U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2006
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______ to ________
Commission file number: 000-50193
CHINA MEDIA1 CORP.
(Name of small business issuer in its charter)
Nevada 46-0498798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
142-757 Wet Hastings St., Suite 328 V6C 1A1
Vancouver, B.C. Canada (Zip Code)
(Address of principal executive offices)
(778) 881-0939
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of November 16, 2006, the
issuer had 44,084,909 shares of its common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CHINA MEDIA1 CORP.
(formerly Eagle River Mining Corp.)
BALANCE SHEETS
September 30, 2006 and December 31, 2005
(Going Concern Uncertainty - Note 1)
(Expressed in U.S. Dollars)
(Unaudited)
2006 2005
----------- -----------
(Restated)
ASSETS
Current assets
Cash and cash equivalents $ 9,400 $ 6,974
Due from common control affiliate (Note 4) 893,733 --
Prepaid expenses -- 24,270
----------- -----------
Total current assets 903,133 31,244
Property, plant and equipment, net of accumulated depreciation
of $40,794 (Note 5) 305,399 75,297
Due from common control affiliate (Note 4) 516,299 892,368
Deferred financing costs (Note 6) -- --
Discount on issuance of convertible promissory notes (Note 6) -- --
----------- -----------
821,698 967,665
----------- -----------
Total assets $ 1,724,831 $ 998,909
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 82,473 $ 83,709
Interest payable on promissory notes (Notes 6 & 7) 94,708 16,142
Due to common control affiliate (Note 4) -- 605,487
Due to related parties (Note 8) 1,452,402 559,450
Income tax payable 185,038 185,038
Fair value of convertible promissory notes - current (Note 6) 996,500 874,500
Fair value of conversion feature of notes - current (Note 6) 121,834 599,657
Promissory note (Note 7) 5,000 --
----------- -----------
Total current liabilities 2,937,955 2,923,983
----------- -----------
Fair value of warrant - non-current (Note 6) 388,718 857,510
----------- -----------
Total liabilities 3,326,673 3,781,493
----------- -----------
Commitments and contingencies (Note 3 and 12) -- --
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 1,700
Additional paid-in capital 4,333,298 51,912
Accumulated deficit (5,937,344) (2,836,196)
----------- -----------
Total stockholders' deficiency (1,601,842) (2,782,584)
----------- -----------
Total liabilities and stockholders' deficiency $ 1,724,831 $ 998,909
=========== ===========
The accompaning notes are an integral part of these financial statements
CHINA MEDIA1 CORP.
(formerly Eagle River Mining Corp.)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the three-month and nine-month periods ended September 30, 2006 and 2005
(Expressed in U.S. Dollars)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Operating expenses:
Depreciation $ 19,003 $ 1,960 $ 32,507 $ 5,796
General and administrative 57,744 23,016 355,707 367,248
Interest expense 60,294 -- 150,800 --
----------- ----------- ----------- -----------
Total operating expenses 137,041 24,976 539,014 373,044
----------- ----------- ----------- -----------
Operating Loss (137,041) (24,976) (539,014) (373,044)
Other income and expenses
Amortization of discount on issuance of convertible promissory
notes (Note 6) (106,569) -- (108,580) --
Gain on conversion feature on convertible promissory
notes to shares -- -- 13,066 --
Change in fair value of conversion feature of promissory
notes (Note 6) 492,889 -- 490,839 --
Change in fair value of warrants (Note 6 and 8) 542,806 -- 545,155 --
Amortization of deferred financing costs (Note 6) (21,882) -- (22,295) --
Net income from contract rights (Note 9) 164,324 360 719,681 (333,628)
Write off of investment on contract right (Note 3a) -- -- (4,200,000) --
----------- ----------- ----------- -----------
1,071,568 360 (2,562,134) (333,628)
----------- ----------- ----------- -----------
Net income (loss) and comprehensive income (loss) $ 934,527 $ (24,616) $(3,101,148) $ (706,672)
=========== =========== =========== ===========
Net income (loss) per share- basic $ 0.02 $ (0.00) $ (0.08) $ (0.02)
=========== =========== =========== ===========
Net income (loss) per share- diluted $ 0.02 $ (0.00) (0.08) $ (0.02)
=========== =========== =========== ===========
Weighted average number of common shares outstanding:
- basic 44,084,909 33,920,000 41,185,536 33,494,872
=========== =========== =========== ===========
- diluted 46,841,893 33,920,000 41,185,536 33,494,872
=========== =========== =========== ===========
The accompaning notes are an integral part of these financial statements
CHINA MEDIA1 CORP.
(formerly Eagle River Mining Corp.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
For the nine-month period ended September 30, 2006 and
year ened December 31, 2005
(Expressed in U.S. Dollars)
(Unaudited)
Total
Common stock Additional stockholders'
------------------ paid-in Accumulated Compreshensive equity
Shares Amount capital Deficit Loss (deficiency)
---------- ------ ---------- ----------- -------------- -------------
Total comprehensive loss $ (67,343)
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 (132,692) (67,493) (200,000)
Issuance of common stock for 4% commission on
convertible notes 83,333 4 34,995 -- 34,999
Imputed interest calculated on due to related parties -- -- 16,917 -- 16,917
Net loss (Restated) -- -- -- (2,659,385) (2,659,385) (2,659,385)
---------- ------ ---------- ----------- ------------ -----------
Total comprehensive loss (Restated) (2,659,385)
Balance, December 31, 2005 (Restated) 34,003,333 1,700 51,912 (2,836,196) (2,782,584)
Issuance of common stock upon the conversion of
promissory notes 81,576 4 28,549 -- 28,553
Issuance of common stock for acquisition of Shenzhen
airport project 10,000,000 500 4,199,500 -- 4,200,000
Imputed interest calculated on due to related parties -- -- 47,203 -- 47,203
Transfer of adjusted cost of conversion feature on
conversion of convertible promissoary notes to shares -- -- 6,134 -- 6,134
Net loss for the nine months ended September 30, 2006 (3,101,148) (3,101,148) (3,101,148)
---------- ------ ---------- ----------- ------------ -----------
Total comprehensive loss $(3,101,148)
===========
Balance, September 30, 2006 44,084,909 $2,204 $4,333,298 $(5,937,344) $(1,601,842)
========== ====== ========== =========== ===========
The accompaning notes are an integral part of these financial statements
CHINA MEDIA1 CORP.
(formerly Eagle River Mining Corp.)
STATEMENTS OF CASH FLOWS
For the nine-month periods ended September 30, 2006 and 2005
(Expressed in U.S. Dollars)
(Unaudited)
2006 2005
----------- ----------
Cash flows from operating activities
Net loss $(3,101,148) $ (706,672)
Adjustments to reconcile net loss to net cash used in
operating activities
Change in fair value of conversion feature of
convertible promissory notes (490,839) --
Change in fair value of warrants (545,155) --
Depreciation 32,507 5,906
Translation adjustment (6,423)
Amortization of deferred financing costs 22,295 --
Amortization of discount on issuance of convertible
promissory notes 108,580 --
Gain on conversion feature on conversion of convertible
notes to shares (13,066) --
Imputed interest expense 47,203 --
Written-off investment on contract right 4,200,000 --
Changes in operating assets and liabilities
Decrease in prepaid expenses 24,270 --
Increase in accounts payable (1,236) 22,169
Increase in debenture interest payable 79,115 --
----------- ----------
Net cash provided by (used in) operating activities 362,526 (685,020)
----------- ----------
Cash flows from investing activities
Purchase of property, plant and equipment (262,608) (39,369)
Cash paid to acquire contracts -- (200,000)
Collection on demand promissory note -- 181,208
Due to (from) common control affiliate (1,123,149) (698,511)
----------- ----------
Net cash flows provided by (used in) investing activities (1,385,757) (756,672)
----------- ----------
Cash flows from financing activities
Advances from related parties 892,952 1,439,997
Issuance of promissory notes 155,000 --
Increase in deferred financing costs (22,295) --
----------- ----------
Net cash flows provided by financing activities 1,025,657 1,439,997
----------- ----------
Increase (decrease) in cash 2,426 (1,695)
Cash and cash equivalents - beginning of period 6,974 3,267
----------- ----------
Cash and cash equivalents - end of period $ 9,400 $ 1,572
=========== ==========
Supplemental Information :
Cash paid for :
Interest expense paid in cash $ 23,664 $ --
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
CHINA MEDIA1 CORP.
(formerly Eagle River Mining Corp.)
Notes to Financial Statements
September 30, 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 nine month period ended September 30, 2006, the Company has
incurred recurring operating losses of $3,101,148 and has a working capital
deficiency of $2,034,822 and a shareholders deficiency of $1,601,842 as at
September 30, 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 convertible promissory note A and Note B 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.
Certain of the comparative figures have been reclassified to conform to the
current period's presentation.
Note 3 - Contract Rights
(I) Advertising Contracts
(a) 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 Advertising Contracts:
The contract provides for the installation and operation of one hundred
large size scrolling advertising light boxes in the Guangzhou Baiyun
International Airport ("GZ Airport") terminal departure hall ("GZ Airport
Contract"). In connection therewith, the Company is required to pay
RMB9,000,000 ($1,137,780) as a deposit seven days after the contract
commences. Management fees of RMB36,000,000 ($4,551,120) 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 ($4,687,654) 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
($5,156,419) 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 ($1,137,780)
still has not been paid.
Subsequent to this contract, Chuangrun entered into an additional contract
for installation of fifty exterior scrolling advertising light boxes at
the GZ 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 ($758,520) (paid) (Note 4) and management fees of
RMB6,000,000 ($758,520), RMB9,000,000 ($1,137,780) and RMB12,000,000
($1,517,040) 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.
In August 2006, the Company was made aware that Actionview, the Company's
sign supplier (Note 3(II)), received a letter from Guangdong Airport
Management Group Corporation ("Guangdong Management Corp.") that raised
questions about the validity of the GZ Airport Contracts. Management of
the Company, Chuangrun as well as the controlling shareholder of both the
Company and Chuangrun, Mr. Adrian Cai, were unaware that there was any
issue about the validity of the GZ Airport Contracts until Actionview
contacted the Company shortly before Actionview filed a Form 8-K
disclosing this matter. The Company has not received written confirmation
from Guangdong Management Group or the GZ Airport regarding the validity
of the GZ Airport Contracts; however, the Company has not contested the
validity of the GZ Airport Contracts given verbal discussions the Company
has held with Guangzhou Titan Media Company Ltd. ("Titan") and the GZ
Airport amongst others. As a consequence, in order to protect the interest
of the Company's shareholders, the controlling shareholder has arranged,
at his own cost, to swap the GZ Airport Contracts with Titan for airport
advertising contracts in Chengdu, Haikou and Xian (Note 3(c), (d) and
(e)). Concurrently, Titan is attempting to negotiate new contracts with GZ
Airport that would supersede the GZ Airport Contracts and if successful,
will offer the contracts to the Company on a first right of refusal basis
at a cost to be determined by the parties.
The deposit of RMB6,000,000 made by the Company in relations to the GZ
Airport has been credited back to the Company by Chuangrun. On November
14, 2006, a Notice was received by Chuangrun from GZ Airport related
entity asking for resolution to the RMB6,000,000 ($758,520) deposit.
Currently, Chuangrun and Titan are still in the process of negotiating new
contracts with GZ Airport.
(ii) Guangzhou Mass Transit Railway ("MTR") Pillar Advertising Contract - the
contract provides for wrapped pillar advertising for twelve stations along
the Route No. 1 and 2 of the MTR system in the Province of Guangzhou,
China. In connection therewith, the Company is required to pay a deposit
of RMB1,200,000 ($151,704) (paid) (Note 4) and a monthly management fee of
RMB100,000 ($12,642). The term of the contract is for a period of five
years expiring on October 31, 2009. Due to the renovation work carried out
at some of the stations for other new routes, the MTR authority allows the
Company to put up wrapped pillar advertising in other stations of the
Route No.1 and 2 in year 2006 without additional charges. The issues
surrounding the validity of the GZ Airport Contracts do not impact this
contract.
(b) Shenzhen Baoan International Airport Advertising Contract
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 ($12,642) per
year for each large size location and RMB70,000 ($8,849) for each small size
location and a one year management fee of RMB 2,880,000 ($364,090) 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.
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 have 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. Due to the start-up nature of the business, Chuangrun
subsequently agreed to charge the management fees based on 20% of the
advertising revenue effective from April 1, 2006 up to the annual amount as
stated in the original operating contract.
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.
As of September 30, 2006, 8 large signs and 14 regular signs were installed. A
deposit of RMB2,800,000 ($353,976) was paid. As the request of the SZ Airport,
the size of the regular signs is made larger than that as stated in the
advertising agreement. The fee for the regular signs and annual management fee
will be adjusted through a supplementary agreement.
The issues surrounding the validity of the GZ Airport Contracts do not impact
this contract.
(c) Chengdu International Airport
On September 8, 2006, the Company acquired an advertising contract for the
Chengdu International Airport ("Chengdu Airport") from Titan ("Chengdu Airport
Contract"). Titan is a third party to the Chengdu Airport Contract and
therefore, consummated as an arm's length transaction. This contract provides
for the installation of thirty-two signs of different sizes. The contract is for
a term of eight years. Titan assigned the Chengdu Airport Contract to the
Company for consideration of $1.00. Under the terms of the Chengdu Airport
Contract, Titan is required to pay Chengdu Airport RMB55,000 ($6,953), RMB59,400
($7,509), RMB60,500 ($7,648) and RMB63,250 ($7,996) per year for each location
for the first two years, third year, fourth year, fifth year and onwards,
respectively. A management fee of RMB660,000 ($83,437), RMB712,800 ($90,112),
RMB726,000 ($91,781) and RMB759,000 ($95,953) per year are also payable for the
first two years, third year, fourth year, fifth year and onwards, respectively.
A security deposit of RMB880,000 ($111,250) has to be paid within 7 days of
signing the contract (paid in October 2006).
The assignment occurred through an operating agreement entered into between the
Company, Titan and Chuangrun. Under the terms of the operating agreement, Titan
and the Company appointed Chuangrun as exclusive agent for the Chengdu Airport
Contract. The Company agreed to pay management fees to Chuangrun for its
services as agent in the amount of 20% of all advertising revenues up to a total
of $2.5 million in the aggregate, which will be increased to $3.0 million
beginning in 2007, for all airports under which Chuangrun acts as exclusive
agent. The management fees include all daily operating expenses but do not
include project deposits and upfront fees.
(d) Xian International Airport
On September 8, 2006, the Company acquired an advertising contract for the Xian
Xianyang International Airport ("Xian Airport") from Titan ("Xian Airport
Contract"). Titan is a third party to the Xian Airport Contract and therefore,
consummated as an arm's length transaction. This contract provides for the
installation of twelve signs. The contract is for a term of eight years. Titan
assigned the Xian Airport Contract to the Company for consideration of $1.00.
Under the terms of the Xian Airport Contract, Titan is required to pay Xian
Airport RMB35,000 ($4,425), RMB37,800 ($4,779), RMB41,580 ($5,257), RMB46,570
($5,887), RMB53,555 ($6,770) and RMB63,194 ($7,989) per year for each location
for the first two years, third year, fourth year, fifth year, sixth year to
seventh year and eighth year, respectively. Management fee of RMB420,000
($53,096), RMB453,600 ($57,344), RMB498,960 ($63,079), RMB558,836 ($70,648),
RMB642,660 ($77,452), RMB758,336 ($95,869) per year are also payable for the
first two years, third year, fourth year, fifth year, sixth year to seventh year
and eighth year, respectively. A security deposit of RMB84,000 ($10,619) has to
be paid within 5 days of signing the contract (paid).
The assignment occurred through an operating agreement entered into between the
Company, Titan and Chuangrun. Under the terms of the operating agreement, Titan
and the Company appointed Chuangrun as exclusive agent for the Chengdu Airport
Contract. The Company agreed to pay management fees to Chuangrun for its
services as agent in the amount of twenty percent of all advertising revenues up
to a total of $2.5 million in the aggregate, which will be increased to $3.0
million beginning in 2007, for all airports under which Chuangrun acts as
exclusive agent. The management fees include all daily operating expenses but do
not include project deposits and upfront fees.
(e) Haikou International Airport
Titan is in the process of finalizing the terms of an agreement with Haikou
International Airport, which is expected to provide for the installation of
approximately 10 large and 17 small signs. Titan has agreed verbally to offer
this advertising contract to the Company once completed on terms similar to the
Chengdu Airport Contract as well as enter into an operating agreement between
the Company, Titan and Chuangrun similar to the operating agreement that relates
to the Chengdu Airport Contract.
(II) 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.
On August 23, 2006, Actionview provided written notice to the Company
terminating immediately the rental agreement. The Company accepted Actionview's
termination of the agreement on August 24, 2006. There was no penalty payable by
either party as a result of termination. As of November 10, 2006, no legal
action has been initiated by either party.
(III) 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 at the Guangzhou Baiyun International Airport, 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
($655,361). The remaining 90% balance, or RMB46,656,000 ($5,898,252), 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.
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 ($13,592,678). The
Agency will pay Chuangrun a 15% prepayment of RMB16,280,000 ($2,058,118) 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 ($11,553,777) will be
paid to Chuangrun.
Due to the issues surrounding the validity of the GZ Airport Contracts, the
Agency notified the Company by written notice on October 25, 2006 that the two
agreements to supply advertisement related to the GZ Airport were terminated
effective August 1, 2006. The Company accepted the Agency's termination of the
agreement through Chuangrun. There were no revenues generated by the Agency
related to the GZ Airport Contracts during the term of the agreement with the
Agency. The deposit placed by the Agency for placing light box advertisements at
the GZ Airport in the amount of RMB5,184,000 ($655,361) will be refunded from
the net revenue generated through the MTR pillar advertising contract.
(IV) 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. On July
11, 2006, the Company had entered into an amendment agreement with Chuangrun to
limit the management fees to twenty percent of the gross revenue from the
advertisement contracts effective from April 1, 2006 up to the annual amount as
stated in the original operating contract. The issues surrounding the validity
of the GZ Airport Contracts do not impact this contract.
The Company has entered into operating agreements with Titan and Chuangrun in
relation to the SZ Airport Contract (Note 3(b)), Chengdu Airport Contract (Note
3(c)) and Xian Airport Contract (Note 3(d)).
Note 4 - Due to Common Control Affiliate
The breakdown of amounts due from Chuangrun can be summarized as follows:
September 30,
2006
-------------
Current:
Cash at bank $ 18
Trade accounts receivable 808,962
Production cost 8,071
Trade accounts payable (16,118)
Accrued commission (517,462)
Customer deposits (12,136)
Current account with the Agency 1,012,750
Current account with Chuangrun (133,017)
Income tax payable (257,335)
----------
Current liabilities due to Chuangrun $ 893,733
----------
Long-term:
Security deposits (Note 3) $ 516,299
----------
Long term receivable from Chuangrun $ 516,299
----------
Net amount due from Chuangrun $1,410,032
==========
Note 5 - Property, Plant and Equipment
Property, plant and equipment consist of the following:
September 30,
2006
-------------
Equipment $276,583
Leasehold improvement 69,610
--------
346,193
Less: accumulated depreciation (40,794)
--------
Net book value $305,399
========
Note 6 - Convertible Promissory Notes
(a) Correction of Error - Restatement
The Company has restated the deferred financing cost and discount on issuance of
convertible promissory notes on the balance sheet as of December 31, 2005 from
$155,258 and $580,764 to $nil and $nil respectively due to the fact that 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
convertible promissory notes ("Note A"). Note A becomes repayable upon demand
from the holders. See Note 6(b) for details. The Company thus has to immediately
write off the remaining amount of the deferring financing cost of $155,258 and
discount of convertible promissory note of $580,764 as of December 31, 2005.
The net effect of the error was a decrease in total assets and total
stockholders' equity by $736,022 on the balance sheet as of December 31, 2005
and an increase in net loss of $736,022 to $2,659,385 for the year ended
December 31, 2005. The net loss per share was increased to $0.08.
On the other hand, the net effect of the error was a reduction in net loss of
$736,022 to $4,228,787 for the three month period ended March 31, 2006 with no
change on the balance sheet as of March 31, 2006. The net loss per share was
decreased to $0.12.
(b) Convertible Promissory Notes ("Note A") issued on November 1, 2005
On November 1, 2005, the Company issued convertible promissory notes ("Note A")
and warrants to purchase shares of the Company's common stock for total gross
proceeds of $874,500. Note A are due on April 1, 2007 and bear interest at prime
rate plus four percent. Note A 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 Note A, 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 Note A
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 of the principal
amount of each Note A, 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 Note A 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
Note A, the annual interest rate on the promissory notes has increased to
fifteen percent effective from January 1, 2006 and Note A is repayable upon
demand from the holders. The Company also immediately wrote off the remaining
amount of $155,258 during the year ended December 31, 2005 (See Note 6 (a)).
The Company has agreed to register the secondary offering and resale of the
shares issuable upon conversion of Note A, 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. Due to the delay in filing
the 10-KSB for the year ended December 31, 2005 and 10-QSB for the quarter ended
March 31, 2006, the Company has to re-file an updated Registration Statement for
approval by Securities Exchange Commission.
Due to the issuance of another convertible promissory note ("Note B") on June
21, 2006 (see Note 6(d) for details), the conversion price of Note A
automatically changed to $0.27 under the terms of Note A, which is now the same
conversion price as Note B.
(c) Bifurcation of the Conversion Feature of Note A 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, the total number of shares to be issued is indeterminable once Note A
is in default and the registration of the shares for the conversion of Note A is
out of the control of the Company (Note 6(b)). The warrant contracts have been
classified as a liability according to paragraph 9 and 21 of EITF 00-19, with
changes in fair value reported in earnings.
The conversion option of Note A 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 Note A for the nine months period ended
September 30, 2006 is summarized as follows:
Assets Liabilities
----------- -------------------------------------
Discount on Conversion
Issuance of Feature of
Convertible Convertible Convertible
Promissory Promissory Promissory
Notes Notes Warrants Note
----------- ----------- --------- -----------
Balance as at December 31, 2005 (previously stated) $ 580,764 $874,500 $ 857,510 $ 599,657
Write off of the discount as the result of default (580,764) -- -- --
--------- -------- --------- ---------
Balance as at December 31, 2005 (restated) -- 874,500 857,510 599,657
Exercise of right to convert promissory
notes into shares -- (28,000) -- (19,200)
Changes in fair value recognized in the
statements of operations -- -- (557,681) (486,401)
--------- -------- --------- ---------
Balance, September 30, 2006 $ -- $846,500 $ 299,829 $ 94,056
========= ======== ========= =========
The fair values of the conversion feature of Note A at June 30, 2006 and
September 30, 2006 are estimated using the Black-Scholes option pricing model
with assumptions as follows:
Risk free interest rate 4.13% - 4.52%
Expected life of the conversion feature in years 0.50 - 0.75 years
Expected volatility 49.2% - 90.2%
Dividend per share $0.00
(d) Convertible Promissory Notes ("Note B") issued on June 21, 2006
On June 21, 2006, the Company issued $150,000 of principal amount of convertible
promissory notes ("Note B") and warrants to purchase shares of the Company's
common stock. The aggregate gross proceeds from the sale of the notes and
warrants were $150,000. The convertible notes are due on December 21, 2007 and
bear interest at the prime rate plus 4%. The notes are initially convertible
into the Company's common shares at a fixed conversion price of $0.27 per share.
After the occurrence of an event of default under the notes, 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;
provided, however that in no event shall such price be less than $0.01.
Commencing on the seventh month of the notes, the Company must make a payment of
one-twelfth of the principal amount of each note, either in cash or by
conversion of such amount into the Company common shares. If, on the payment
date, the market price for the Company's common shares are below $0.54 per
share, the Company may make this payment either in cash at 110% of the amount of
the payment or in the Company common shares at a conversion rate equal to the
lesser of $0.27 per share or 80% of the volume weighted average price of the
Company common shares for the five trading days prior to a conversion date;
provided, however, that in no event shall such price be less than $0.01, 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 $0.54 per share, then
the Company must make this payment in the Company common shares at a conversion
price of $0.27 per share.
The notes were issued with new Series "A" warrants to purchase up to 555,556
shares of the Company common stock at an exercise price of $0.44 per share
expiring June 21, 2011 (Note 8).
The Company granted "piggyback" registration rights with respect to the shares
of common stock underlying Note B and the new Series "A" warrants issued in this
offering.
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 Note B and
the new Series "A" warrants.
In connection with the offer and sale of the Note B and the new Series "A"
warrants, the Company paid a total of $22,295 financing charges (including
$15,000 cash commission to the broker, $3,000 due diligent fees and $4,295 legal
fees), which have been deferred and amortized over the life of Note B.
As the Company did not pay interest to the note holder according to the terms of
the agreement, Note B was regarded as in default as from July 1, 2006. The
balance of the financing charges and discount on issuance of convertible note,
$21,882 and $106,569, were thus written off in the quarter ended September 30,
2006.respectively.
(e) Bifurcation of the Conversion Feature of Note B and new Series "A" 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 new Series "A" 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, the total number of shares to be issued is indeterminable
once Note A is in default and the registration of the shares for the conversion
of Note A is out of the control of the Company (Note 6(b)). The new Series "A"
warrants have been classified as a liability according to paragraph 9 and 21 of
EITF 00-19, with changes in fair value reported in earnings.
The conversion option of Note B 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. However, the total number of shares to be issued is
indeterminable once Note A is in default and the registration of the shares for
the conversion of Note A is out of the control of the Company (Note 6(b)). 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
new Series "A" warrants and the conversion feature of Note B for the nine months
period ended September 30, 2006 is summarized as follows:
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 $ -- $ -- $ -- $ --
Issuance of convertible promissory
notes on June 21, 2006 108,580 150,000 76,363 32,216
Amortization of discount on note (108,580) -- -- --
Changes in fair value recognized in the
statements of operations -- -- 12,526 (4,438)
--------- -------- ------- -------
Balance, September 30, 2006 $ -- $150,000 $88,889 $27,778
========= ======== ======= =======
The fair values of the conversion feature of Note B at June 21, 2006, June 30,
2006 and September 30, 2006 are estimated using the Black-Scholes option pricing
model with weighted average assumptions as follows:
Risk free interest rate 4.11% to 4.47%
Expected life of the conversion feature in years 1.22 to 1.50 years
Expected volatility 71.7% to 132.0%
Dividend per share $0.00
Note 7 - Promissory Note
On September 28, 2006, the Company issued a promissory note for $5,000 bearing
interest at 10% per annum. The promissory note is due for repayment with
interest on December 31, 2006. If the Company is in default of repayment, the
principal amount plus interest accrued will bear interest at 18% per annum.
Note 8 - 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 $900,559 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 of $545,000 due to Hanxiong Cai, a
director of the Company. The amounts 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.
(c) 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 9 - Warrants
As of September 30, 2006, there were 1,299,258 Series "A" warrants, 1,299,258
Series "B" warrants and 555,556 New Series "A" 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. 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 and each new Series "A" warrant entitles the holder to purchase
one share of the common stock of the Company at an exercise price of $0.44 per
share until June 21, 2011.
The fair value of the Series "A" warrants, Series "B" and new Series "A"
warrants was $388,718 as of September 30, 2006.
The fair values of the warrants at June 21, 2006, June 30, 2006 and September
30, 2006 are estimated using the Black-Scholes option pricing model with
weighted average assumptions as follows:
Risk free interest rate 3.90% to 4.47%
Expected life of the conversion feature in years 3.08 to 5.00 years
Expected volatility 128.8% to 132.0%
Dividend per share $0.00
Note 10 - Net income (loss) from contract rights
The net income (loss) from contract rights (Note 3) is as follows:
Three months ended Nine months ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
------------- ------------- ------------- -------------
Sales $592,938 $554,765 $2,799,134 $1,219,457
Cost of sales 72,711 59,203 326,564 135,772
-------- -------- ---------- ----------
Gross profit 520,227 495,562 2,472,570 1,083,685
Operating expenses
Sales commission 80,058 83,214 296,071 182,918
Management fees (Note 3) 119,819 375,000 1,025,663 1,125,000
Repair and maintenance 2,191 -- 2,191 --
Rent 100,086 36,988 174,804 109,395
-------- -------- ---------- ----------
302,154 495,202 1,498,729 1,417,313
Operating income (loss) before income tax 218,073 360 973,841 (333,628)
Income tax 53,749 -- 254,160 --
-------- -------- ---------- ----------
Net income (loss) from contract rights $164,324 $ 360 $ 719,681 $ (333,628)
======== ======== ========== ==========
Note 11 - Earnings Per Share
Basic earnings (loss) per share are computed by dividing net earnings (loss)
available to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net earnings available to common stockholders by the weighted-average
number of common shares outstanding during the period increased to include the
number of additional common shares that would have been outstanding if
potentially dilutive common shares had been issued.
The following table sets forth the computations of shares and net loss used in
the calculation of basic and diluted loss per share for the three-month and
nine-month periods ended September 30, 2006 and 2005:
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net income (loss) for the period 934,527 (24,616) (3,101,148) (706,672)
Income impact of the assumed conversion 38,199 -- -- --
----------- ----------- ----------- -----------
972,726 (24,616) (3,101,148) (706,672)
=========== =========== =========== ===========
Weighted-average number of shares outstanding 44,084,909 33,920,000 41,185,536 33,494,872
Effective of dilutive securities :
Dilutive convertible note A 2,341,984 -- -- --
Dilutive convertible note B 415,000 -- -- --
Dilutive warrants A - antidiluted -- -- -- --
Dilutive warrants B - antidiluted -- -- -- --
Dilutive new warrants A - antidiluted -- -- -- --
----------- ----------- ----------- -----------
Dilutive potential common shares 2,756,984 -- -- --
----------- ----------- ----------- -----------
Adjusted weighted-average shares and
assumed conversions 46,841,893 33,920,000 41,185,536 33,494,872
=========== =========== =========== ===========
Basic income (loss) per share attributable to
common shareholders $ 0.02 $ (0.00) $ (0.08) $ (0.02)
=========== =========== =========== ===========
Diluted income (loss) per share attributable to
common shareholders $ 0.02 $ (0.00) $ (0.08) $ (0.02)
=========== =========== =========== ===========
The outstanding warrants A, warrants B and new warrants B were not included in
the calculation as the effect would be antidilutive.
Note 12 - 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.
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 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, 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:
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 People's Republic of China, from Mr. Cai Hanxiong, proprietor of
the Guangzhou Chuangrun Advertising Company Limited located in the People's
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 ("GZ 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.
(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 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 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 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.
In January, 2006 we acquired a contract to install 12 large and 24 regular
size scrolling light boxes at Shenzhen Baoan International Airport ("SZ
Airport") by the issuance of 10 million restricted shares to Guangzhou Titan
Media. Shenzhen is the first Special Economic Zone in China. Established in the
early 80's, it had 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 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 currently have Motorola, Samsung and Tissot at the Departure Level
signs. Fourteen double sided signs have been installed at the Arrival Level of
the Airport And the Agricultural Bank has taken 1 poster on each sign.
Since the acquisition of the Guangzhou Baiyun International Airport ("GZ
Airport") contracts, there is an ongoing dispute between Guangzhou Chuangrun
Advertising Co. Ltd. ("Chuangrun") (our exclusive operating agent in China) and
ActionView Far East Limited ("ActionView") (scrolling sign box supplier). We
made aware in August 2006 that ActionView has received a letter from GZ Airport
that raised questions about the validity of the two advertising contracts we
acquired from Chuangrun. After lengthy discussions with Mr. Adrian Cai,
controlling person of both the Company and Chuangrun; in order to protect the
interest of the Company's shareholders, Mr. Cai has at his own cost, arranged to
swap the two GZ Airport contracts with Titan Media for airport advertising
contracts in Chengdu, Haikou and Xian. It was earlier this year that we acquired
our Shenzhen Airport contract from Titan and it has started to generate revenue
in the third quarter. This decision was made after careful consideration of the
situation. Chengdu is the 6th largest airport in China and the contract covers
32 signs of different sizes. Haikou the 8th largest and covers 10 large and 17
small signs. Xian the 9th largest and covers 12 large signs. The combined net
revenue of the 71 signs is projected to exceed that of the combined 150 signs in
Guangzhou because we can avoid the high rental charge of the in-door signs ($
3,750 or RMB 30,000 per sign per month) and the revenue sharing arrangement with
ActionView in Guangzhou. There will be neither monetary nor share considerations
in the swap and all the related costs will be borne by Mr. Cai. Currently, Titan
is in the process of finalizing the terms of an agreement with Haikou
International Airport, and will offer this advertising contract to the Company
once completed on terms similar to the Chengdu Airport Contract as well as enter
into an operating agreement between the Company, Titan and Chuangrun similar to
the operating agreement that relates to the Chengdu Airport Contract.
As far as we can determine, there were two root problems with the GZ Airport
contracts. First, they were signed about 2 years ago and the airport had since
changed from a government agency into a private corporation together with a
complete overhaul of management personnel. We have met with airport
representatives several times and the receptions were either hot or cold
depending on the person. Second, the ActionView design also posted a problem.
Since signing of the GZ Airport contract and contract with ActionView, Chuangrun
started to work with ActionView to develop a scrolling light box with LED
display for the outside bus waiting area of the Airport based on ActionView's
own design and technology in their light boxes. It has been over a year and the
design and technology are still not totally satisfactory. Since the installation
of the Shenzhen Airport Departure Level signs earlier this year, we have been
experiencing a variety of problems that were not expected before. Although the
signs were not purchased from ActionView, they were manufactured by the same
factory using the same design and technology. This led to a much more thorough
and careful examination of the product by Chuangrun's engineers, especially the
glass, electrical, electrical interference, lighting system and overall
stability problems. Effort was put in but problems persisted with the Shenzhen
signs. These two problems combined to cause a lengthy delay as well as a lot of
anxiety amongst all interested parties; shareholders and management included.
Since the Shenzhen Airport installations, Chuangrun has learned a lot from the
experience and has started to source alternate suppliers. The new signs
installed at Shenzhen Airport Arrival Level are manufactured by a Guangzhou area
specialty scrolling sign maker. They have also contacted a major sign maker in
Shanghai that has installed 70% of scrolling signs in the Shanghai area. Both
suppliers offer sophisticated state-of-the-art electronic/mechanical systems and
are both specialized professional sign makers, and are eager to supply us at
very reasonable prices. We will use these new suppliers for the three new
airports and we do not expect the kind of problems with Shenzhen Airport to
happen again.
Chengdu International Airport Contracts
(a) Chengdu Aiport Contract. On August 1, 2006, Guangzhou Titan Media
Company Ltd. entered into that certain Chengdu International Advertising
Contract for 8 large size advertising signage locations and 24 small size
advertising signage locations (the "Chengdu Airport Contract"). Under the terms
of the Chengdu Airport Contract, Titan is required to pay Chengdu Airport
RMB55,000, RMB59,400, RMB60,500 and RMB63,250 per year for each location for the
first two years, third year, fourth year, fifth year and onwards, respectively.
A management fee of RMB660,000, RMB712,800, RMB726,000 and RMB759,000 per year
are also payable for the first two years, third year, fourth year, fifth year
and onwards, respectively. A security deposit of RMB880,000 has to be paid
within 7 days of signing the contract. The contract is for a term of 8 years.
Titan assigned the Chengdu Airport contract to us for consideration of $1.00. We
expect the Chengdu Airport contract to generate approximately $10,000,000 in
revenues per year, starting in the 4th quarter of 2006. The assignment was
effectuated through an operating agreement entered into between us and Titan.
(b) Chengdu Operating Agreement. On September 8, 2006, the Company entered
into an operating agreement with, Guangzhou Titan Media Company Limited, or
Titan, and Guangzhou Chuangrun Advertising Co. Ltd., or GZ Chuangrun. GZ
Chuangrun is owned by China Media1's Chief Executive Officer, Mr. Cai Hanxiong.
Under the terms of the operating agreement, Titan has assigned and
transferred to the Company all revenues generated from the operations relating
to the agreement between Titan and the Chengdu International Airport for 8 large
size advertising signage locations and 24 small size advertising signage
locations (the "Chengdu Airport Contract"). Further, the Company has agreed to
pay from such revenues assigned to the Company all of the operating expenses of
GZ Chuangrun incurred relating to Chengdu Airport Contract, including, but not
limited to, trade accounts payable, real property lease obligations, employee
lease obligations, and taxes.
Under the terms of the operating agreement, Titan and the Company
appointed GZ Chuangrun as exclusive agent for the Chengdu Airport Contract. The
Company agreed to pay management fees to GZ Chuangrun for its services as agent
of: 20% of all advertising revenues up to a total of $2.5 million in the
aggregate for all airports under which GZ Chuangrun acts as exclusive agent,
which amount will be increased to $3.0 million beginning in 2007. The management
fees include all daily operating expenses, but do not include project deposits
and upfront fees.
Xian Xianyang International Airport Contracts
(a) Xian Aiport Contract. On September 8, 2006, Guangzhou Titan Media
Company Ltd. entered into that certain Xian Xianyang International Advertising
Contract for 12 large size advertising signage locations (the "Xian Airport
Contract"). Under the terms of the Xian Airport Contract, Titan is required to
pay Xian Airport RMB35,000, RMB37,800, RMB41,580, RMB46,570, RMB53,555 and
RMB63,194 per year for each location for the first two years, third year, fourth
year, fifth year, sixth year to seventh year and eighth year, respectively.
Management fee of RMB420,000, RMB453,600, RMB498,960, RMB558,836, RMB642,660,
RMB758,336 per year are also payable for the first two years, third year, fourth
year, fifth year, sixth year to seventh year and eighth year, respectively. A
security deposit of RMB84,000 has to be paid within 5 days of signing the
contract. The contract is for a term of 8 years. Titan assigned the Xian Airport
contract to us for consideration of $1.00. We expect the Xian Airport contract
to generate approximately $5,000,000 in revenues per year, starting in the 4th
quarter of 2006. The assignment was effectuated through an operating agreement
entered into between us and Titan. See Item 1.01 2(b).
(b) Xian Operating Agreement. On September 8, 2006, the Company entered
into an operating agreement with, Guangzhou Titan Media Company Limited, or
Titan, and Guangzhou Chuangrun Advertising Co. Ltd., or GZ Chuangrun. GZ
Chuangrun is owned by the Company's Chief Executive Officer, Mr. Cai Hanxiong.
Under the terms of the operating agreement, Titan has assigned and
transferred to the Company all revenues generated from the operations relating
to the agreement between Titan and the Xian Xianyang International Airport for
12 large size advertising signage locations (the "Xian Airport Contract").
Further, the Company has agreed to pay from such revenues assigned to the
Company all of the operating expenses of GZ Chuangrun incurred relating to Xian
Airport Contract, including, but not limited to, trade accounts payable, real
property lease obligations, employee lease obligations, and taxes.
Under the terms of the operating agreement, Titan and the Company
appointed GZ Chuangrun as exclusive agent for the Xian Airport Contract. The
Company agreed to pay management fees to GZ Chuangrun for its services as agent
of: 20% of all advertising revenues up to a total of $2.5 million in the
aggregate for all airports under which GZ Chuangrun acts as exclusive agent,
which amount will be increased to $3.0 million beginning in 2007. The management
fees include all daily operating expenses, but do not include project deposits
and upfront fees.
Guangzhou Airport
We are in the process of negotiating with Guangzhou Airport to rectify the
confusion of the original contracts. We have just received a letter from the
Airport to ask us to deal with the RMB 6 million (approx. US$ 750,000) that is
on deposit since August 2005 for the scrolling light box advertising locations.
We have decided to leave the deposit with the Airport at an Agricultural Bank
account until a decision has been reached concerning the contracts.
Looking into the future, 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 - The major airports in China are all expanding in
response to the increasing passenger. 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.
iii. Other revenues - 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.
In the first three quarters of 2005, the Company accounts for the revenue
and expenses attributed to the contract rights assigned by Chuangrun on a gross
basis. However, after a review by the Securities Exchange Commission on the
financial statements for the quarter ended September 30, 2005, we conclude that
it is more appropriate to disclose the revenue and expenses attributed to the
contract rights assigned by Chuangrun on a net basis as we rely on Chuangrun to
operate the business as our agent in China under the existing contract
arrangements. The account regrouping does not affect the bottom line of the
financial statements.
Results of Operations
Restatement
The Company intends to restate the deferred financing cost and discount on
issuance of the November 2005 convertible promissory notes on the balance sheet
as of December 31, 2005 from $155,258 and $580,764 to $nil and $nil respectively
because that 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 under the November 2005 convertible promissory notes. The
November 2005 convertible promissory notes become due and payable upon demand
from holders after an event of default (Note 6(b)). Accordingly, the Company
intends write off the remaining amount of the deferring financing cost of
$155,258 and discount of convertible promissory note of $580,764 as of December
31, 2005.
The net effect of the error was a decrease in total assets and total
stockholders' equity by $736,022 on the balance sheet as of December 31, 2005
and an increase in net loss of $736,022 to $2,659,385 for the year ended
December 31, 2005. The net loss per share was increased to $0.08.
On the other hand, the net effect of the error was a reduction in net loss of
$736,022 to $4,228,787 for the three month period ended March 31, 2006 with no
change on the balance sheet as of March 31, 2006. The net loss per share was
decreased to $0.12.
For the three months ended September 30, 2006 versus September 30, 2005
Net Income (loss) from contract rights
Revenues
Revenues from our advertising contracts for the three month period ended
September 30, 2006 increased to $592,938 from $554,765 for the three month
period ended September 30, 2005. This increase is primarily attributable to the
revenue of $223,749 derived from the SZ Airport advertising contracts.
Cost of Sales
Cost of sales increased to $72,711 for the three months ended September 30, 2006
from $59,203 for the three months ended September 30, 2005. This increase is
primarily attributable to the increase in the production cost of the posters for
the light boxes and the pillar wrap advertising materials following the increase
in sales revenue.
Sales Commission
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%, 10% and 15% in 2006 and
2007, respectively, for sales generated through existing client accounts, new
advertising agencies and new customers, respectively. Sales commission decreased
to $80,058 for the three months ended September 30, 2006 from $83,214 for the
three months ended September 30, 2005.
Management fees
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 and onwards for the management of GZ airport and MTR
contracts. These fees are intended to cover the salaries of our Chief Executive
Officer and key management in China and other operating expenses in China. Due
to the start-up nature of the business, Chuangrun agrees to charge the
management fees based on 20% of the advertising revenue effective from April 1,
2006 up to the annual amount as stated in the original operating contract.
The Company has also 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 for the SZ Airport contract. The management fees include all
daily operating expenses, but do not include project deposits and upfront fees.
Due to the start-up nature of the business, Chuangrun subsequently agreed to
charge the management fees based on 20% of the advertising revenue effective
from April 1, 2006 up to the annual amount as stated in the original operating
contract.
Our management fees to Chuangrun decreased to $119,819 for the three months
ended September 30, 2006 from $375,000 for the three months ended June 30, 2005
due to the change in the basis of calculation of the commission.
Net Income (Loss)
We recognized net income (from contract rights) of $164,324 for the three months
ended September 30, 2006 as compared to a net income of $360 for the three
months ended September 30, 2005. This increase is attributable to the increase
in revenue from the MTR and SZ Airport advertising contracts together with
limitation of the management fee to 20% of the advertising revenue in the
quarter ended September 30, 2006.
For the nine months ended September 30, 2006 versus September 30, 2005
Net Income (loss) from contract rights
Revenues
Revenues from our MTR advertising contracts for the nine month period ended
September 30, 2006 increased to $2,799,134 from $1,219,457 for the nine month
period ended September 30, 2006. This increase is primarily attributable to the
increase in revenue from the MTR advertising contracts and the revenue of
$287,677 derived from the SZ Airport advertising contracts.
Cost of Sales
Cost of sales increased to $326,564 for the nine months ended September 30, 2006
from $135,772 for the nine months ended September 30, 2005. This increase is
primarily attributable to the increase in the production cost of the posters for
the light boxes and the pillar wrap advertising materials following the increase
in sales revenue.
Sales Commission
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%, 10% and 15% in 2006 and
2007, respectively, for sales generated through existing client accounts, new
advertising agencies and new customers, respectively. Sales commission increased
to $296,071 for the nine months ended September 30, 2006 from $182,918 for the
nine months ended September 30, 2005.
Management fees
Our management fees to Chuangrun decreased to $1,025,663 for the nine months
ended September 30, 2006 from $1,125,000 for the nine months ended September 30,
2005 due to change in the basis of calculation of management fee from April 1,
2006.
Net Income (Loss)
We recognized net income (from contract rights) of $719,681 for the nine months
ended September 30, 2006 as compared to a net loss of $333,628 for the nine
months ended September 30, 2005. This increase is attributable to the increase
in revenue from the MTR and SZ Airport advertising contracts together with
limitation of the management fee to 20% of the advertising revenue starting from
the quarter ended June 30, 2006.
Liquidity and Working Capital
We had a working capital deficiency of $2,034,822 as of September 30, 2006
and $2,892,739 (restated) as of December 31, 2005. We had cash of $9,400 as of
September 30, 2006, compared to cash of $6,974 as of December 31, 2005. The
difference results primarily from the issuance of $150,000 of convertible
promissory notes and $5,000 promissory note during the nine month period ended
September 30, 2006.
Our operating activities provided $362,526 for the nine months ended
September 30, 2006 as compared to $685,020 used during the nine months ended
September 30, 2005.
Net cash flows used in investing activities was $1,385,757 for the nine
month period ended September 30, 2006 as compared to $756,672 used in investing
activities for the nine months ended September 30, 2005. These cash flows were
related to the deposit of RMB2,880,000 ($364,090) placed with SZ airport
according to the terms of the advertising contract.
Net cash flows provided by financing activities was $1,025,657 for the
nine month period ended September 30, 2006 as compared to $1,439,997 for the
nine months ended September 30, 2005.
During the nine months ended September 30, 2006, the Company has a net
loss of $3,101,148, has a working capital deficit of $2,034,822 and a
shareholders deficiency of $1,601,842. During the year ended December 31, 2005,
the Company has incurred net losses of $2,659,385 (restated) and has a working
capital deficiency of $2,892,739 (restated) and a shareholders deficiency of
$2,782,584 (restated). 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. There are no assurances that
the Company will be successful in this regard. The Company is in default on its
promissory notes and requires additional funds to maintain operations.
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
October 2006 was 41,950 shares. The closing price of our common stock in 2006
has ranged from $0.12 and $0.43 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 November 16, 2006, approximately 9,794,350 shares of our common
stock were reserved for issuance upon exercise or conversion of the following
securities: (i) 5,668,056 shares representing approximately 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); (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; (iv) 972,222 shares
representing 175% of the number of shares of common stock issuable upon full
conversion of the outstanding promissory notes dated June 21, 2006 (without
regard to limitation upon conversion); and (v) 555,556 shares representing the
shares of common stock issuable upon exercise in full of the warrants issued to
the holders of the convertible promissory notes dated June 21, 2006.
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 variable conversion price as a discount to market price.
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.
Due to an event of default, our outstanding November 2005 convertible notes are
presently convertible into common stock at a variable per share conversion price
of 80% of the volume weighted average price of our common shares for the five
trading days prior to a conversion date, 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 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 than our market price. 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:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the NASDAQ automated quotation system; or
o 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
There is substantial doubt about our ability to continue as a going concern.
During the nine months ended September 30, 2006, the Company has a working
capital deficit of $2,034,822 and a shareholders deficiency of $1,601,842.
During 2005, we incurred recurring operating losses of $2,659,385 (restated) and
has a working capital deficiency of $2,892,739 (restated) and a shareholders
deficiency of $2,782,584 (restated) at December 31, 2005. These conditions raise
substantial doubt about our ability to continue as a going concern. Management's
plans in this regard are to raise equity financing as required. There are no
assurances that we will be successful in this regard. We are in default on our
promissory notes and require additional funds to maintain operations.
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.
We recognize our revenues in Chinese dollars and as such our results are subject
to 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.
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 our 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 we 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 us to allow us 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.
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 quarterly filing may not be accurate.
Any and all projections and estimates contained in this quarterly filing
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.
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 November 16, 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.
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 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 June 21, 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.
Exhibit No. Description
- ----------- ------------------------------------------------------------------
3.1 Articles of Incorporation (1)
3.2 Bylaws (Amended) (2)
4.1 Specimen Stock Certificate (1)
10.1 Agreement dated May 18, 2005 between Westcap Securities, Inc. and
China Media1 Corporation (3)
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.(4)
10.3 Guangzhou New Baiyun Airport Bus Waiting Area Electronic Light Box
Advertising Contract dated as of April 5, 2005 between Guangzhou
Chuangrun Advertising Company Limited and Chi Shang Ling Yue
Advertising Company Limited. (5)
10.4 Guangzhou New Baiyun Airport Electronic Light Box Advertising
Contract dated as of May 26, 2005 between Guangzhou Chuangrun
Advertising Company Limited and Chi Shang Ling Yue Advertising
Company Limited. (5)
10.5 Agreement by and Between Chuangrun Media Limited and Actionview
Far East Limited. (5)
10.6 Subscription Agreement dated November 1, 2005 by and among China
Media1 Corp. and the subscribers set forth therein (4)
10.7 Form of Convertible Promissory Note dated November 1, 2005 (4)
10.8 Form of Series A Warrant (4)
10.9 Form of Series B Warrant (4)
10.10 Agreement dated March 11, 2005 between The Guangzhou Baiyan
International Airport Company Limited and The Guangzhou Chuagrun
Media Company Limited (6)
10.11 Agreement dated November 28, 2004 between The Guangzhou Baiyan
International Airport Company Limited and The Guangzhou Chuagrun
Media Company Limited (6)
10.12 Agreement dated November 28, 2004 between The Guangzhou MRT (Mass
Transit Railway) Company of Guangdong, the People's Republic of
China and The Guangzhou Chuagrun Media Company Limited (6)
10.13 Agreement dated January 16, 2006 between Guangzhou Titan Media
Company Ltd. and Shenzhen City Airport Advertising Company
Limited. (7)
10.14 Agreement dated January 2006 between China Media1 Corp., Guangzhou
Titan Media Company Ltd. (7)
10.15 Operating Agreement dated February 28, 2006 by and among Guangzhou
Titan Media Company Limited, Guangzhou Chuangrun Advertising Co.
Ltd. and China Media1 Corp. (7)
10.16 Subscription Agreement dated as of June 21, 2006 by and between
China Media1 Corp. and the subscriber set forth therein. (8)
10.17 Form of Convertible Promissory Note dated June 21, 2006. (8)
10.18 Form of Series A Warrant dated June 21, 2006. (8)
31.1 Certification of Hanxiong Cai, Chief Executive Officer and
Chairman of the Board of Directors of China Media1 Corp., pursuant
to 18 U.S.C. Sec.1350, as adopted pursuant to Sec.302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Danny C. Hon, Chief Financial Officer of China
Media1 Corp., pursuant to 18 U.S.C. Sec.1350, as adopted pursuant
to Sec.302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Hanxiong Cai, Chief Executive Officer and
Chairman of the Board of Directors of China Media1 Corp., pursuant
to 18 U.S.C. Sec.1350, as adopted pursuant to Sec.906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Danny C. Hon, Chief Financial Officer of China
Media1 Corp., pursuant to 18 U.S.C. Sec.1350, as adopted pursuant
to Sec.906 of the Sarbanes-Oxley Act of 2002.
- ----------
(1) 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.
(2) Filed as an Exhibit to the Company's Form 10-QSB for the Quarterly period
ended March 31, 2003.
(3) Filed as an Exhibit to the Company's Form 10-QSB for the Quarterly period
ended March 31, 2005.
(4) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
November 1, 2005.
(5) Filed as an Exhibit to the Company's Current Report on Form 8-K dated June
17, 2005.
(6) Filed as an Exhibit to the Company's Registration Statement on Form SB-2
(file no. 333-130392) on December 16, 2005 and declared effective on
January 5, 2005.
(7) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
January 16, 2006.
(8) Filed as an Exhibit to the Company's Current Report on Form 8-K dated June
21, 2006.
- ----------
*Previously Filed
**Filed Herewith
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.
CHINA MEDIA1 CORP.
Dated November 17, 2006
By /s/ Hanxiong Cai
--------------------------------------------
Hanxiong Cai
Chief Executive Officer and
Chairman of the Board of Directors
(Principal executive officer)
By /s/ Danny C. Hon
--------------------------------------------
Danny C. Hon
Chief Financial Officer
(Principal financial and accounting officer)