NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2019
NOTE 1. Description of Business
China Media Inc. (“we”, “our”, the “Company”, “China Media”), formerly Protecwerx Inc., was incorporated in the State of Nevada on October 16, 2007.
The Company does not conduct any substantive operations of its own; rather, it conducts its primary business operations through Vallant Pictures Entertainment Co., Ltd., its wholly owned subsidiary incorporated under the laws of the British Virgin Islands, which in turn, conducts its business through Xi’an TV Media Co. Ltd. (“Xi’An TV”). Effective control over Xi’An TV was transferred to the Company through the series of contractual arrangements without transferring legal ownership in Xi’An TV. As a result of these contractual arrangements, the Company maintained the ability to approve decisions made by Xi’An TV and was entitled to substantially all of the economic benefits of Xi’An TV.
Xi’An TV was incorporated in Xi’An, Shaan’xi Province, People’s Republic of China (“PRC”) and is in the business of investing, producing and developing film and television programming for the Chinese market.
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited interim consolidated financial statements of China Media Inc. have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual financial statements for the year ended June 30, 2019. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the year ended June 30, 2019 have been omitted.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, including estimates of ultimate revenues and ultimate costs of film and television products, the amount of receivables that ultimately will be collected, the potential outcome of future tax consequences of events that have been recognized in the Company’s financial statements and loss contingencies. Actual results could differ from those estimates. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or results of operations will be affected. Estimates are made based on past experience and other assumptions that management believes are reasonable under the circumstances, and management evaluates these estimates on an ongoing basis.
Recently Adopted Accounting Pronouncement
On July 1, 2019, the Company adopted Accounting Standards Update (ASU) 2016-02, Leases (as amended by ASU 2018-01, 2018-10, 2018-11, 2018-20, and 2019-01, collectively ASC Topic 842), using the modified retrospective method. The Company elected the transition method which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this transition method, previously reported financial information has not been restated to reflect the application of the new standard to the comparative periods presented. The Company elected the package of practical expedients permitted under the transition guidance within ASC 842, which among other things, allows the Company to carry forward certain historical conclusions reached under ASC Topic 840 regarding lease identification, classification, and the accounting treatment of initial direct costs. The Company elected not to record assets and
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liabilities on its consolidated balance sheet for new or existing lease arrangements with terms of 12 months or less. The Company recognizes lease expenses for such lease on a straight-line basis over the lease term.
The primary impact of applying ASC Topic 842 is the initial recognition of $92,000 of lease liability and $62,000 of right-of-use asset on the Company’s consolidated balance sheet as of July 1, 2019, for lease classified as operating leases under ASC Topic 840, as well as enhanced disclosure of the Company’s leasing arrangement. There is no cumulative effect to retained earnings or other components of equity recognized as of July 1, 2019 and the adoption of this standard did not impact the consolidated statement of operations and comprehensive loss or consolidated statement of cash flows of the Company. The Company does not have finance lease arrangements as of September 30, 2019. See Note 4 for further discussion.
Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has suffered recurring losses from operations and has a working capital deficit as of September 30, 2019. The Company also generated negative operating cash flows and incurred net loss for the three months ended September 30, 2019.
These matters, among others, raise substantial doubt about our ability to continue as a going concern. While the Company's cash position may not be significant enough to support the Company's daily operations, management intends to raise additional funds by way of cooperation with other film and television producers, obtaining loans from shareholders and borrowing from Dean Li, the President and Chief Executive Officer of the Company, to fund operations. The consolidated financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern.
NOTE 3. Related Party Transactions
From time to time, the Company borrowed loans from Dean, Li, the President and Chief Executive Officer of the Company. As of September 30, 2019 and June 30, 2019, the Company owed Dean Li $717,282 and $717,974, respectively. The loans borrowed from Mr. Dean Li are non-secured, free of interest with no specified maturity date. The imputed interests are assessed as an expense to the business operation and an addition to the paid-in-capital and calculated based on annual interest rate in the range of 3.75%-4.12% with reference to one-year loan.
The Company has a five-year lease agreement with Shaanxi Gede Trading Co., Ltd. (“Gede”) to lease its main office for a monthly rent of RMB11,167 (approximately $1,637) with a term of five years and expiration date on December 31, 2022. Gede’s Legal Representative and Chief Executive Officer is a major shareholder of the Company. As of September 30, 2019, the Company had right-of-use asset of $56,152 and lease liability of $89,016 of this lease. The Company also owed Gede rent payable of $42,324 for another lease that ended on December 31, 2017. As of June 30, 2019, total rent payable owed to Gede was $73,270. See Note 4 for more details.
On December 11, 2018, the Company provided a guarantee for Shaanxi Hengtai Mingji Trading Co., Ltd.’s (“Hengtai”) two-year loan borrowed from Chang’An Bank in the amount of RMB 210,532,513 (approximately $30,616,700 when borrowed). The loan was pledged by Hengtai’s receivable from Shaanxi Senzhiyuan Industrial Co., Ltd. (“Senzhiyuan”), a related party of the Company. See Note 5 for more details.
NOTE 4. Operating Lease
On January 1, 2018, the Company entered into a lease agreement with Shaanxi Gede Trading Co., Ltd. (“Gede”), a related party, to lease its main office for a monthly rent of RMB11,167 (approximately $1,637) with a term of five years.
Balance sheet information related to the operating lease is as follows:
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For the three months ended September 30, 2019, the Company had operating lease cost of $4,776 and the reduction in operating lease right-of-use asset – related party was $4,034. No cash was paid for amount included in the measurement of operating lease liability – related party during the three months ended September 30, 2019.
The weighted-average remaining lease term and the weighted-average discount rate of our lease are as follows:
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September 30,
2019
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Weighted-average remaining lease term
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3.25 years
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Weighted-average discount rate
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4.85%
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The following table summarizes the maturity of our operating lease liability – related party as of September 30, 2019:
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For The Years Ended June 30,
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2020 (remaining)
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$
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46,948
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2021
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18,779
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2022
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18,779
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2023 and thereafter
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9,390
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Total lease payment
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93,896
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Less imputed interest
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(4,880)
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Total lease liability – related party
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$
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89,016
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NOTE 5. Commitments and Contingencies
On December 11, 2018, the Company entered into a guarantee agreement to provide guarantee for Shaanxi Hengtai Mingji Trading Co., Ltd.’s (“Hengtai”) two-year loan borrowed from Chang’An Bank in the amount of RMB 210,532,513 (approximately $30,616,700 when borrowed). The guarantee period is two years starting from the date the payment is due. The loan is pledged by Hengtai’s receivable from Shaanxi Senzhiyuan Industrial Co., Ltd. (“Senzhiyuan”) in the amount of RMB 226,000,000 and 50 million equity interest in Hengtai owned by Hengtai’s two shareholders. The controlling shareholder of Senzhiyuan is also a principal shareholder of the Company.
The information of lease commitment is provided in Note 4.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including "could", "may", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential" and the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report.
Results of Operations
Comparison of the three months ended September 30, 2019 and 2018:
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For Three Months Ended
September 30,
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2019
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2018
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Operating expense
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Selling, general and administrative expense
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$
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57,683
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$
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59,208
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Total operating expense
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57,683
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59,208
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Other expense:
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Interest expense
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6,848
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6,848
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Total other expense
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6,848
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6,848
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Net loss before income taxes
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(64,531)
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(66,056)
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Income taxes
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-
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-
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Net loss
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$
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(64,531)
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$
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(66,056)
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Revenue and Cost
We had no sales and cost for the three months ended September 30, 2019 and 2018.
Operating expenses
During the three months ended September 30, 2019, our total operating expense was $57,683, a decrease of $1,525 or 2.6% as compared to $59,208 for the three months ended September 30, 2018. The main decrease was due to decrease in payroll expense.
Net loss
For the three months ended September 30, 2019 we incurred a net loss of $64,531, as compared to a net loss of $66,056 for the three months ended September 30, 2018, a slight decrease of $1,525 or 2.3%. This decrease was primarily due to the decrease in operating expense.
Liquidity and Capital Resources
The following table sets forth a summary of our cash flows for the periods indicated:
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For the Three Months Ended
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September 30,
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2019
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2018
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Net cash used in operating activities
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$
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(27,547)
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$
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(32,660)
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Net cash provided by financing activities
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26,971
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27,487
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Effect of exchange rate changes on cash and cash equivalents
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(89)
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(210)
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NET CHANGE IN CASH AND CASH EQUIVALENTS
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(665)
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(5,383)
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
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2,603
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7,179
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CASH AND CASH EQUIVALENTS AT END OF PERIOD
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$
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1,938
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$
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1,796
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As of September 30, 2019, we had cash of $1,938 in our bank accounts and a working capital deficit of $1,113,612.
During the three months ended September 30, 2019, we used net cash of $27,547 in operating activities, compared to net cash used of 32,660 in operating activities during the same period of 2018. The decrease of $5,113 for net cash used in operating activities was mainly due to the amortization of operating lease right-of-use asset – related party in this period.
During the three months ended September 30, 2019, we received net cash of $26,971 from financing activities, compared to net cash received of $27,487 in financing activity during the same period of 2018. The decrease of $516 in net cash provided by financing activity was mainly due to the decrease in loan from related party.
Our cash level decreased by $665 during the three months ended September 30, 2019, compared to a decrease of $5,383 in the same period of 2018. The changes in cash were a result of the factors described above.
We anticipate that we will meet our ongoing cash requirements through equity or debt financing. We plan to cooperate with various individuals and institutions to acquire the financing required to produce and distribute our products and anticipate this will continue until we accrue sufficient capital reserves to finance all of our productions independently.
We intend to meet our cash requirements for the next 12 months through a combination of debt financing and equity financing and partnerships with finance groups on television and movie projects.
Critical Accounting Policies and Estimates
Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 201910-K for disclosures regarding our critical accounting policies and estimates. The interim financial statements follow the same accounting policies and methods of computations as those for the year ended June 30, 2019.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Inflation
The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.
Audit Committee
The functions of the audit committee are currently carried out by our Board of Directors, who has determined that we do not have an audit committee financial expert on our Board of Directors to carry out the duties of the audit committee.
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The Board of Directors has determined that the cost of hiring a financial expert to act as a director and to be a member of the audit committee or otherwise perform audit committee functions outweighs the benefits of having a financial expert on the audit committee.