loss for the nine months ended September 30, 2005 -- -- -- -- (709,331) (709,331)
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Balance, September 30, 2005 33,920,000 $1,696 $1,116,707 $(6,423) $(818,649) $293,331
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(See condensed notes to the consolidated financial statements)
CHINA MEDIA1 CORP.
(formerly Eagle River Mining Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine-month
periods ended September 30, 2005 and 2004
(Unaudited)
Stated in U.S. dollars 2005 2004
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Cash flows from operating activities
Net loss for the period $(709,331) $(14,526)
Adjustments to reconcile net loss to net cash used in operating activities
Amortization 8,565 --
Translation adjustment (6,423) --
Changes in operating assets and liabilities
(Increase) Decrease in accounts receivables (701,555) 1,120
(Increase) Decrease in production costs (1,600) --
(Increase) Decrease in refundable deposits (891,720) --
Increase (Decrease) in accounts payable 130,495 313
Increase (Decrease) in customer deposits 642,038 --
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Net cash used in operating activities (1,529,531) (13,093)
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Cash flows from investing activities
Purchase of leasehold improvements (39,369) --
Cash paid to acquire advertising projects (200,000)
Collection on demand promissory note 181,208 --
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Net cash flows provided by (used in) investing activities (58,161) --
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Cash flows from financing activities
Advances from related parties 563,281 10,077
Management fees due to related party 1,022,716 --
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Net cash flows provided by financing activities 1,585,997 10,077
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Decrease in cash and cash equivalents (1,695) (3,016)
Cash and cash equivalents - beginning of period 3,267 3,692
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Cash and cash equivalents - end of period $1,572 $676
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Supplemental Information :
Cash paid for :
Interest expense paid in cash $ -- $ --
Income taxes paid in cash -- --
Non-cash investing for :
3,700,000 Shares issued for acquisition of Airport and MTR projects 984,200 --
(See condensed notes to the consolidated financial statements)
CHINA MEDIA1 CORP.
(Formerly Eagle River Mining Corp.)
Notes to Financial Statements
September 30, 2005
(unaudited)
(Expressed in U.S. Dollars)
Note 1 - Organization and Business
China Media1 Corp., formerly Eagle River Mining Corp., was formed on August 6,
2002 under the laws of the State of Nevada. The Company changed its name to
China Media1 Corp. (the "Company") on January 14, 2005. The Company, a
development-stage company until the first quarter of 2005, was initially engaged
in the acquisition and exploration of mineral properties. On December 26, 2004,
the Company signed an agreement to acquire two advertising contracts from the
Chuangrun Media Limited of Hong Kong, and Guangzhou Chuangrun Advertising
Company Limited located in the Peoples Republic of China ("China") collectively
("Chuangrun"), through the issuance of 3,700,000 new shares of common stock, and
transfer of 17,300,000 shares of common stock by two shareholders, as well as
paying $200,000 to Chuangrun (see Note 3). The acquisition of the contracts
resulted in a change in control of the Company. The Company and Chuangrun are
controlled by one and the same individual.
The Company commenced revenues from advertising contracts in the first quarter
of 2005.
The accompanying consolidated financial statements include the accounts
pertaining to the Company's contract rights operated by Chuangrun and the
accounts of China Media1 Corp. All significant intercompany accounts have been
eliminated in consolidation.
Note 2 - Significant Accounting Policies
Financial Statement Presentation
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities Exchange
Commission ("SEC") regarding interim financial reporting. Accordingly, they do
not include all of the information and notes required by accounting principles
generally accepted in the United States of America. The financial statements and
related notes of China Media1 Corp. for the year ended December 31, 2004 were
filed with the SEC on form 10-KSB on April 14, 2005.
The unaudited consolidated financial statements reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of results for the interim periods
presented. Preparing financial statements requires management to make estimates
and assumptions that affect the amounts that are reported in the unaudited
consolidated financial statements and accompanying disclosures. Although these
estimates are based on management's best knowledge of certain events and actions
that the Company may undertake in the future, actual results may be different
from those estimates. The results of operations for the three and nine months
ended September 30, 2005, are not necessarily indicative of the results to be
expected for any future period or the full fiscal year.
Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities and commitments in the normal course
of business, under accounting principles generally accepted in the United States
of America. The Company has incurred net losses since inception, and requires
additional capital to repay certain debts to related parties, as well as to fund
its operations. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management plans to raise equity
financing of approximately $2,500,000 to repay related-party obligations, fund
expansion of operations in China, as well as administrative and regulatory
compliance. There are no assurances that management will be successful in their
plans to obtain financing. The accompanying financial statements do not include
any adjustments that might result from this uncertainty.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and assumptions.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are recorded net of allowances for doubtful accounts and
reserves for returns. In the normal course of business, the Company extends
credit to customers that satisfy predefined credit criteria. The Company is
required to estimate the collectability of its receivables. Reserves for returns
are based on historical return rates and sales patterns. Allowances for doubtful
accounts are established through the evaluation of accounts receivable agings
and prior collection experience to estimate the ultimate realization of these
receivables.
Concentration of credit risk
The Company maintains Renminbi cash balances in banks of China and Canadian
Dollar cash balances in a Canadian bank, that are not insured. Revenues are
derived in geographic locations outside the United States. The advertising
business in China accounts for 100% of the total revenue of the Company.
Foreign Currency Translations
The assets and liabilities of the Company's foreign operations are generally
translated into U.S. dollars at current exchange rates, and revenues and
expenses are translated at average exchange rates for the year. Resulting
foreign currency translation adjustments are reflected as a separate component
of stockholders' equity. Transaction gains and losses that arise from exchange
rate fluctuations on transactions denominated in a currency other than the
functional currency, except those transactions which operate as a hedge of an
identifiable foreign currency commitment or as a hedge of a foreign currency
investment position, are included in the results of operations as incurred.
Fair Value of Financial Instruments
Fair value estimates of financial instruments are made at a specific point in
time, based on relevant information about financial markets and specific
financial instruments. As these estimates are subjective in nature, involving
uncertainties and matters of significant judgment, they cannot be determined
with precision. Changes in assumptions can significantly affect estimated fair
values.
These financial instruments include cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities and amounts due to related
parties. Fair values were assumed to approximate carrying values for these
financial instruments since they are short term in nature and their carrying
amounts approximate fair values.
Long-Lived Assets
Long-term assets of the Company will be reviewed when changes in circumstances
require as to whether their carrying value has become impaired, pursuant to
guidance established in Statement of Financial Accounting Standards No. 144
("SFAS 144"), Accounting for the impairment or Disposal of Long-Lived Assets.
Management will consider assets to be impaired if the carrying value exceeds the
future projected cash flows from related operations (undiscounted and without
interest charges). If impairment is deemed to exist, the assets will be written
down to fair value. The Company currently does not have significant long-lived
assets.
Revenue Recognition
The Company's revenues for 2005 consisted of revenues from advertisement
services. In accordance with S.E.C. Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," the Company recognizes revenue when the
following criteria are met: persuasive evidence that an arrangement exists;
delivery has occurred or services have been rendered; the price to the customer
is fixed or determinable; and collectability is reasonably assured. If all of
the above criteria have been met, revenues are principally recognized upon
shipment of products or when services have been rendered. Revenues derived from
advertisement services are recognized as the services are performed. Amounts
received from customers in advance of revenue recognition are deferred and
classified on the balance sheet as "deferred revenue."
Deferred cost on advertising projects
The deferred cost on advertising projects represents the cost incurred for the
acquisition of the advertising projects. The deferred cost will be amortized
over the life of the projects from 5 to 10 years.
Production Costs
Design and installation costs incurred for a customer are capitalized and
amortized over the initial service contract period, generally within one year.
Advertising Expenses
The Company will expense advertising costs if and when incurred.
Stock-Based Compensation
The Company adopted the fair value method of accounting for stock-based
compensation recommended by of Statement of Financial Accounting Standards No.
123R, "Accounting for Stock-based Compensation". The Company does not have a
stock option plan nor has it granted any stock options since inception.
Income Taxes
The Company has adopted Statement of Financial Accounting Standards No. 109
(SFAS 109), Accounting for Income Taxes, which requires the Company to recognize
deferred tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns using the liability method. Under this method, deferred tax liabilities
and assets are determined based on the temporary differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
If it likely the Company will not recover deferred tax assets because of
continued losses or due to limited operating history, management will record a
valuation allowance.
Earnings (Loss) Per Share
Earnings (loss) per share is computed using the weighted average number of
shares outstanding during the period. The Company has adopted SFAS No. 128,
"Earnings Per Share". Diluted loss per share is equivalent to basic loss per
share because there are no dilutive securities.
Comprehensive Income
Comprehensive income comprises equity except those resulting from investments by
owners and distributions to owners. The Company has no elements of "other
comprehensive income" for the periods presented.
Independent Auditors' Review
The accompanying consolidated financial statements are required to be reviewed
by the Company's independent auditors in accordance with Statement of Auditing
Standard No. 100. The Company's auditors have been unable to complete their
review procedures in a timely manner and prior to the filing of this Quarterly
Report on Form 10-QSB. Management expects the review to be completed in five (5)
business days. We will file an amendment to this Form 10-QSB when our
independent accountants complete their review.
Note 3 - Contract Rights
Advertising Contracts
On December 26, 2004, the Company signed an agreement to acquire the two
following contracts from Chuangrun located in Southern China: Guangzhou New
Baiyun Airport Scrolling Advertising Signs - the contract provides for the
installation of 100 large size scrolling three-poster signs in the passenger
terminal of the Guangzhou Airport, China. In connection therewith, the Company
is required to pay RMB9,000,000 ($1,114,650) as a deposit seven (7) days after
the contract commences. Management fees of RMB36,000,000 ($4,458,600) per annum
is payable on a quarterly basis with equal amounts for the first 2 years.
Management fees of RMB37,080,000 ($4,592,358) per annum is payable on a
quarterly basis with equal amounts for the third to fifth years. Management fees
will then be increased to RMB40,788,000 ($5,051,594) per annum thereafter and is
payable on a quarterly basis with equal amounts. The term of the contract is for
a period of 10 years with an option to renew for an additional 10 year period
for a total of 20 years. Due to the delay in scheduling by the airport
authority, the installation of the scrolling signs and payment of the deposit of
RMB9,000,000 ($1,114,650) still has not been requested by the airport authority
as of September 30, 2005.
Guangzhou Mass Transit Railway ("MTR") Pillar Advertising Contract - the
contract provides for pillar wrap around advertising for 12 stations along the
Guangzhou MTR system in China. In connection therewith, the Company is required
to pay a deposit of RMB1,200,000 ($148,620) (paid) and a monthly management fee
of RMB100,000 ($12,385). The term of the contract is for a period of 5 years
expiring on October 31, 2009.
On March 11, 2005, Chuangrun entered into an additional contract for
installation of 50 exterior scrolling advertising signs the Guangzhou New Baiyun
Airport and the contract was also assigned to the Company. In connection
therewith, the Company has to pay a deposit of RMB6,000,000 ($743,100) (paid)
and management fees of RMB6,000,000 ($743,100), RMB9,000,000 ($1,114,650) and
RMB12,000,000 ($1,486,200) per annum are payable on a half-yearly basis with
each amounts for the first 3 years, forth to sixth years and thereafter,
respectively. The term of the contract is for a period of 10 years, with an
option to renew for an additional 10 years. This contract is expected to
commence in November 2005.
Sign Rental Agreement
Chuangrun entered into a rental agreement on May 13, 2005 with Actionview Far
East Limited ("Actionview") on the Company's behalf for the interior and
exterior signs for use in the Guangzhou New Baiyun Airport. The Company will pay
fees equal to 30% of revenues generated or certain minimum amounts agreed upon
by both parties for the first six months, then 25% of revenues for the next six
months (or three months for certain signs) and 20%, thereafter after the minimum
amounts specified are achieved. The term of the contract is for 5 years expiring
on March 31, 2010. Revenue is defined as the gross turnover less the business
tax, sales commissions and premises rental fees. Actionview is responsible for
installation and maintenance of the signs.
Significant Customer Contracts
On April 5, 2005, Chuangrun entered into an agreement with an advertising
agency, Chi Shang Ling Yue Advertising Company Limited (the "Agency"), for
supply advertisement on 30 exterior scrolling advertising signs for a period of
one year, commencing when signs are installed (the "Scrolling Contract"). The
Agency has to pay the Company a 10% contract fulfillment guarantee in the amount
of RMB5,184,000 ($642,038) (paid). The remaining 90% balance, or RMB46,696,000
($5,783,300) will be paid within one month after the signs are installed.
Chuangrun has assigned the rights under this agreement with the Agency to China
Media1 Corp. as part of China Media1's previous acquisition of the rights to
display advertising at the Guangzhou New Baiyun Airport.
On May 26, 2005, Chuangrun entered into an agreement with the Agency for the
placement of advertisements on 70 light boxes throughout four (4) different
locations inside the Guangzhou New Baiyun Airport (the "Lightbox Contract").
Each box contains three poster advertisements. Chuangrun has assigned the rights
under this agreement with the Agency to China Media1 Corp. as part of China
Media1's previous acquisition of the rights to display advertising at the
Guangzhou New Baiyun Airport. The contract period is one (1) year, commencing on
September 1, 2005. The total completion price will be RMB107,520,000
($13,316,352). The Agency will pay Chuangrun a 15% prepayment of RMB16,280,000
($1,997,453) either when 30% of the lights boxes are up and ready for
advertising placements or on August 15, 2005, which ever comes later. Within
seven days of completing putting up all the posters, the remaining amount of
RMB91,392,000 ($11,318,900) will be paid to Chuangrun.
Under the terms of both agreements, the Agency is responsible for providing the
appropriate business licenses, permits, and other related forms to legally
complete the installation. The Agency must also deliver design of each
advertisement (poster) to Chuangrun five (5) days before installation of that
advertisement.
Operating Contract
Chuangrun is the management company for the advertising contracts in China, as
defined in the amended and restated operating agreement dated as of October 10,
2005 and made retroactively effective to January 1, 2005. Under the terms of the
amended and restated operating agreement, Chuangrun has assigned to the Company
all revenues generated from the operations relating to the agreements between
Chuangrun and the Guangzhou New Baiyun Airport for 100 indoor advertising
signage locations and 50 Outdoor advertising signage locations. Further, the
Company has agreed to pay from such revenues assigned to the Company all of the
operating expenses of Chaungrun incurred relating to the agreements with the
Guangzhou New Baiyun Airport for 100 Indoor advertising signage locations and 50
Outdoor advertising signage locations, including, but not limited to, trade
accounts payable, real property lease obligations, employee lease obligations,
and taxes. In addition, Chuangrun has assigned to the Company all revenues
generated from the operations relating to the agreement between Chuangrun and
the Guangzhou MTR for 12 station pillar wrap advertising locations. The Company
has agreed to pay from such revenues assigned to the Company all of the
operating expenses of Chaungrun incurred relating to the Guangzhou MTR 12
station pillary wrap agreement, including, but not limited to, trade accounts
payable, real property lease obligations, employee lease obligations, and taxes.
Under the terms of the amended and restated operating agreement, Chuangrun was
appointed as the Company's exclusive agent for all of Chuangrun projects and the
Guangzhou MTR project. Chuangrun agreed to form a joint venture in Guangzhou to
facilitate management of the projects after the Company has received funding.
The Company agreed to pay management fees to Chuangrun of U.S. $1,500,000 for
2005, U.S. $2,000,000 for 2006, and U.S. $3,000,000 for each year thereafter, as
compensation for Chuangrun acting as agent. The management fees include all
daily operating expenses, but do not include project deposits and upfront fees.
Note 4 - Related Party Transactions
At September 30, 2005, amounts due to related parties are as follows:
Due to an affiliate company - Archer Pacific Management Inc. $ 557,566
Due to Chuangrun 1,022,716
Due to an ex-officer 159,475
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$1,739,757
==========
Archer Pacific Management Inc. is a company controlled by a director of the
Company. The amounts due to Archer Pacific represent advances and payments made
by the director on behalf of the Company. The outstanding amounts are
non-interest bearing, unsecured and due on demand.
The amounts due to Chuangrun consist of management fees and commissions
payable to Chuangrun and advances and payments made on behalf of the Company
Total commissions earned were $182,918 during the nine months ended September 30
30, 2005, which have been accrued in the accompanying balance sheet, to the
extent these have not been paid. The Company recorded $1,125,000 of earned
management fees for the nine months ended September 30, 2005, which are included
in amounts due to related parties in the accompanying balance sheet. In
addition, Chuangrun has paid a deposit and certain leasehold improvements in
connection with its MTR Rail contract, on the Company's behalf as recorded in
the accompanying balance sheet.
In November 2004, the Company issued a convertible loan in the amount of $20,000
to an unrelated party who subsequently was elected an officer and director of
the Company. The note was convertible into the Company's common stock at $0.25
per share, after adjustment for the 20 for 1 stock split. The loan was
unsecured, bore interest at 5% per annum, and was due on January 31, 2005. On
January 18, 2005, the Company received notice by the holder to convert the loan
into common stock. The Company issued 80,000 shares of its common stock in March
2005.
The amounts due to an ex-officer were in relation to the wages and rent payable
to the ex-officer and the expenses incurred on behalf of the Company.
Note 5 - Share Capital
The authorized share capital of the Company has been increased to 1,500,000,000
shares of common stock with a par value of $0.00005 per share after the approval
of the board of directors and shareholders of the Company on January 14, 2005.
The Company also carried out a forward split of the shares of common stock of
the Company on a 20 for 1 basis. All shares and per share amounts were
retroactively adjusted for all periods presented to reflect the stock split.
Note 6 - Subsequent Event and Contingent Liabilities
In March 2005, the Company received notice from an individual claming to be a
valid holder of warrants to purchase 2,000,000 shares (post 20 for 1 stock
split) of the Company's common stock at $0.05 per share, dated May 2004.
Management of the Company with knowledge of facts and circumstances at the time
immediately denied any prior knowledge or execution of any such transaction. The
Company's counsel has notified the claimant that the purported warrant is not
valid and will not be acknowledged. No compensation expense has been recorded in
the Company's financial statements because no services were provided by the
claimant related to the purported warrant and the potential warrant value in May
2004 would have been insignificant because the exercise price significantly
exceeded the trading price of the Company's common stock at that time.
On November 1, 2005, the Company issued $874,500 of principal amount of
convertible promissory notes and warrants to purchase shares of the Company's
common stock. The aggregate gross proceeds from the sale of the notes and
warrants were $874,500. The convertible notes are due on May 1, 2007 and bear
interest at the prime rate plus four percent (4%). The notes are initially
convertible into the common shares at a conversion price of $0.35 per share.
After the occurrence of an event of default under the notes, the conversion
price shall be adjusted to eighty percent (80%) of the volume weighted average
price of the Company's common shares for the five trading days prior to a
conversion date.
Commencing on the seventh month of the notes, the Company must make a payment of
one-twelfth (1/12) of the principal amount of each note, either in cash or by
conversion of such amount into the Company's common shares. If, on the payment
date, the market price for the Company's common shares are below $0.70 per
share, the Company may make this payment either in cash at 110% of the amount of
the payment or in the Company's common shares at a conversion rate equal to the
lesser of $0.35 per share or eighty percent (80%) of the volume weighted average
price of the Company's common shares for the five trading days prior to a
conversion date, subject to certain limitations. However, if, on the payment
date, the market price for the Company's common shares is equal to or greater
than $0.70 per share, then the Company must make this payment in China Media1
common shares at a conversion price of $0.35 per share.
The notes were issued with Series "A" Warrants to purchase up to 1,249,286
shares of the common stock of the Company at an exercise price of $0.55 per
share until November 1, 2010 and Series "B" Warrants to purchase up to 1,249,286
shares of the common stock of the Company at an exercise price of $0.70 per
share until November 1, 2010.
The Company has agreed to register the secondary offering and resale of the
shares issuable upon conversion of the notes, the shares issuable upon exercise
of the Series "A" Warrants, and the shares issuable upon exercise of the Series
"B" Warrants within 45 days of the closing of the private placement of the notes
and the warrants.
The Company relied on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, for the offer and sale of the notes
and the warrants.
In connection with the offer and sale of the notes and the warrants, the Company
incurred $52,470 or 6% broker's commision, a 4% restricted stock commission on
the sale of the notes, a 5% cash commission on any cash proceeds received by the
Company on the exercise of any Series "A" or "B" Warrants, Series "A" Warrants
to purchase up to 49,971 shares of the common stock of the Company, and Series
"B" Warrants to purchase up to 49,971 shares of the common stock of the Company.
The Company also incurred $17,490 on due diligence and $71,000 on legal,
regulatory filing and professional fees for the transaction.
Item 2. Management's Discussion and Analysis or Plan of Operation
The information presented here should be read in conjunction with China Media1
Corp.'s (the "Company") consolidated financial statements and other information
included in this Form 10-QSB. The Company has presented its quarterly financial
statements, which should be read in conjunction with its annual financial
statements and the notes thereto for the financial year ended December 31, 2004
filed under Form 10-KSB.
Preliminary notes regarding forward-looking statements
The statements contained in this Form 10-QSB that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These include statements about the Company's expectations, beliefs,
intentions or strategies for the future, which are indicated by words or phrases
such as "anticipate," "expect," "intend," "plan," "will," "the Company
believes," "management believes" and similar words or phrases. The
forward-looking statements are based on the Company's current expectations and
are subject to certain risks, uncertainties and assumptions. The Company's
actual results could differ materially from results anticipated in these
forward-looking statements. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements.
Critical accounting policies and estimates
Our discussion and analysis or plan of operation is based upon our financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used or changes in the accounting estimate that are reasonably
likely to occur could materially change the financial statements. We believe the
following critical accounting policies reflect our more significant estimates
and assumptions used in the preparation of our financial statements:
Income Taxes - We record a valuation allowance to reduce our deferred tax assets
to the amount that is more likely than not to be realized. We have considered
future market growth, forecasted earnings, future taxable income, and prudent
and feasible tax planning strategies in determining the need for a valuation
allowance. We currently have recorded a full valuation allowance against net
deferred tax assets as we currently believe it is more likely than not that the
deferred tax assets will not be realized.
Valuation of Long-Lived Assets - We review property, plant and equipment and
other assets for impairment whenever events or changes in circumstances indicate
the carrying value of an asset may not be recoverable. Our asset impairment
review assesses the fair value of the assets based on the future cash flows the
assets are expected to generate. An impairment loss is recognized when estimated
undiscounted future cash flows expected to result from the use of the asset plus
net proceeds expected from disposition of the asset (if any) are less than the
carrying value of the asset. When impairment is identified, the carrying amount
of the asset is reduced to its estimated fair value. Deterioration of our
business in a geographic region could lead to impairment adjustments when
identified. The accounting effect of an impairment loss would be a charge to
income, thereby reducing our net profit.
Plans of operations
On or about February 1, 2005, we completed the acquisition through an assignment
of exclusive advertising contracts in Guangzhou located the southern region of
the Peoples Republic of China, from Mr. Cai Hanxiong, proprietor of the
Guangzhou Chuangrun Advertising Company Limited located in the Peoples Republic
of China; Mr. Cai Hanxiong also controls the voting common stock of China Media1
Corp. (the "Company") after the transaction. Chuangrun Media Limited of Hong
Kong is the original party to the two (2) airport contracts discussed below, and
Guangzhou Chuangrun Advertising Company Limited, located in the Peoples Republic
of China ("China") is the original party to the Guangzhou Mass Transit Railway
("MTR") pillar advertising contract. The two companies are collectively
"Chuangrun". The assignment from Chuangrun includes rights to the following
three contracts:
(1) The Guangzhou New Baiyun Airport Scrolling Advertising Signs t 6 12
Contract - the contract provides for the installation of 100 large
size (1.5 meters x 5 meters) scrolling three-poster signs in the
passenger terminal of one of the newest airports in Southern China.
This generates a total of 300 poster spaces (three per sign). No
revenues have been generated under this contract.
(2) The Guangzhou Mass Transit Railway ("MTR") Pillar Advertising
Contract - the contract provides for pillar wrap around (diameter
1.5 to 1.7 meters, height 3 meters) advertising for 12 stations
along the Guangzhou MTR system. The Company has revenue generated
through this contract from January 2005.
(3) The Guangzhou Baiyun Airport granted another contract to Chuangrun
in March 2005 for an additional fifty (50) scrolling advertising
light box locations along the entire domestic and international
arrivals level outdoor loading area. The Company will install newly
designed double-sided light boxes with three posters on each side.
This generates a total of 300 poster spaces (six per sign). No
revenues have been generated under this contract. The Company
expects to have revenue generated from this contract from December
2005.
We also has the right to acquire, and Chuangrun promises to assign, a China Rail
Train Naming and Advertising Project within one year, when the project is proven
viable, at a price to be negotiated in the future. The contracts above were
recently executed by Chuangrun with third parties in China. Chuangrun has
existing advertising clients and revenues, and publishes "give-away" magazines,
as well as other scrolling advertising boards in the MTR, which are not part of
the contracts discussed above.
Results of Operations
For the three and nine months ended September 30, 2005 versus 2004
Revenues
We generated no revenues in 2004 as we were a development-stage company.
However, we have generated revenues from our MTR advertising contracts from the
first quarter of 2005. Revenues generated during the first nine months of 2005
are largely from short-term trial contracts. Our MTR contract generated revenues
of $554,765 and $1,219,457 during the three-month and nine-month periods ended
September 30, 2005 respectively.
Cost of Revenues
Included in cost of revenues are production costs and rents relating to the
Pillar Advertising contract. The cost of revenues was $98,151 and $250,963 for
the three-month and nine-month periods ended September 30, 2005 respectively.
Sales Commissions Expense
We pay sales commissions when we collect our receivables. We are responsible for
the payments to Chuangrun for sales commissions earned by their employees. Sales
commissions are 5%, 10% and 15% in 2005; 3%, 5% and 10% in 2006 and 2007, each,
for sales generated through existing client accounts, new advertising agencies
and new customers, respectively. Total commissions incurred were $83,214 and
$182,918 during the three-month and nine-month periods ended September 30, 2005.
General and Administrative Expenses, Excluding Management Fees to Related Party
Included in general and administrative expenses were wages incurred for an
ex-officer totaling $nil and $140,000 for the three and nine months ended
September 30, 2005. All general and administrative expenses in China are paid
through our management fees as discussed below.
Management Fees to Related Party
In connection with our operating agreement with Chuangrun, we are required to
pay management fees in the amount of $1,500,000 in 2005, $2,000,000 in 2006 and
$3,000,000 in 2007. These fees are intended to cover the salaries of our Chief
Executive Officer and key management in China, and other operating expenses in
China. During the three and nine months ended June 30, 2005, we incurred
$375,000 and $1,125,000 in management fees to Chuangrun.
Net Loss
We incurred a net loss of $24,616 and $706,672 during the three and nine months
ended September 30, 2005 respectively as we have recently commenced our
advertising business. We expect losses to continue for the next six months until
we obtain sufficient revenues that exceed our cost structure.
Liquidity and Capital Resources
Cash Flows
We used cash flows in our operations of $1,383,531 and $13,093 during the nine
months ended September 30, 2005 and 2004, largely because of our net loss of
$706,672 and increase in accounts receivable of $701,555 and deposits of
$891,720.
We provided cash for our financing activities primarily through advances from
related parties and deferring the payment of management fee to the related
parties.
Liquidity
We incurred losses during the three and nine months ended September 30, 2005 and
2004, and will likely incur losses the remainder of 2005. Our working capital is
not sufficient to meet our obligations. Our officers and directors have advanced
funds to us in order to cover certain operating expenses pursuant to demand
notes. These factors raise substantial doubt about the Company's ability to
continue as a going concern.
On November 1, 2005, the Company issued $874,500 of principal amount of
convertible promissory notes and warrants to purchase shares of the Company's
common stock. The aggregate gross proceeds from the sale of the notes and
warrants were $874,500. The convertible notes are due on May 1, 2007 and bear
interest at the prime rate plus four percent (4%). The notes are initially
convertible into the common shares at a conversion price of $0.35 per share.
After the occurrence of an event of default under the notes, the conversion
price shall be adjusted to eighty percent (80%) of the volume weighted average
price of the Company's common shares for the five trading days prior to a
conversion date.
Commencing on the seventh month of the notes, the Company must make a payment of
one-twelfth (1/12) of the principal amount of each note, either in cash or by
conversion of such amount into the Company's common shares. If, on the payment
date, the market price for the Company's common shares are below $0.70 per
share, the Company may make this payment either in cash at 110% of the amount of
the payment or in the Company's common shares at a conversion rate equal to the
lesser of $0.35 per share or eighty percent (80%) of the volume weighted average
price of the Company's common shares for the five trading days prior to a
conversion date, subject to certain limitations. However, if, on the payment
date, the market price for the Company's common shares is equal to or greater
than $0.70 per share, then the Company must make this payment in China Media1
common shares at a conversion price of $0.35 per share.
The notes were issued with Series "A" Warrants to purchase up to 1,249,286
shares of the common stock of the Company at an exercise price of $0.55 per
share until November 1, 2010 and Series "B" Warrants to purchase up to 1,249,286
shares of the common stock of the Company at an exercise price of $0.70 per
share until November 1, 2010.
The Company has agreed to register the secondary offering and resale of the
shares issuable upon conversion of the notes, the shares issuable upon exercise
of the Series "A" Warrants, and the shares issuable upon exercise of the Series
"B" Warrants within 45 days of the closing of the private placement of the notes
and the warrants.
The Company relied on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, for the offer and sale of the notes
and the warrants.
In connection with the offer and sale of the notes and the warrants, the Company
incurred $52,470 or 6% broker's commision, a 4% restricted stock commission on
the sale of the notes, a 5% cash commission on any cash proceeds received by the
Company on the exercise of any Series "A" or "B" Warrants, Series "A" Warrants
to purchase up to 49,971 shares of the common stock of the Company, and Series
"B" Warrants to purchase up to 49,971 shares of the common stock of the Company.
The Company also incurred $17,490 on due diligence and $71,000 on legal,
regulatory filing and professional fees for the transaction.
Risk Factors
We have sought to identify what we believe to be the most significant risks to
our business. However, we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to our Common Stock.
We provide the following cautionary discussion of risks, uncertainties and
possible inaccurate assumptions relevant to our business. These are factors that
we think could cause our actual results to differ materially from expected
results. Other factors besides those listed here could adversely affect us.
Risk of Foreign Currency Fluctuations
Due to a change in Chinese monetary policy, the Chinese Yuan is a floating rate
against a basket of other currencies. Exposure to foreign currency risk could
exist should there be a large fluctuation between the exchange rate between the
Chinese Yuan and U.S. Dollar. We cannot predict the outcome of currency
fluctuations; however, indications exist that the Chinese Yuan may be
undervalued in relation to the US Dollar. We do not use financial instruments to
hedge against changes the exchange rate between the Chinese Yuan and the U.S.
Dollar.
Limited Public Market, Possible Volatility of Share Price
The Company's Common Stock is currently quoted on the NASD OTC Bulletin Board
under the ticker symbol CMDA. As of September 30, 2005, there were approximately
33,920,000 shares of Common Stock outstanding. There can be no assurance that a
trading market will be sustained in the future.
Dependence on Executive Officers and Technical Personnel
The success of our business plan depends on attracting qualified personnel, and
failure to retain the necessary personnel could adversely affect our business.
Competition for qualified personnel is intense, and we may need to pay premium
wages to attract and retain personnel. Attracting and retaining qualified
personnel is critical to our business. Inability to attract and retain the
qualified personnel necessary would limit our ability to implement our business
plan successfully.
Need for Additional Financing
The Company believes it has sufficient capital to meet its short-term cash
needs, including the costs of compliance with the continuing reporting
requirements of the Securities Exchange Act of 1934. However, if losses continue
it may have to seek loans or equity placements to cover longer term cash needs
to continue operations and expansion.
No commitments to provide additional funds have been made by management or other
stockholders. Accordingly, there can be no assurance that any additional funds
will be available to the Company to allow it to cover operation expenses.
If future operations are unprofitable, it will be forced to develop another line
of business, or to finance its operations through the sale of assets it has, or
enter into the sale of stock for additional capital, none of which may be
feasible when needed. The Company has no specific management ability or
financial resources or plans to enter any other business as of this date.
The effects of inflation have not had a material impact on its operation, nor is
it expected to in the immediate future.
Political, Economic and Regulatory Risks in China
The market in China is monitored by the government, which could impose taxes or
restrictions at any time which would make operations unprofitable and infeasible
and cause a write-off of the investment. Other factors include political policy
on foreign ownership and political policy to open the doors to foreign
investors.
There are economic risks associated with doing business in China which could
affect our operations. The Chinese economy has experienced significant growth in
the past decade, but this growth has been uneven across geographic and economic
sectors and has recently been slowing. There can be no assurance that this
growth will not continue to decrease or that the slow down will not have a
negative effect on our business. The Chinese economy is also experiencing
deflation which may continue in the future. The current economic situation may
adversely affect our ability to do advertising business as a result of slowing
domestic demand and deflation.
The restrictions on currency exchange could limit our ability to repatriate our
revenues from China. Although Chinese governmental policies were introduced in
1996 to allow greater convertibility of the Renminbi, significant restrictions
still remain. We can provide no assurance that the Chinese regulatory
authorities will not impose greater restrictions on the convertibility of the
Renminbi to western currencies. The government could refuse to allow the
exchange, or could restrict the amount or volume of exchange. Because the
majority of our future revenues is in the form of Renminbi, any future
restrictions on currency exchange may limit our ability to utilize revenue
generated in Renminbi to fund our business activities outside China, if we ever
have any. This restriction, if it occurs, may affect our ability to pay
repatriate any profits in U.S. dollars or other acceptable currency.
Item 3. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to the Exchange Act Rule 13a-14. This
evaluation was done under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by them in the reports that we
file under the Exchange Act is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. Prior the
end of this period, we hired an accountant licensed in both Hong Kong, China and
Canada and with significant experience in US GAAP accounting. We feel this event
significantly improves our internal controls and provides for effective
communication and disclosure between our representatives in China, Canada and
the U..S.
There were no significant changes in the Company's internal controls or in the
other factors that could significantly affect those controls since the most
recent evaluation of such controls.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Please refer to our Current Report on Form 8-K dated November 1, 2005.
Item 3.Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a)
Exhibit No. Description
- ------------------- ----------------------------------------------------------
3.1* Articles of Incorporation
3.2** Bylaws (Amended)
4.1* Specimen Stock Certificate
10.1*** Agreement dated May 18, 2005 between Westcap Securities,
Inc. and China Media1 Corporation.
10.2**** Amended and Restated Operating Agreement dated October 10,
2005 between Chuangrun Media Company
Limited, Guangzhou Chuangrun Advertising Co. Ltd. and
China Media 1. Corp
31.1 Rule 13(a) - 14 (a)/15(d) - 14(a) Certifications
32.1 Section 1350 Certifications
- --------------
*Filed as an Exhibit to the Company's Registration Statement on Form SB-2, dated
October 29, 2002 and filed in form 8-K on February 3, 2005 for the change of
company name and authorized capital, and incorporated herein by this reference.
**Filed as an Exhibit to the Company's Form 10-QSB for the Quarterly period
ended March 31, 2003.
***Filed as an Exhibit to the Company's Form 10-QSB for the Quarterly period
ended March 31, 2005.
**** Filed as an Exhibit to the Company's Current Report on Form 8-K dated
November 1, 2005.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 21, 2005
CHINA MEDIA 1 CORP.
By: /s/ Hanxiong Cai
------------------------------
Hanxiong Cai, President, Chairman and a member of the Board of Directors (who
also performs the function of principal
executive officer)
By: /s/ Ernest Cheung
------------------------------
Ernest Cheung
Chief Financial Officer, Secretary and a member of the Board of Directors
(principal financial and accounting officer)