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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-QSB/A
(Mark one)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly period ended March 31, 2006
|_| 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 (IRS Employer
of incorporation or organization) Identification No.)
142-757 West Hastings St., Suite 328, Vancouver, B.C. Canada V6C 1A1
(Address of principal executive offices)
(778) 881-0939
(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 June 12, 2006: 44,084,909
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following is the interim unaudited financial statements included in this
Quarterly Report on Form 10-QSB:
Balance sheet as of March 31, 2006 (unaudited) 3
Statements of operations for the three months ended
March 31, 2006 and 2005 (unaudited) 4
Statements of cash flows for the three months ended
March 31, 2006 and 2005 (unaudited) 5
Notes to the financial statements (unaudited) 6
2
CHINA MEDIA1 CORP.
(formerly Eagle River Mining Corp.)
BALANCE SHEET
March 31, 2006
(Going Concern Uncertainty - Note 1)
(Expressed in U.S. Dollars)
(Unaudited)
2006
==================================================================================================
ASSETS
Current assets
Cash and cash equivalents $ 2,050
Prepaid expenses 8,859
- --------------------------------------------------------------------------------------------------
Total current assets 10,909
Property, plant and equipment, net of accumulated depreciation of $14,453 (Note 5) 130,661
Due from common control affiliate (Note 4) 1,257,480
- --------------------------------------------------------------------------------------------------
1,388,141
- --------------------------------------------------------------------------------------------------
Total assets $ 1,399,050
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 73,902
Interest payable on convertible promissory note (Note 6) 23,906
Due to common control affiliate (Note 4) 1,266,411
Due to related parties (Note 7) 794,809
Income tax payable (Note 11) 185,038
Fair value of convertible promissory notes (Note 6) 846,500
Fair value of conversion feature of notes (Note 6) 338,600
Fair value of warrants (Note 6) 636,636
- --------------------------------------------------------------------------------------------------
4,165,802
- --------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 3 and 10) --
Stockholders' deficiency:
Common Stock, 1,500,000,000 shares authorized, par value of $0.00005 per share,
44,084,909 shares issued and outstanding 2,204
Additional paid-in capital 4,296,027
Accumulated deficit (7,064,983)
- --------------------------------------------------------------------------------------------------
Total stockholders' deficiency (2,766,752)
- --------------------------------------------------------------------------------------------------
Total liabilities and stockholders' deficiency $ 1,399,050
==================================================================================================
The accompaning notes are an integral part of these financial statements
3
CHINA MEDIA1 CORP.
(formerly Eagle River Mining Corp.)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the three-month periods ended March 31, 2006 and 2005
(Expressed in U.S. Dollars)
(Unaudited)
2006 2005
==========================================================================================================
Operating expenses:
Depreciation 6,166 1,918
General and administrative 90,463 112,547
Interest expense (Note 7) 41,912 --
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 138,541 114,465
- ----------------------------------------------------------------------------------------------------------
Operating Loss (138,541) (114,465)
Other income and expenses
Discount on issuance of convertible promissory notes (Note 6) (580,764) --
Gain on conversion feature on convertible promissory notes to shares 13,066 --
Change in fair value of conversion feature of promissory notes (Note 6) 241,857 --
Change in fair value of warrants (Note 6 and 8) 220,874 --
Deferred financing costs (Note 6) (155,258) --
Net loss from contract rights (Note 9) (366,043) (131,199)
Write off of investment on contract right (Note 3a) (4,200,000) --
- ----------------------------------------------------------------------------------------------------------
(4,826,268) (131,199)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Net loss and comprehensive loss $ (4,964,809) $ (245,664)
==========================================================================================================
Net loss per share- basic and diluted $ (0.14) $ (0.01)
============================
Weighted average number of common shares outstanding:
- basic and diluted 35,290,143 32,588,444
============================
The accompaning notes are an integral part of these financial statements
4
CHINA MEDIA1 CORP.
(formerly Eagle River Mining Corp.)
STATEMENTS OF CASH FLOWS
For the three-month periods ended March 31, 2006 and 2005
(Expressed in U.S. Dollars)
(Unaudited)
2006 2005
===========================================================================================================
Cash flows from operating activities
Net loss $(4,964,809) $ (245,664)
Adjustments to reconcile net loss to net cash used in operating activities
Change in fair value of conversion feature of convertible promissory notes (241,857) --
Change in fair value of warrants (220,874) --
Deferred financing costs 155,258 --
Depreciation 6,166 1,918
Discount on issuance of convertible promissory notes 580,764 --
Gain on conversion feature on conversion of convertible notes to shares (13,066) --
Imputed interest expense 9,932 --
Written-off investment on contract right 4,200,000 --
Changes in operating assets and liabilities
Decrease in prepaid expenses 15,411 --
Increase (decrease) in accounts payable (9,807) 17,849
Increase in debenture interest payable 8,317 --
- -----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (474,565) (225,897)
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of property, plant and equipment (61,530) (38,361)
Cash paid to acquire contracts -- (200,000)
Due from common control affiliate 295,812 252,723
- -----------------------------------------------------------------------------------------------------------
Net cash flows used in investing activities 234,282 14,362
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Advances from related parties 235,359 209,864
- -----------------------------------------------------------------------------------------------------------
Net cash flows provided by financing activities 235,359 209,864
- -----------------------------------------------------------------------------------------------------------
Decrease in cash (4,924) (1,671)
Cash and cash equivalents - beginning of period 6,974 3,267
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $ 2,050 $ 1,596
===========================================================================================================
Supplemental Information:
- -------------------------
Cash paid for:
Interest expense paid in cash $ 23,658 $ --
Income taxes paid in cash -- --
===========================================================================================================
Non-cash investing and financing activity:
Issuance of common stock upon conversion of convertible promissory notes $ 34,687 $ 20,000
Issuance of common stock for advertising contract 4,200,000 --
===========================================================================================================
The accompaning notes are an integral part of these financial statements
5
CHINA MEDIA1 CORP.
(formerly Eagle River Mining Corp.)
Notes to Financial Statements
March 31, 2006
(Expressed in U.S. Dollars)
(Unaudited)
Note 1 - Organization and Business and Going Concern Uncertainty
Organization and Business
China Media1 Corp. (formerly Eagle River Mining Corp.) (the "Company") was
formed on August 6, 2002 under the laws of the State of Nevada and changed its
name to China Media1 Corp. 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 Chuangrun
Media Limited and Guangzhou Chuangrun Advertising Company Limited (collectively
"Chuangrun"). The acquisition of the contracts is regarded as a recapitalization
of the Company and resulted in a change in control of the Company and was
recorded at book value resulting in a reduction in additional paid-in capital of
$132,692 and a reduction of accumulated deficit of $67,493. As a result of the
transaction, the Company and Chuangrun are controlled by one and the same
individual.
The contracts acquired provide the Company with a fixed number of advertising
spots in certain train stations and an international airport in Guangzhou,
China. The Company earns revenue by providing the acquired advertising spots to
its customers based on advertising contracts. As these contracts are
administered by an agent, revenues earned and expenses paid are presented on a
net basis within the financial statements (Note 3 and 4).
These financial statements include the accounts pertaining to the Company's
contract rights operated by Chuangrun on a net basis and the accounts of the
Company. All significant inter-company accounts have been eliminated as
appropriate.
Going Concern Uncertainty
These financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business for the foreseeable
future. During the three month period ended March 31, 2006, the Company has
incurred recurring operating losses of $4,964,809 and has a working capital
deficiency of $4,154,893 and a shareholders deficiency of $2,766,752 as at March
31, 2006. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in this regard are to raise
equity financing as required. As discussed in note 6, the Company is in default
on its promissory notes and requires additional funds to maintain operations.
These financial statements do not include any adjustments to the carrying value
and classification of assets and liabilities that would be necessary should the
Company be unable to continue operations as a going concern.
Note 2 - Basis of Presentation
The accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles in the United States of America.
However, certain information and footnote disclosures normally included in
financial statements prepared in conformity with generally accepted accounting
principles in the United States of America have been omitted or condensed
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). In the opinion of management, all adjustments of a normal recurring
nature necessary for a fair presentation have been included. The results for
interim periods are not necessarily indicative of results for the entire year.
These condensed financial statements and accompanying notes should be read in
conjunction with the Company's annual financial statements and the notes thereto
for the fiscal year ended December 31, 2005 included in its Annual Report on
Form 10-KSB.
6
Certain of the comparative figures have been reclassified to conform to the
current period's presentation.
Note 3 - Contract Rights
(a) Advertising Contracts
December 26, 2004 Contracts
On December 26, 2004, the Company signed an agreement to acquire the following
two contracts from Chuangrun:
(i) Guangzhou Baiyun Airport Scrolling Advertising Signs - the contract
provides for the installation and operation of one hundred large
size scrolling advertising light boxes in the Guangzhou Baiyun
International Airport terminal departure hall. In connection
therewith, the Company is required to pay RMB9,000,000 ($1,122,750)
as a deposit seven days after the contract commences. Management
fees of RMB36,000,000 ($4,491,000) per annum are payable to the
airport authority on a quarterly basis with equal amounts for the
first two years. Management fees of RMB37,080,000 ($4,625,730) per
annum are payable on a quarterly basis with equal amounts for the
third to fifth years. Management fees will then be increased to
RMB40,788,000 ($5,088,303) per annum thereafter and are payable on a
quarterly basis in equal amounts. The term of the contract is for a
period of ten years with an option to renew for an additional ten
year period. To date, 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 ($1,122,750) still has not been
requested.
Subsequent to this contract, Chuangrun entered into an additional
contract for installation of fifty exterior scrolling advertising
light boxes at the Guangzhou Baiyun International Airport and the
contract was also assigned to the Company. In connection therewith,
the Company is required to pay a deposit of RMB6,000,000 ($748,500)
(paid) (Note 4) and management fees of RMB6,000,000 ($748,500),
RMB9,000,000 ($1,122,750) and RMB12,000,000 ($1,497,000) per annum
payable on a half-yearly basis for the first three years, forth to
sixth years and thereafter, respectively. The term of the contract
is for a period of ten years with an option to renew for an
additional ten years.
(ii) Guangzhou Mass Transit Railway ("MTR") Pillar Advertising Contract -
the contract provides for wrapped pillar advertising for twelve
stations along the MTR system in China. In connection therewith, the
Company is required to pay a deposit of RMB1,200,000 ($149,700)
(paid) (Note 4) and a monthly management fee of RMB100,000
($12,475). The term of the contract is for a period of five years
expiring on October 31, 2009.
January 16, 2006 Contracts
On January 16, 2006, Guangzhou Titan Media Company Ltd. ("Titan") entered into
the Shenzhen Baoan International Airport Advertising Contract with Shenzhen
Airport Advertising Company Limited ("SZ Airport") for twelve large size
advertising signage locations and twenty-four regular size advertising signage
locations (the "SZ Airport Contract"). Under the terms of the SZ Airport
Contract, Titan is required to pay SZ Airport a fee of RMB100,000 ($12,475) per
year for each large size location and RMB70,000 ($8,733) for each small size
location and a one year management fee of RMB 2,880,000 ($359,280) as a security
deposit. The management fee relates to rent for usage of space at the airport
terminal. The contract is for a term of ten years.
7
Titan assigned the benefits and risks of the SZ Airport Contract to the Company
for consideration of 10,000,000 shares of the Company's common stock. The
assignment was effectuated through an operating agreement entered into between
the Company, Titan and Chuangrun on February 28, 2006. Under the terms of the
operating agreement, Titan and the Company has appointed Chuangrun as the
exclusive agent for the SZ Airport Contract. The Company has agreed to pay
management fees of US$100,000 per quarter to Chuangrun beginning in the second
quarter of 2006 as compensation for Chuangrun acting as agent. The management
fees include all daily operating expenses, but do not include project deposits
and upfront fees.
The Company determined the value of the transaction based on the market price of
the securities under the guidance of Statements of Financial Accounting
Standards No. 141, "Business Combinations". The fair value of the 10,000,000
shares issued is calculated using the closing market price ($0.42) of the
Company's shares on February 28, 2006 (contract signing date) times the numbers
of shares issued for the transaction, which is more clearly evident and more
reliably measured. Thus the fair value of the shares issued in exchange for the
SZ Airport Contract is $4,200,000, Accordingly, the fair value of the shares
issued for the transaction were recorded as an intangible asset on the balance
sheet with an offset to share capital and additional paid-in capital.
Subsequent to the acquisition of the SZ Airport Contract and under the guidance
in Statements of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", the Company determined that the fair value of the SZ Airport
Contract based on the expected future cash flows could not be reasonably
estimated based on the existing conditions of the other airport advertising
contracts. Consequently, the Company recorded a charge in the statements of
operations of $4,200,000 for recognition of the impairment during the three
month period ended March 31, 2006.
(b) Sign Rental Agreement
Chuangrun entered into a rental agreement on May 13, 2005 with Actionview Far
East Limited ("Actionview") on the Company's behalf. Part of the contract and
related payments was for the interior and exterior signs for use in the
Guangzhou Baiyun International Airport. Chuangrun, on behalf of the Company,
will pay to Actionview 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 five 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.
(c) 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 thirty scrolling advertising light boxes for a period of
one year, commencing the later of May 1, 2005 or after the light boxes are
installed. The Agency has to pay the Company a 10% contract fulfillment
guarantee in the amount of RMB5,184,000 ($646,704). The remaining 90% balance,
or RMB46,656,000 ($5,820,336), will be paid within one month after the signs are
installed. Chuangrun has assigned the rights under this agreement with the
Agency to the Company as part of the Company's previous acquisition of the
rights to display advertising at the Guangzhou Baiyun International Airport.
When the light boxes are ready and advertising contracts are signed between the
Agency and its advertising customers, there will be a penalty equal to 0.005% of
the contract amounts if Chuangrun cannot install the advertisements in the light
boxes according to the advertisement periods specified in the contracts entered
into by the Agency with its customers.
8
On May 26, 2005, Chuangrun entered into an agreement with the Agency for the
placement of advertisements on seventy light boxes throughout four 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 the Company as part of the Company's
previous acquisition of the rights to display advertising at the Guangzhou New
Baiyun Airport. The contract period is one year, commencing on September 1,
2005. The total completion price will be RMB107,520,000 ($13,413,120). The
Agency will pay Chuangrun a 15% prepayment of RMB16,280,000 ($2,030,930) 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 ($11,401,152) 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 days before installation of that
advertisement.
(d) Operating Contracts
Chuangrun is the management entity for the advertising contracts in China, as
defined in the amended and restated operating agreement dated as of October 10,
2005 and made retroactive 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 Baiyun International Airport. Further, the Company has agreed to
pay from such revenues all of the operating expenses of Chaungrun incurred
relating to the agreements with the Guangzhou Baiyun International Airport,
including, but not limited to, trade accounts payable, real property 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 MTR. The Company has agreed to pay from such revenues assigned to
the Company all of the operating expenses of Chaungrun incurred relating to the
MTR agreement including, but not limited to, trade accounts payable, real
property lease obligations, employee obligations and taxes.
The Company has agreed to pay management fees to Chuangrun of $1,500,000 for
2005, $2,000,000 for 2006 and $3,000,000 for each year thereafter, as
consideration for Chuangrun's services. The management fees include all daily
operating expenses but do not include project deposits and upfront fees.
The Company has also entered into an operating agreement with Titan and
Chuangrun in relation to the SZ Airport Contract (Note 3a).
Note 4 - Due to Common Control Affiliate
The breakdown of amounts due to Chuangrun can be summarized as follows:
March 31,
2006
--------------
Current:
Cash at bank $ 11
Trade accounts receivable 693,735
Trade accounts payable (377,432)
Accrued commission (239,096)
Customer deposits (646,704)
Current account with the Agency (166,791)
Current account with Chuangrun (530,134)
--------------
Current liabilities due to Chuangrun $ (1,266,411)
--------------
Long-term:
Security deposits (Note 3) $ 1,257,480
--------------
Long term receivable from Chuangrun $ 1,257,480
--------------
Net amount due to Chuangrun $ (8,931)
==============
9
Note 5 - Property, Plant and Equipment
Property, plant and equipment consist of the following:
March 31,
2006
--------------
Equipment $ 112,366
Leasehold improvement 32,748
--------------
145,114
Less: depreciation (14,453)
--------------
Net book value $ 130,661
==============
Note 6 - Convertible Promissory Notes
On November 1, 2005, the Company issued convertible promissory notes and
warrants to purchase shares of the Company's common stock for total gross
proceeds of $874,500. The convertible notes are due on April 1, 2007 and bear
interest at prime rate plus four percent. The convertible notes are convertible
into the common shares at a conversion price of $0.35 per share. However, after
the occurrence of an event of default as defined in the promissory note, the
conversion price shall be adjusted to eighty percent of the volume weighted
average price of the Company's common shares for the five trading days prior to
a conversion date and the annual interest rate shall be automatically increased
to fifteen percent. The convertible notes were issued with 1,299,258 Series "A"
warrants and 1,299,258 Series "B" warrants to purchase up to 2,498,572 shares of
the common stock of the Company (Note 8).
Commencing on the seventh month of the notes and on the same day of each month
thereafter, 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 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 the Company's common shares at a conversion price of $0.35 per
share.
In connection with the offer and sale of the notes and the warrants, the Company
paid $52,470 in broker's commission, a four percent restricted stock commission
on the sale of the convertible notes at a value of $34,999, a five percent cash
commission to be paid 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 paid $17,490 in due diligence and $71,000 on legal, regulatory filing and
professional fees for the transaction. These deferred financing costs have been
capitalized and will be amortized over the life of the related instruments. As
the gross revenue derived from the contract rights for the period ended December
31, 2005 could not meet one of the criteria considered as an event of default of
the promissory notes, the Company immediately wrote off the remaining amount of
$155,259 during the three month period ended March 31, 2006.
10
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. The Registration Statement was approved by
Securities Exchange Commission on January 5, 2006.
As the gross revenue derived from the contract rights for the period ended
December 31, 2005 could not meet one of the criteria considered as an event of
default of the promissory notes, the annual interest rate on the promissory
notes has increased to fifteen percent effective from January 1, 2006 and the
promissory notes are repayable upon demand from the holders according to the
terms of the promissory notes.
Bifurcation of the Conversion Feature of the Promissory Notes and Warrants
The host contract itself does not embody a claim to the residual interest in the
Company and thus the economic characteristics and risks of the host contract
should be considered that of a debt instrument and classified under the
liability section of the balance sheet.
The warrants are detached from the convertible debenture with no put option
feature. There is no liquidated damage or cash penalty payable to the warrant
holder if the Company cannot register the shares underlying the warrants.
However, these warrants contain a provision under Item 2(b) of the Warrant
Agreement that could result in the issuance of an indeterminable number of
shares should registration of these shares not be achieved by the Company. As
the registration of the shares underlying the warrants is out of the control of
the Company, the warrant contracts have been classified as a liability according
to paragraph 21 of EITF 00-19, with changes in fair value reported in earnings.
The conversion option of the promissory note allows the holder to convert the
debt into equity shares at any time within a specified period at a specified
conversion price. The conversion option is equivalent to a call option granted
by the Company to the note holders to purchase the shares of the Company at a
specified price within a specified time. However, after the occurrence of an
event of default as defined in the promissory note, the conversion price shall
be adjusted to 80% of the volume weighted average price of the Company's common
shares for the five trading days prior to a conversion date. Accordingly, the
conversion option should be separated from the host contract as it is not
clearly and closely related to the host contract and should be recognized and
measured at fair value. Further, as there is no explicit limit on the number of
shares to be delivered upon the occurrence of an event of default, the
conversion feature of the promissory note should be classified as a liability
and measured at fair value in accordance with paragraphs 9 and 21 of EITF 00-19,
with changes in fair value reported in earnings. If the conversion feature of
the promissory note is ultimately settled in shares, any gains or losses on the
conversion should also be included in earnings.
The impact on the balance sheet and income statement of the bifurcation of the
warrants and the conversion feature of the convertible promissory notes for the
three months period ended March 31, 2006 is summarized as follows:
11
Assets Liabilities
------------ --------------------------------------------
Discount on Conversion
Issuance of Feature of
Convertible Convertible Convertible
Promissory Promissory Promissory
Note Notes Warrants Note
------------ ------------ ------------ ------------
Balance as at December 31, 2005 $ 580,764 $ 874,500 $ 857,510 $ 599,657
Write off of discount on issuance of
convertible promissory notes recognized
in the statements of operations (580,764) -- -- --
Exercise of right to convert promissory
notes into shares -- (28,000) -- (19,200)
Changes in fair value recognized in the
statements of operations -- -- (220,874) (241,857)
------------ --------------------------------------------
Balance, March 31, 2006 $ -- $ 846,500 $ 636,636 $ 338,600
============ ============================================
The fair value of the conversion feature of the note at March 31, 2006 using the
Black-Scholes option pricing model with assumptions as follows:
Risk free interest rate 4.06%
Expected life of the conversion feature in years 1.00 years
Expected volatility 112.8%
Dividend per share $0.00
Note 7 - Related Party Transactions
Unless disclosed elsewhere in these financial statements, the Company entered
into the following related party transactions:
(a) The Company has an amount of $787,966 due to Archer Pacific
Management Inc. ("Archer Pacific"), 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.
(b) The Company has an amount due to an ex-officer of $6,843 relating to
expenses incurred on behalf of the Company. The outstanding amount
is non-interest bearing, unsecured and due on demand.
Note 8 - Warrants
As of March 31, 2006, there were 1,299,258 Series "A" warrants and 1,299,258
Series "B" warrants outstanding (Note 6). Each Series "A" warrant entitles the
holder to purchase one share of the common stock of the Company at an exercise
price of $0.52 per share until November 1, 2009 while each Series "B" warrant
entitles the holder to purchase one share of the common stock of the Company at
an exercise price of $0.66 per share until November 1, 2009.
12
The fair value of the Series "A" warrants and the Series "B" warrants was
$636,636 as of March 31, 2006.
The fair values of the warrants are estimated at March 31, 2006 using the
Black-Scholes option pricing model with assumptions as follows:
Risk free interest rate 4.15%
Expected life of the conversion feature in years 3.6 years
Expected volatility 134.6%
Dividend per share $0.00
Note 9 - Net loss from contract rights
The net loss from contract rights (Note 3) is as follows:-
Three months ended Three months ended
March 31, 2006 March 31, 2005
---------------------------- ----------------------------
Sales $ 224,152 $ 375,493
Cost of sales (28,743) (40,063)
------------ ------------
Gross profit 195,409 335,430
Less: Operating expenses
Sales commission 24,180 56,324
Management fees (Note 3) 500,000 374,102
Rent 37,272 36,203
------------ ------------
(561,452) (466,629)
------------ ------------
Net loss from contract rights $ (366,043) $ (131,199)
============ ============
Note 10 - 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.
13
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") financial statements and other information included in
this Form 10-QSB. The Company's quarterly financial statements should be read in
conjunction with its annual financial statements and the notes thereto for the
financial year ended December 31, 2005 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:
14
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.
Plan 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 the Company
after the transaction. Chuangrun Media Limited of Hong Kong is the original
party to the two airport contracts discussed below and Guangzhou Chuangrun
Advertising Company Limited, located in the Peoples Republic of China, is the
original party to the Guangzhou Mass Transit Railway pillar advertising
contract. The two companies are collectively "Chuangrun". The assignment from
Chuangrun includes rights to the following three contracts:
(1) The Guangzhou Baiyun International Airport Scrolling Advertising Signs
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.
15
(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 generated revenue through this contract from January 2005.
(3) The Guangzhou Baiyun International Airport granted another contract to
Chuangrun in March 2005 for an additional fifty scrolling advertising light box
locations along the entire domestic and international arrivals level outdoor
loading area. We will install newly designed double-sided light boxes with six
posters on each side. This generates a total of 600 poster spaces (twelve per
sign). No revenues have been generated under this contract. We expect to have
revenue generated from commencing August 2006.
We also have 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.
During the year, we worked with Actionview Far East Limited in perfecting
the double-sided light boxes for the outdoor bus loading areas at the Guangzhou
Baiyun International Airport. As at May 8, 2006, five completed light boxes are
going through outdoor weather testing to ensure its all weather operability. We
will install a first batch of five boxes when the outdoor weather testing is
complete and it will take 3 to 4 weeks to complete the installation of all fifty
light boxes. Once installation starts, our advertising agent, Chi Shang Ling
Yue, is obligated to pay the balance of 30,656,000 Renminbi (approx. US$ 3.78
million) of the contract within 30 days of completion. Also once installation
has started, our project manager Chuangrun will also start to market the
remaining 20 outdoor signs not committed to Chi Shang Ling Yue.
After successful installation of the 50 outdoor signs, we hope to have
ample funding to start installation of the indoor scrolling signs. Chi Shang
Ling Yue has also committed to 70 of the 100 indoor signs for a total of
107,520,000 Renminbi (approx. US$ 13.2 million). At the same time, our project
manager Chuangrun will also start to market the remaining 30 indoor signs not
committed to Chi Shang Ling Yue.
16
In January, 2006 we acquired a contract to install 12 large and 24 regular
size scrolling light boxes at Shenzhen Baoan International Airport (the
"Airport") through the issuance of 10 million restricted shares issued under
Securities Exchange Commission Rule 144 to Guangzhou Titan Media. Shenzhen is
the first Special Economic Zone in China. Established in the early 80's, it has
grown from a fishing village just outside of Hong Kong into a metropolis of over
10 million residents. The Airport is 35 km outside of Shenzhen city and serves a
total population of about 25 million. It is the 5th busiest airport in China
with 16 million passengers in 2005, ranking behind Beijing, Shanghai Pudong,
Guangzhou and Shanghai Hongqui. In March, we installed 3 large size light boxes
at the entrances of Building "A" Departure Level of the Airport. This is our
first on location installation at an airport and we have gained invaluable
experience through the exercise. In April 2006, we installed another 5 large
size light boxes at the entrances of Building "B" Departure Level of the
Airport. We have started signing up advertising clients with a starting date of
July, 2006. We estimate revenue will be around RMB 32,000 ($3,992) to 40,000
($4,990) per poster per month.
We can identify 3 different paths of expansion:
i. Pursue other airports - China is the fastest growing market
for air travel, growing at double digits. Advertising rates
will vary from airport to airport but the overall trend is
going up because of the increasing passenger flow.
ii. Existing contracts - Some major airports in China are
expanding in response to the increasing number of passengers.
Major events are also driving airport expansion, such as the
2008 Beijing Olympics, the 2010 Shanghai World Exposition and
the 2010 Guangzhou Asian Games. As they expand, we will get
more space if we can beat our competitors.
iii. Other venues - Our light boxes are designed not just for
airports, they are also suitable for situations where there is
a lot of pedestrian traffic and where public announcements are
necessary, such as bus depots, train stations, etc.
17
Results of Operations
For the three months ended March 31, 2006 versus March 31, 2005
Net loss from contract rights
We generated revenues from our MTR advertising contracts since the first quarter
of 2005. Our MTR contract generated revenues of $224,152 (2005: $375,493) during
the three-month period ended March 31, 2006.
Included in cost of revenues are production costs and rents relating to the MTR
Pillar Advertising contract. The cost of revenues was $28,743 (2005: $40,063)
for the three-month period ended March 31, 2006.
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 and 3%, 5% and 10% in 2006 and 2007,
respectively,, for sales generated through existing client accounts, new
advertising agencies and new customers, respectively. Total commissions incurred
were $24,180 (2005: $56,324) during the three-month period ended March 31, 2006.
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 months ended March 31, 2006, we incurred $500,000 (2005:
$374,102) in management fees to Chuangrun.
Net Loss
We incurred a net loss of $4,964,809 (2005: $245,664) during the three months
ended March 31, 2006 as the advertising revenues from the airport contracts have
not been generated. We expect losses to continue for the next three months until
sufficient advertising revenue is generated from the airport contract to exceed
our cost structure.
Liquidity and Capital Resources
Cash Flows
We used cash flows in our operations of $474,565 (2005: $225,897) during the
three months ended March 31, 2006, largely because of the increase in loss of
$366,043 from our contract rights in China.
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 months ended March 31, 2006, and will likely
incur losses in the second quarter of 2006. 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.
18
On November 1, 2005, the Company issued convertible promissory notes and
warrants to purchase shares of the Company's common stock for total gross
proceeds of $874,500. The convertible notes are due on April 1, 2007 and bear
interest at prime rate plus four percent. The convertible notes are convertible
into common shares at a conversion price of $0.35 per share. However, after the
occurrence of an event of default as defined in the promissory note (and such an
event has occurred - see discussion below), the conversion price shall be
adjusted to eighty percent of the volume weighted average price of the Company's
common shares for the five trading days prior to a conversion date and the
annual interest rate shall be automatically increased to fifteen percent.
Commencing on the seventh month of the notes and on the same day of each month
thereafter, 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 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 the Company's 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 has to pay interest starting from January 2006 on a quarterly basis.
The Company paid interest in January 2006 but has not yet arranged payment of
interest afterwards.
As the gross revenue derived from the contract rights for the period ended
December 31, 2005 could not meet one of the criteria considered as an event of
default of the promissory notes, the annual interest rate on the promissory
notes has increased to fifteen percent effective from January 1, 2006 and the
promissory notes are repayable upon demand from the holders according to the
terms of the promissory notes.
Risk Factors
An investment in our common stock involves a high degree of risk. You should
carefully consider the following risk factors and the other information in this
annual report before investing in our common stock. Our business and results of
operations could be seriously harmed by any of the following risks. The trading
price of our common stock could decline due to any of these risks.
19
Risks related to our securities
Our stock may be affected by limited trading volume and may fluctuate
significantly in price.
Our common stock is traded on the NASD OTC Bulletin Board. Trading in our stock
has been limited and there can be no assurance that an active trading market for
our stock will develop. As a result, this could adversely affect our
shareholders' ability to sell our common stock in short time periods, or
possibly at all. Thinly traded shares can be more volatile than shares traded in
an active public market. The average daily trading volume of our common stock in
February 2006 was approximately 55,963 shares ranging from 5,000 shares to
262,200 shares. The high and low bid price of our common stock for the last two
years has ranged from $0.002 and $0.90 per share. Our common stock has
experienced, and is likely to experience in the future, significant price and
volume fluctuations, which could adversely affect the market price of our common
stock without regard to our operating performance.
We have issued a substantial number of securities convertible into shares of our
common stock which will result in substantial dilution to the ownership
interests of our existing stockholders.
As of June 12, 2006, approximately 6,971,016 shares of our common stock were
reserved for issuance upon exercise or conversion of the following securities:
(i) 4,372,500 shares representing 175% of the number of shares of common stock
issuable upon conversion in full of the outstanding convertible promissory notes
dated November 1, 2005 (without regard to any limitations on conversion); (ii)
2,498,574 shares, representing the shares of common stock issuable upon exercise
of in full of the warrants issued to the holders of the convertible promissory
notes dated November 1, 2005 (without regard to any limitations on exercise) and
(iii) 99,942 shares issuable upon exercise of the warrants issued to the broker
in connection with the issuance of the convertible promissory notes dated
November 1, 2005.
The exercise or conversion of these securities will result in a significant
increase in the number of outstanding shares and substantially dilute the
ownership interests of our existing shareholders.
A substantial number of our convertible securities are convertible into shares
of common stock at a conversion price of $0.35 per share. Most of these shares
are eligible for public resale. The trading price of our common stock and our
ability to raise additional financing may be adversely affected by the influx
into the market of such a substantial number of shares.
20
Our outstanding convertible notes are presently convertible into 2,428,571
shares of common stock at a per share conversion price of $0.35 which is less
than the current trading price of our shares Although many of the shares
issuable upon conversion of our convertible warrants are eligible for public
resale under Securities and Exchange Commission Rule 144, we have agreed to file
a registration statement to cover the public resale of all of these shares. This
significant increase in number of shares available for public sale may have a
negative impact on the trading price of our shares and substantially dilute the
ownership interest of our existing shareholders. In the event that our stock
trades below $0.35 per share, in order to raise additional financing we would
likely be required to issue additional shares of common stock or securities
convertible into common stock at a purchase or conversion price as applicable,
of less that $0.35 per share. To the extent these factors are viewed negatively
by the market, it may provide an incentive for persons to execute short sales of
our common stock that could adversely affect the trading price of our common
stock.
Our common stock is deemed to be a "penny stock" which may make it more
difficult for investors to sell their shares due to suitability requirements.
Our common stock is deemed to be a "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are
stock:
- - With a price of less than $5.00 per share;
- - That are not traded on a "recognized" national exchange;
- - Whose prices are not quoted on the NASDAQ automated quotation system; or
- - Of issuers with net tangible assets of less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or $5.0
million (if issuer has been in continuous operation for less than three
years), or with average revenues of less than $6.0 million for the last
three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for our shareholders to
sell shares to third parties or to otherwise dispose of them. This could cause
our share price to decline.
We do not expect to pay dividends for the foreseeable future.
For the foreseeable future, it is anticipated that earnings, if any, that may be
generated from our operations will be used to finance our operations and that
cash dividends will not be paid to holders of our common stock.
Risks related to our business
Going concern
During the three months ended March 31, 2006, the Company has incurred recurring
operating losses of $4,964,809 and has a working capital deficiency of
$4,154,893 and a shareholders deficiency of $2,766,752 at March 31, 2006. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in this regard are to raise equity financing
as required. The Company is in default on its promissory notes and requires
additional funds to maintain operations.
21
If future operations are unprofitable, we 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. We have no specific management ability or financial
resources or plans to enter any other business as of this date.
Default on the convertible promissory note
The Company has issued a convertible promissory note for financing. The Company
may breach any one of the conditions listed on the promissory note resulting in
an increase in the required interest payment, a demand for immediate re-payment
of principal amounts or conversion of the note into shares of our common stock
at a more favorable ratio to the note holder.
We recognize our revenues in Chinese dollars and as such our results are subject
to currently 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.
We are dependant on our 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.
We may need additional financing.
We believe we have 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.
The effects of inflation have not had a material impact on its operation, nor is
it expected to in the immediate future.
22
We are subject to 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
earnings 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.
We have limited operating history.
Until January 2005, we were a development stage company with no revenues. Our
primary business purpose is to develop and produce advertising in Southern
China. As of the date of this prospectus, we have three contracts to develop and
produce advertising in Southern China and have recently begun generating
revenues. However, we are still subject to all of the risks, uncertainties,
expenses, delays, problems, and difficulties typically encountered in the
establishment of a new business. We expect that unanticipated expenses,
problems, and technical difficulties will occur and that they will result in
material delays in the development of our business model. We may not obtain
sufficient capital or achieve a significant level of operations and, even if we
do, we may not be able to conduct such operations on a profitable basis.
Any projections used in this prospectus may not be accurate.
Any and all projections and estimates contained in this prospectus or otherwise
prepared by us are based on information and assumptions which management
believes to be accurate; however, they are mere projections and no assurance can
be given that actual performance will match or approximate the projections.
23
Because stock ownership is concentrated, you and other investors will have
minimal influence on stockholders' decisions.
Assuming that issued convertible notes and outstanding warrants have not been
converted or exercised, our executive officers and/or their affiliated companies
directly or beneficially own approximately 52% of our outstanding common stock
as of May 26, 2006. As a result our executive officers may be able to
significantly influence the management of the company and all matters requiring
stockholder approval, including the election of directors. Such concentration of
ownership may also have the effect of delaying or preventing a change in control
of our company.
Our directors and executive officers control the company.
Our directors, executive officers and/or their affiliated companies directly or
beneficially own approximately 23,338,235 shares or approximately 52% of our
outstanding common stock. Accordingly, these persons, as a group, may be able to
exert significant influence over the direction of our affairs and business,
including any determination with respect to our acquisition or disposition of
assets, future issuances of common stock or other securities, and the election
of directors. Such a concentration of ownership may also have the effect of
delaying, deferring, or preventing a change in control of the company. We have
appointed Chuangrun, a company owned by our chairman, as our operating agency in
China with fixed management fees: $1.5 million in 2005, $2 million in 2006 and
$3 million thereafter. China Media1 will only participate in profits after the
management fees.
Cautionary statement concerning forward-looking statements
Some of the statements in this annual report are forward looking statements,
which are subject to risks and uncertainties. These risks and uncertainties
could cause actual results to differ materially from those expressed in
forward-looking statements. We base these forward-looking statements on our
expectations and projections about future events, which we derive from the
information currently available to us. Such forward-looking statements relate to
future events or our future performance. Forward-looking statements are only
predictions. The forward-looking events discussed in this annual report, the
documents to which we refer you and other statements made from time to time by
us or our representatives, may not occur, and actual events and results may
differ materially and are subject to risks, uncertainties and assumptions about
us. For these statements, we claim the protection of the "bespeaks caution"
doctrine. The forward-looking statements speak only as of the date hereof, and
we expressly disclaim any obligation to publicly release the results of any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this filing.
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 and Canada
and with experience in US GAAP accounting. We believe this 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.
24
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 January 16, 2006.
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
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.
25
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: June 21, 2006
CHINA MEDIA 1 CORP.
By: /s/ Hanxiong Cai
------------------------------
Hanxiong Cai, Chief Executive Officer and Chairman of the Board of Directors
(principal executive officer)
By: /s/ Danny Hon
------------------------------
Danny Hon
Chief Financial Officer, Secretary and a member of the Board of Directors
(principal financial and accounting officer)
26