XOTC:CMDI Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

CMDI Fair Value Estimate
Premium
CMDI Consider Buying
Premium
CMDI Consider Selling
Premium
CMDI Fair Value Uncertainty
Premium
CMDI Economic Moat
Premium
CMDI Stewardship
Premium
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
 
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to ________________
 
Commission File Number: 000-53027
 
CHINA NEW MEDIA CORP.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
33-0944402
(State or Other jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)

Dalian Vastitude Media Group
8th Floor, Golden Name Commercial Tower
68 Renmin Road, Zhongshan District
Dalian, P.R. China
 
116001
(Address of Principal Executive Offices)
(Zip Code)
 
 
86-0411-8272-8168
(Registrant’s Telephone Number, Including Area Code)
 
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
 
    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o
 
    Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
 Yes x        No o
 
    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer o           Accelerated filer o           Non-accelerated filer o            Smaller reporting company x
 
    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No x
 
    As of May 15, 2012, the Company had outstanding 27,590,001 shares of common stock, $0.0001 par value.
 
 
 

 
 
INDEX

 
 
  Page  
PART I    FINANCIAL INFORMATION
3  
     
Item 1.  Condensed Consolidated Financial Statements.(Unaudited) 3  
     
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations. 27  
     
Item 3.  Quantitative and Qualitative Disclosures About Market Risk. 37  
     
Item 4.  Controls and Procedures. 37  
     
PART II  OTHER INFORMATION
38  
     
Item 1. Legal Proceedings 38  
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38  
     
Item 6.  Exhibits 38  
 
 

 
1
 
 
 
 
 

 
INTRODUCTION
 
 
Use of Certain Defined Terms
 
In this Form 10-Q, unless indicated otherwise, references to:

●  
“We,” “us,” “our” and the “Company” refers to China New Media Corp. and its subsidiaries.
 
●  
“Securities Act” refers to the Securities Act of 1933, as amended, and “Exchange Act” refer to the Securities Exchange Act of 1934, as amended;
 
●  
“China” and “PRC” refer to the People's Republic of China;
 
●  
“RMB” refers to Renminbi, the legal currency of China; and
 
●  
“U.S. dollar,” “$” and “US$” refer to the legal currency of the United States. For all U.S. dollar amounts reported, the dollar amount has been calculated on the basis that $1 = RMB 6.5486 for March 31, 2011, and $1 = RMB 6.29597 for March 31, 2012, which were determined based on the currency conversion rate at the end of each respective period. The conversion rates of $1 = RMB 6.66893 is used for the condensed consolidated statement of income and other comprehensive income and consolidated statement of cash flows for the nine months ended March 31, 2011, and $1= RMB6.36054 is used for the condensed consolidated statement of income and other comprehensive income and consolidated statement of cash flows for the nine months ended March 31, 2012; both of which were based on the average currency conversion rate for each respective quarter.
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Information contained in this report includes some statements that are not purely historical fact and that are “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are contained principally in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.
 
The forward-looking statements herein represent our expectations, beliefs, plans, intentions or strategies concerning future events, including, but not limited to: our future financial performance; the continuation of historical trends; the sufficiency of our cash balances for future needs; our future operations; our sales and revenue levels and gross margins, costs and expenses; new product introduction, entry and expansion into new markets and utilization of new sales channels and sales agents; improvements in, and the relative quality of, our technologies and the ability of our competitors to copy such technologies; our competitive technological advantages over our competitors; brand image, customer loyalty and expanding our client base; the sufficiency of our resources in funding our operations; and our liquidity and capital needs.
 
Our forward-looking statements are based on our current expectations and beliefs concerning future developments, and there can be no assurance that any projections or other expectations included in any forward-looking statements will come to pass.  Moreover, our forward-looking statements are subject to various known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. 
 
Except as required by applicable laws, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
 
2
 
 
 
 

 
PART I
FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS.
 CHINA NEW MEDIA CORP. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (IN US DOLLARS)
 (UNAUDITED)
             
   
As of March 31
   
As of June 30
 
   
2012
   
2011
 
             
 ASSETS
           
             
 Current assets
           
 Cash and cash equivalents
  $ 1,127,958     $ 1,808,880  
 Accounts receivable, net
    4,466,874       5,395,698  
 Advance to suppliers
    342,977       619,582  
 Prepaid expenses
    47,316       189,759  
 Loans receivable
    2,548,138       1,761,139  
 Other current assets
    753,150       243,159  
 Deferred tax assets
    185,476       129,443  
 Total current assets
    9,471,889       10,147,660  
                 
 Property, equipment and construction in progress, net
    22,961,285       18,867,352  
                 
 Other assets
               
 Security deposits
    1,878,639       1,955,343  
 Equity investment
    83,323       -  
 Billboards use right
    7,455,531       4,766,060  
 Total other assets
    9,417,493       6,721,403  
                 
 Total Assets
  $ 41,850,667     $ 35,736,415  
                 
 LIABILITIES AND EQUITY
               
                 
 Current liabilities
               
 Short term loans
  $ 11,562,952     $ 11,603,746  
 Current portion of long term loan
    476,495       464,150  
 Capital lease obligation - current portion
    585,945       -  
 Accounts payable
    2,652,747       47,067  
 Other payables
    1,818,067       1,121,947  
 Accrued expenses
    134,651       491,997  
 Deferred revenues
    1,428,017       1,618,548  
 Taxes payable
    1,215,075       1,055,620  
 Short term borrowing - third party
    317,664       -  
 Due to related parties
    255,094       158,297  
 Total current liabilities
    20,446,707       16,561,372  
                 
 Capital leases obligation - non-current portion
    519,022       -  
                 
 Total  Liabilities
    20,965,729       16,561,372  
                 
 Commitments and contingencies
               
                 
 Equity
               
Series A Preferred Stock, $0.0001 par value, 20,000,000 shares authorized,
         
  1,000,000 shares issued and outstanding
    100       100  
Common stock, $0.0001 Par value; 80,000,000 shares authorized;
         
  27,590,701 shares issued and outstanding
    2,759       2,759  
 Additional paid-in-capital
    6,820,820       6,820,820  
 Accumulated other comprehensive income
    1,042,887       636,300  
 Retained earnings
    11,764,973       10,724,103  
 Total China New Media Corp. equity
    19,631,539       18,184,082  
 Noncontrolling interest
    1,253,399       990,961  
 Total equity
    20,884,938       19,175,043  
                 
 Total Liabilities and Equity
  $ 41,850,667     $ 35,736,415  
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
3
 
 

 
 
 CHINA NEW MEDIA CORP. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
 (IN US DOLLARS)
 (UNAUDITED)
 
                         
   
For the nine months ended March 31,
   
For the three months ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
                         
                         
 Revenues
  $ 13,677,360     $ 14,571,264     $ 4,071,427     $ 5,402,726  
                                 
 Cost of revenue
    (7,188,490 )     (6,304,608 )     (2,783,255 )     (2,342,570 )
                                 
 Gross profit
    6,488,870       8,266,656       1,288,172       3,060,156  
                                 
 Selling, general and administrative expenses
    (3,874,595 )     (2,738,538 )     (1,415,572 )     (1,046,951 )
                                 
 Income (loss) from operations
    2,614,275       5,528,118       (127,400 )     2,013,205  
                                 
 Other income (expenses):
                               
 Interest income
    4,442       3,947       1,551       916  
 Interest expense
    (774,245 )     (491,507 )     (305,100 )     (175,950 )
 Loss from equity investment
    (11,855 )     -       (3,954 )     -  
 Other income
    -       166,082       -       48,545  
 Other expenses
    (23,099 )     (15,526 )     (1,851 )     (102 )
                                 
   Total Other income (expenses)
    (804,757 )     (337,004 )     (309,354 )     (126,592 )
                                 
 Income (loss) before income taxes
    1,809,518       5,191,114       (436,754 )     1,886,613  
                                 
 Income tax provision (benefit)
                               
   Current
    589,993       1,409,685       23,558       511,169  
   Deferred
    (55,027 )     (46,504 )     (98,822 )     (23,300 )
  Total income tax provision (benefit)
    534,966       1,363,181       (75,264 )     487,869  
                                 
 Net income (loss)
    1,274,552       3,827,933       (361,490 )     1,398,744  
                                 
 Less: net income attribute to the noncontrolling interest
    233,684       94,452       80,737       7,881  
                                 
 Net income (loss) attributable to China New Media Corp.
  $ 1,040,868     $ 3,733,481     $ (442,227 )   $ 1,390,863  
                                 
 Net income (loss)
    1,274,552       3,827,933       (361,490 )     1,398,744  
                                 
 Other comprehensive income
                               
 Foreign currency translation adjustments
    435,340       882,032       17,623       601,418  
                                 
 Comprehensive income (loss)
    1,709,892       4,709,965       (343,867 )     2,000,162  
                                 
 Less: comprehensive income attribute to the noncontrolling interest
    262,437       616,469       82,721       504,311  
                                 
 Comprehensive income (loss) attributable to China New Media Corp.
  $ 1,447,455     $ 4,093,496     $ (426,588 )   $ 1,495,851  
                                 
 Earnings (loss) per share
                               
 Basic
  $ 0.04     $ 0.14     $ (0.02 )   $ 0.05  
 Diluted
  $ 0.04     $ 0.13     $ (0.02 )   $ 0.05  
 Weighted average number of common shares
                               
 Basic
    27,550,701       27,550,701       27,550,701       27,550,701  
 Diluted
    27,550,701       28,196,904       27,550,701       27,550,701  
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
4
 
 

 
 CHINA NEW MEDIA CORP. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN US DOLLARS)
 (UNAUDITED)
 
             
   
For the nine months ended March 31,
 
   
2012
   
2011
 
             
 CASH FLOWS FROM OPERATING ACTIVITIES:
           
 Net income
  $ 1,274,552     $ 3,827,933  
 Adjustments to reconcile net income to net cash
               
 provided by operating activities:
               
 Depreciation and amortization
    3,498,270       1,955,181  
 Amortization of stock based compensation expense
    22,871       -  
 Loss from equity investment
    11,855       -  
 Provision for doubful accounts
    207,142       -  
 Deferred tax benefit
    (52,056 )     (46,504 )
 Changes in operating assets and liabilities
               
 Accounts receivable
    854,311       (2,794,405 )
 Other current assets
    (600,660 )     (2,261,688 )
 Security deposit
    127,405       17,991  
 Advance to suppliers
    290,110       959,485  
 Accounts payable
    2,885,753       428,261  
 Other payables
    505,975       679,643  
 Accrued expenses
    (378,169 )     153,697  
 Deferred revenues
    (231,210 )     575,784  
 Taxes payable
    130,044       1,080,481  
                 
             Net cash provided by operating activities
    8,546,193       4,575,859  
                 
 CASH FLOWS FROM INVESTING ACTIVITIES:
               
 Loan to third party
    (732,643 )     -  
 Acquisition of billboards use right
    (4,504,460 )     (1,566,756 )
 Purchase of property and equipment
    (3,980,837 )     (4,798,015 )
                 
             Net cash used in investing activities
    (9,217,940 )     (6,364,771 )
                 
 CASH FLOWS FROM FINANCING ACTIVITIES:
               
 Net proceeds from capital contributions
    -       479,837  
 Net proceeds from short-term bank loans
    754,653       1,799,390  
 Payment of capital leases obligations
    (105,878 )     -  
 Repaymnet of short-term bank loans
    (1,100,536 )     -  
 Repayment of related party loans
    87,698       (321,034 )
 Proceeds from outside party
    314,439       -  
 Repayments of long-term bank loans
    -       (299,898 )
                 
             Net cash (used in) provided by financing activities
    (49,624 )     1,658,295  
                 
 EFFECT OF EXCHANGE RATE CHANGE ON
               
 CASH AND CASH EQUIVALENTS
    40,449       50,272  
                 
 NET DECREASE IN CASH AND CASH EQUIVALENTS
    (680,922 )     (80,345 )
                 
 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    1,808,880       1,672,017  
                 
 CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 1,127,958     $ 1,591,672  
                 
 SUPPLEMENTAL CASH FLOW DISCLOSURE
               
    Income taxes paid
  $ 446,077     $ 692,274  
    Interest paid
  $ 724,034     $ 491,507  
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
5
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

China New Media Corp., (“the Company”), formerly known as Golden Key International Inc., is a corporation organized under the laws of the State of Delaware in 1999.

The Company, along with its subsidiaries and VIEs, is engaging in sales, construction and operations of outdoor advertising displays and other alternative media business.

On December 8, 2009, Golden Key International Inc. acquired all of the outstanding capital stock of HongKong Fortune-Rich Investment Co., Ltd., a Hong Kong corporation (“Fortune-Rich ”), through China New Media Corp., a Delaware corporation (the “Merger Sub”) wholly owned by the Company.  Fortune-Rich is a holding company whose only asset, held through a subsidiary, is 100% of the registered capital of Dalian Guo-Heng Management & Consultation Co., Ltd. (“Dalian Guo-Heng”), a limited liability company organized under the laws of the People’s Republic of China. Substantially all of the Fortune-Rich’s operations are conducted in China though Dalian Guo-Heng, and through contractual arrangements with several of Dalian Guo-Heng’s consolidated affiliated entities in China, including Dalian Vastitude Media Group Co., Ltd. (“V-Media”) and its subsidiaries. V-Media is an out-door advertising company headquartered in Dalian, the commercial center of Northeastern China.  As a result of these contractual arrangements, which obligate the Company to absorb a majority of the risk of loss from V-Media’s activities and entitle it to receive a majority of its residual returns. In addition, V-Media Group 's shareholders have pledged their equity interest in V-Media Group to Dalian Guo-Heng, irrevocably granted Dalian Guo-Heng an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in V-Media Group and agreed to entrust all the rights to exercise their voting power to the person(s) appointed by Dalian Guo-Heng. Through these contractual arrangements, the Company and Dalian Guo-Heng hold all the variable interests of V-Media Group, and the Company and Dalian Guo-Heng have been determined to be the most closely associated with V-Media Group. Therefore, the Company is the primary beneficiary of V-Media Group. Based on these contractual arrangements, the Company believes that V-Media Group should be considered as a Variable Interest Entity (“VIE”)  under Accounting Standards Codification (“ASC”) 810 (“Consolidation”), because the equity investors in V-Media Group do not have the characteristics of a controlling financial interest and the Company through Dalian Guo-Heng is the primary beneficiary of V-Media Group.
 
In connection with the acquisition, Merger Sub issued 10 shares of the common stock of the Merger Sub which constituted the 10% ownership interest in the Merger Sub and 1,000,000 shares of Series A Preferred Stock of the Company to the shareholders of Fortune-Rich, in exchange for all the shares of the capital stock of Fortune-Rich (the “Share Exchange” or “Merger”). The 10 shares of the common stock of the Merger Sub were converted into approximately 26,398,634 shares of the common stock of the Company so that upon completion of the Merger, the shareholders of Fortune-Rich own approximately 96 % of the common stock of the Company.
 
 
6
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (Continued)

As a result of the above-mentioned transactions, the shareholders of Fortune-Rich and persons affiliated with V-Media own securities that represent 96% of the equity in the Company.
 
The acquisition was accounted for as a reverse merger under the purchase method of accounting since there was a change of control. Accordingly, Hong Kong Fortune-Rich Investment Co., Ltd. and its subsidiaries will be treated as the continuing entity for accounting purposes.

As part of the merger, the Company’s name was changed from “Golden Key International, Inc.” to “China New Media Corp.” to more effectively reflect our business and communicate our brand identity to customers.

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of China New Media Corp., its subsidiary, Fortune-Rich and its wholly-owned subsidiary Dalian Guo-Heng, as well as Dalian Guo-Heng’s variable interest entity, V-Media Group.
 
The noncontrolling interests represent the minority stockholders’ interest in V-Media Group’s majority owned subsidiaries.

All significant inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates
 
In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting years. Significant estimates, required by management, include the recoverability of long-lived assets and the valuation of outstanding warrants and allowance of doubtful accounts.  Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and demand deposits with a bank with an original maturity of less than three months. Since a majority of the bank accounts are located in PRC, those bank balances are uninsured.
 
 
7
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounts Receivable
 
Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible amounts, as needed.
 
The Company uses the aging method to estimate the allowance for anticipated uncollectible receivable balances. Under the aging method, bad debt percentages determined by management based on historical experience as well as current economic climate are applied to customers’ balances categorized by the number of months the underlying invoices have remained outstanding. The allowance is adjusted to the amount computed as a result of the aging method. If facts subsequently become available to indicate that the allowance provided requires an adjustment, then the adjustment will be classified as a change in estimate. There were $493,169 and $286,027 allowance for uncollectible amounts as of March 31, 2012 and June 30, 2011, respectively. Accounts are written off only after exhaustive collection efforts.

Advance to suppliers
 
The Company periodically makes advances to certain vendors for purchases of advertising materials and equipment and records those advances as advance to suppliers. Historically, the Company has not experienced any losses as a result of these advances.

Property, Equipment and Construction in Progress
 
Property and equipment are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to earnings as incurred while additions, renewals and betterments are capitalized. When the asset property and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property, plant and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:
 
 
 
Estimated Useful Life
 
Residual value
Building
15 years
  5 %
Improvement of the building
5 years
  0 %
Advertising equipment
4-15 years
  5 %
Transportation
7 years
  5 %
Office equipment and furniture
5 years
  5 %
 

 8
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
Construction in progress represents direct costs of construction or acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until it is completed and ready for intended use.
 
Assets held under capital leases are stated at the lower of fair market value or the present value of the minimum lease payments at the inception of the lease, and depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.
 
Impairment of long-lived assets
 
Long-lived assets, which include property, plant and equipment, billboard use right and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the assets. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. No impairment loss has been recorded for the three and nine months ended March 31, 2012 and 2011.
 
Deferred revenues
 
Deferred revenues represent cash received in advance from customers according to the contracts for advertising service fees, advertisement production and sponsorship fees. These advances are usually refundable to the customers if the Company is unable to deliver the advertising services. Deferred revenues are recognized as income when services are provided based on the terms of the contracts.

Revenue recognition
 
The Company recognizes revenues when advertisements are posted over respective contractual terms based on the schedules agreed with customers and collections are reasonably assured. Payments received in advance of services provided are recorded as deferred revenues.


9
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cost of revenues
 
Cost of advertising services consists primarily of media costs payable under exclusive advertising agreements, depreciation of advertising equipment and amortization of billboards use right, business taxes and surcharges and other direct operating costs. Media costs are expensed as incurred.

Foreign currency translation
 
The Company and Fortune-Rich use the United States dollar (“US Dollars”) for financial reporting purposes. The Company, Dalian Guo-Heng and Dalian Vastitute Group maintain their books and records in the currency of Renminbi (“RMB”), being the primary currency of the economic environment in which their operations are conducted.
 
For financial reporting purposes, RMB has been translated into United States dollars ("USD") as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income". Gains and losses resulting from foreign currency translations are included in accumulated other comprehensive income. There is no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.

Income Taxes
 
The Company recognized deferred tax assets and liabilities based upon the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, whenever necessary, against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Equity Method Investment
 
The Company uses the equity method to account for its investment with ownership interest between 20% and 50% because it has significant influence but not control. Under the equity method, the Company recognizes its initial investment at cost and subsequently recognizes in earnings its proportionate share of the income or loss of the investee.
 
10
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value of Financial Instruments

The Company adopted the provisions of ASC 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs other than quoted prices that are observable for the asset or liability in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
 
Level 3-Inputs are unobservable inputs which reflect managements’ own assumptions.

The carrying amounts of certain financial instruments, including accounts receivable, advances to suppliers, other receivable, accounts payable, taxes payable, other payables, accrued expenses, deferred revenue, short-term capital lease obligations and short-term borrowing approximate their fair value due the short-term nature of these items. The carrying amount of the Company’s long-term capital lease obligations approximates the fair value based on the Company's expected borrowing rate for financial instruments with similar remaining maturities and comparable risk in market.

Stock-Based Compensation

The Company measures compensation expense for its non-employee stock-based compensation under ASC 718, “Compensation- Stock Compensation”.  The fair value of the stock issued is used to measure the transaction, as this is more reliable than the fair value of the services received.  Fair value is measured as the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete.  The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital.




11
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings per Share

The Company computes earnings per share (“EPS’) in accordance with ASC 260, “Earnings per share.” ASC 260 requires companies with complex capital structures to present basic and diluted EPS.  Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period.  Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later.  Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

Concentrations of Business and Credit Risk

The Company maintains certain bank accounts in the PRC, which are not protected by FDIC insurance or other insurance.

The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC and the general state of the PRC’s economy.

The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. The Company’s operating results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Reclassification

Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported total assets, liabilities, stockholders' equity or net income.

Recent Accounting Pronouncements
 
The Company’s management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on the Company’s condensed consolidated financial position, results of operations, or cash flows.


12
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 

NOTE 3 - LOANS RECEIVABLE

Loans receivable consist of three loans to non-related parties. The Company loaned $0.79 million (RMB 5 million) to Rongbang New Energy Resources for one year from April 27, 2011 to April 26, 2012 at fixed interest rate of 10% per annum. Management expects to receive the full repayment by May 20, 2012.

The Company made two loans to Tianjun Trade Co.: (1) One-year term loan from June 10, 2011 to June 9, 2012 in the amount of $0.95 million (RMB 6 million) at a fixed interest rate of 10% per annum, and (2) Eleven-month term loan from January 1, 2012 to November 27, 2012 in the amount of $0.48 million (RMB 3 million) at a fixed interest rate of 10% per annum. Tianjun Trade Co. repaid $0.1 million as of March 31, 2012.

The Company made a non-interest bearing loan of $0.58million (RMB 3.66 million) to Dalian Qianbaihe Cloth Accessories Co., which was due on April 20, 2012. Qianbaihe Cloth Accessories Co. repaid $0.15 million as of March 31, 2012, the balance is expected to be received by May 20, 2012.

NOTE 4 - MAJOR SUPPLIERS
 
During the three months ended March 31, 2012, three major suppliers provided approximately 75% of the Company’s purchase of raw materials. For the three months ended March 31, 2011, one major supplier provided 36% of the Company’s purchase of raw materials.
 
During the nine months ended March 31, 2012, three major suppliers provided approximately 67% of the Company’s purchase of raw materials. For the nine months ended March 31, 2011, one major supplier provided 16% of the Company’s purchase of raw materials.

NOTE 5 - PROPERTY, EQUIPMENT AND CONSTRUCTION IN PROGRESS, NET

Property, equipment and construction in progress consist of the following:
 
   
March 31, 2012
   
June 30,2011
 
Advertising equipment
  $ 24,375,204     $ 20,950,906  
Office equipment and furniture
    771,884       518,763  
Office building and Improvement
    442,082       355,048  
Transportation
    1,449,089       1,338,611  
         Subtotal     27,038,259       23,163,328  
Less: Accumulated depreciation
    (8,019,035 )     (6,217,911 )
Construction in progress
    3,942,061       1,921,935  
                 
Total
  $ 22,961,285     $ 18,867,352  

 
13
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 
NOTE 5 - PROPERTY, EQUIPMENT AND CONSTRUCTION IN PROGRESS, NET (Continued
 
Depreciation expense was $586,361 and $428,454 for the three months ended March 31, 2012 and 2011, respectively, and totaled $1,636,179 and $1,178,254 for the nine months ended March 31, 2012 and 2011 respectively. Approximately $17.4 million of advertising equipment was pledged for short term loans as of March 31, 2012.

Construction in progress mainly consists of billboards and other outdoor advertising platforms.

Equipment held under capital leases had a net book value of $1,758,568 and $-0- at March 31, 2012 and June 30, 2011, respectively.

NOTE 6 - SECURITY DEPOSITS

Security deposits are mainly comprised of deposits made to third parties to guarantee the Company’s outstanding loans (see Note 10 and 11). As of March 31, 2012 and June 30, 2011, the Company has security deposit balances of $1,878,639 and $1,955,343, respectively, which will be returned when the respective loans are repaid.

NOTE 7 – EQUITY INVESTMENT
 
According to a contract signed on August 18, 2011, the Company obtained a 20% interest in Letian Net (“Letian”) after the entire consideration (RMB 600,000) was deposited to a designated bank account of the Company's subsidiary – Dalian Vastitude Network Technology Co., Ltd. as of December 31, 2011. Under the equity method of accounting a 20% loss in the equity of Letian of $3,954 and $11,855, respectively, was recognized for the three and nine months ended March 31, 2012. Letian is an online advertising platform in Dalian, the PRC.

   
As of March 31, 2012
Current assets
  $ 59,999  
Noncurrent assets
    -  
Current liabilities
  $ 24,583  
Noncurrent liabilities
    -  
         
   
For the nine months ended March 31, 2012
Revenue
    -  
Gross profit
    -  
Net income
  $ (59,274 )

14
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 8 - BILLBOARDS USE RIGHT
 
The Company makes advance payments for the right to construct advertising equipment and post advertisements in certain locations based on long-term contracts with local government authorities or other business entities. These payments are recorded as billboards use right and amortized on a straight-line basis over the contract terms.

The Company leases a billboard use right at Times Square in New York under non-cancellable operating leases. The Company recognizes expense on a straight-line basis over the term of the lease. The Company has entered into one-year lease agreements commencing March 1, 2012 and paid the first six months rent up front and is liable to pay the balance of $1.68 million in June 2012. As of March 31, 2012, there was no revenue generated from this billboard.

Amortization of billboards use right for the three months ended March 31, 2012 and 2011 was $934,655, and $277,701, respectively, and totaled $1,873,440 and $762,081 for the nine months ended March 31, 2012 and 2011, respectively.

The projected amortization expense as of March 31, 2012 attributed to future periods is as follows:
 
12 months ending March 31,
 
Expense
 
2013
  $ 3,417,182  
2014
    1,306,539  
2015
    952,475  
2016
    476,255  
2017
    320,047  
Thereafter
    983,033  
    $ 7,455,531  
         




15
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 

NOTE 9 - TAXES

a)  
Corporate Income Tax

Significant components of the income tax provision were as follows for the three months and nine months ended March 31, 2012 and 2011:
 
     
For the nine months ended March 31,
   
For the three months ended March 31,
 
     
2012
   
2011
   
2012
   
2011
 
Current tax provision
                       
 
Federal
  $ -     $ -     $ -     $ -  
 
State
    -       -       -       -  
 
Foreign
    589,993       1,409,685       23,558       511,169  
                                   
        589,993       1,409,685       23,558       511,169  
                                   
Deferred tax benefit,net of valuation allowance
                         
 
Federal
    -       -       -       -  
 
State
    -       -       -       -  
 
Foreign
    (55,027 )     (46,504 )     (98,822 )     (23,300 )
                                   
        (55,027 )     (46,504 )     (98,822 )     (23,300 )
                                   
Income tax provision
  $ 534,966     $ 1,363,181     $ (75,264 )   $ 487,869  
 
United States

The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.

China New Media Corp., a Delaware corporation, has incurred a net operating loss for federal income tax purposes for the year ended June 30, 2011. The Company had loss carry forwards for U.S. federal income tax purposes available for offset against future taxable U.S income expiring through 2030 of approximately $180,387 and $157,516 as of March 31, 2012 and June 30, 2011, respectively. Management believes that the realization of the benefits from these losses appears uncertain due to the Company's limited operating history in the United States. Accordingly, a full deferred tax asset valuation allowance has been provided against federal deferred tax assets and no deferred tax asset benefit has been recorded for US operation. The valuation allowance against federal deferred tax assets was $61,332 and $53,555 as of March 31, 2012 and June 30, 2011, respectively.




16
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 – TAXES (Continued)

Hong Kong

Fortune-Rich was incorporated in Hong Kong and has operations through its subsidiaries in the PRC, its only tax jurisdiction. Fortune-Rich did not earn any income that was derived in Hong Kong since incorporation and therefore was not subject to Hong Kong Profit tax. All Fortune-Rich and its subsidiaries’ income is generated in the PRC. Accordingly, its income tax provision is calculated based on the applicable tax rates and existing legislation, interpretations and practices in respect thereof.

PRC
Dalian Guo-heng and V-Media Group are governed by the Income Tax Law of the People’s Republic of China concerning the private-run enterprises, which are currently subject to tax at a statutory rate of 25% on net income reported after appropriated tax adjustments. Because of different tax jurisdictions’ restriction, the V-Media Group and its subsidiaries of Jiaotong, Shenyang, Wangluo, Tianjin, Beijing, Shanghai have loss carryovers that can only be used to offset their own future taxable income. The loss carry forward for those subsidiaries amounted to $734,372 and $375,992 as of March 31, 2012 and June 30, 2011, respectively.

The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of the deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience, expectation of future income, the carryforward periods available for tax reporting purposes, and other relevant factors. For the nine months ended March 31, 2012, management concluded that it was more likely than not those additional PRC deferred tax assets would be realized. This determination was based upon actual and projected future operating results. Accordingly, the Company recorded a deferred tax benefit of $55,027 and $46,504 for the nine months ended March 31, 2012 and 2011, respectively.

b) Business Tax

Dalian Guo-heng, Dalian Vastitude Media Group Co., Ltd. and its five subsidiaries are also subject to 5% business tax and related surcharges levied on advertising services in China, which are approximately 3% on our revenues from providing advertising services. Dalian V-Media’s another subsidiary is only subject to 3% business tax. Total business tax expense for the three months ended March 31, 2012 and 2011 was $182,750 and $262,417, respectively, and totaled $591,708 and $702,977 for the nine months ended March 31, 2012 and 2011, respectively.


17
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
NOTE 9 – TAXES (Continued)

c) Taxes payable consisted of the following:

   
March 31,
   
June 30,
 
   
2012
   
2011
 
Business tax payable
  $ 90,280     $ 115,973  
Corporate income tax payable
    945,893       773,286  
Other
    178,902       166,361  
                 
Total taxes payable
  $ 1,215,075     $ 1,055,620  

The Company recognizes interest and penalties accrued related to unrecognized tax benefits and penalties, if any, as income tax expense. There were no unrecognized tax benefits or penalties for the period ended March 31, 2012. The Company files income tax returns with U.S. Federal Government, as well as Delaware State and the Company files returns in foreign jurisdictions of Hong Kong and PRC China. With few exceptions, the Company is subject to U.S. federal and state income tax examinations by tax authorities for years on or after 2008.

The Company’s foreign subsidiaries and VIEs also file income tax returns with both the National Tax Bureau and the Local Tax Bureaus. The Company is subject to income tax examinations by these foreign tax authorities. The Company has passed all tax examinations by both National and Local tax authorities since the inception of the Company in 2000.

NOTE 10 - SHORT TERM LOANS

The short term loans include the following:

   
March 31,
2012
   
June 30,
2011
 
a) Loan payable to Harbin Bank
  $ 952,991     $ 928,300  
                 
b) Loans payable to Shanghai Pudong Development Bank
    2,541,308       2,475,466  
                 
c) Loan payable to Dalian Bank Xigang Branch
    1,588,318       1,547,166  
                 
d) Loan payable to Industrial and Commercial Bank of China
    285,897       -  
                 
e) Loan payable to Jinzhou Bank
    2,382,476       2,320,749  
                 
f) Loans payable to Industrial Bank
    -       1,083,016  
                 
g)Loans payable to Jilin Bank
    2,382,476       2,320,749  
                 
h)Loan payable to Dalian Bank Shenyang Branch
    952,991       928,300  
                 
i)Loan payable to Dalian Bank Shanghai Branch
    476,495       -  
                 
Total short term loans
  $ 11,562,952     $ 11,603,746  
 
 
18
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 - SHORT TERM LOANS (Continued)

a) Loan payable to Harbin Bank had an original one-year term from April 14, 2009 to April 13, 2010 at a fixed interest rate of 5.31% per year. The loan has been renewed for another year from May 9, 2011 to May 8, 2012 at a variable interest rate of 7.872% per year. This loan has been guaranteed by an unrelated company Union Chuangye Guaranty Company. The Company pledged a real estate property owned by the Company’s major Stockholder Ms. Ming Ma and part of its advertising equipment with the value of RMB 10.17 million (approximately $1.6 million). The Company is negotiating with the bank to renew the loan and expects to renew it by May 30, 2012. The bank has informally agreed to extend the maturity of the loan.
 
b) Loan payable to Shanghai Pudong Development bank consists of two loans. One is an original one-year term loan from November 10, 2008 to November 10, 2009 with the amount of RMB 6,000,000 (approximately $952 thousand) at a fixed interest rate of 7.99% per year. This loan has been renewed from November 22, 2011 to November 21, 2012 at a variable interest rate of 8.528% per year. The Company pledged a real estate property owned by the Company’s major Stockholder. The other loan is a one-year term loan from June 22, 2011 to June 15, 2012 in the amount of RMB 10,000,000 (approximately $1.59 million) at a variable interest rate of 8.528% per year. This loan has been guaranteed by an unrelated company, Union Chuangye Guaranty Company. The Company also pledged part of its advertising equipment with the value of RMB 20.4 million (approximately $3.2 million).

c) Loan payable to Dalian Bank Xigang Branch had an original one-year term from March 14, 2011 to March 11, 2012 at a variable interest rate of 5.56% at June 30, 2011. This loan has been repaid and a new loan has been borrowed with one year term from March 27, 2012 to March 26, 2013 at a variable interest rate of 9.184% per year. This loan has been guaranteed by an unrelated company, Dalian Huanbohai Development Credit Guaranty Company. The Company also pledged part of its advertising equipment with the value of RMB18.26 million (approximately $2.9 million).
 
d) Loan payable to Industrial and Commercial Bank of China is a one-year term loan from September 28, 2011 to August 21, 2012 at a fixed interest rate of 7.872% per year. The Company pledged a real estate property owned by the Company’s major Stockholder.
 
e) Loan payable to Jinzhou Bank was a one-year term loan from April 21, 2010 to April 20, 2011 at a fixed interest rate of 6.90% per year. The loan has been renewed for another year from May 3, 2011 to April 20, 2012 at a fixed interest rate of 8.20% per year. This loan has been guaranteed by the Company’s major Stockholders Mr. Guojun Wang and Ms. Ming Ma. The Company pledged part of its advertising equipment with the value of RMB17,000,000 (approximately $2.7 million). This loan has been repaid in April 2012.


19
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 10 - SHORT TERM LOANS (Continued)

f) Loan payable to Industrial Bank was a one-year term loan from July 20, 2010 to July 19, 2011 in the amount of RMB 7,000,000 (approximately $1.1 million) at a variable interest rate of 6.11% per year. This loan has been repaid on July 19, 2011.

g) Loan payable to Jilin Bank consists of two loans. One loan is a one-year term loan from May 6, 2011 to May 4, 2012 in the amount of RMB 5,000,000 (approximately $0.8 million) at a variable interest rate of 8.528% per year. The other loan is a one-year term loan from May 9, 2011 to May 8, 2012 in the amount of RMB 10,000,000 (approximately $1.6 million) at a variable interest rate of 8.528% per year. The two loans have been guaranteed by an unrelated company, Dalian Enterprise Credit Guaranty Co., Ltd. The Company also pledged part of its advertising equipment with the approximate value of RMB 43,408,300 (approximately $6.9 million). The Company is negotiating with the bank to renew the loans and expects to renew them by May 30, 2012. The bank has informally agreed to extend the maturity of the loans

h) Loan payable to Dalian Bank Shenyang Branch is a one-year term loan from June 10, 2011 to June 8, 2012 at a variable interest rate of 8.856% per year. This loan has been guaranteed by Dalian Vastitude Media Group Co., Ltd.

i) Loan payable to Dalian Bank Shanghai Branch is an eleven-month term loan from December 29, 2011 to November 28, 2012 at a fixed interest rate of 9.184% per year. This loan has been guaranteed by Dalian Vastitude Media Group Co., Ltd.

NOTE 11 - LONG TERM LOANS

The Loan from Dalian Bank in the amount of RMB 8,000,000 has a three-year term from May 31, 2009 to June 25, 2012. In accordance with the loan agreement RMB 2,000,000 was repaid on June 23, 2010 and RMB 3,000,000 was repaid on June 23, 2011. The remaining RMB 3,000,000 (approximately $476,495) is due on June 25, 2012. This loan has a variable interest rate of 4.95% at March 31, 2012. This loan has been guaranteed by an unrelated company, Dalian Enterprise Credit Guaranty Company.

20

 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 12 – CAPITAL LEASES

On December 29, 2011, the V-Media Group’s subsidiary of Shenyang entered into a sale-leaseback agreement with ORIX finance leases (China) Co., Ltd. (“ORIX Leasing”) pursuant to which Shenyang sold to ORIX Leasing a LED panel with a book net value of $0.99 million (RMB6.26 million) for $0.6 million (RMB$3.77 million) and leased such equipment back. The lease payments for this equipment are paid on a monthly basis over a two-year period and consist of a fixed payment based upon a 24-month amortization of the purchase price plus an interest component that is based upon the rate announced from time to time by the People’s Bank of China for two-year loans. At March 31, 2012, the monthly rental fee under the agreement was $0.03 million (RMB 181,309), which included an interest component calculated at the rate of 6.65%. The Company has the right at the end of the lease term to repurchase all of the equipment for a nominal purchase price.

On December 29, 2011, the V-Media Group’s subsidiary of Beijing entered into a sale-leaseback agreement with ORIX finance leases (China) Co., Ltd. (“ORIX Leasing”) pursuant to which Beijing sold to ORIX Leasing a LED panel with a book net value of $0.85 million (RMB5.37 million) for $0.5 million (RMB$3.23 million) and leased such equipment back. The lease payments for this equipment are paid on a monthly basis over a two-year period and consist of a fixed payment based upon a 24-month amortization of the purchase price plus an interest component that is based upon the rate announced from time to time by the People’s Bank of China for two-year loans. At March 31, 2012, the monthly rental fee under the agreement was $0.02 million (RMB 155,410), which included an interest component calculated at the rate of 6.65%. The Company has the right at the end of the lease term to repurchase all of the equipment for a nominal purchase price.

Under the Company’s non-cancellable lease agreements, the minimum lease payments for the remaining lease terms are summarized as follows:

   
as of March 31, 2012
 
       
Total minimum lease payments
  $ 1,176,756  
Amounts representing interest
    (71,789 )
      1,104,967  
         
Less: current portion
    585,945  
         
Capital lease non-current portion
  $ 519,022  


21

 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
NOTE 13 - SHORT TERM BORROWING - THIRD PARTY

The Company entered a three months loan of $317,664 (RMB 2 million) from China Dalian International Cooperation (Group) Co., Ltd., which is due by May 31, 2012 with an interest expenses of $11,912 (RMB75,000).

NOTE 14 - RELATED PARTY TRANSACTIONS

Amounts due to related parties are as follows:
 
   
March 31,
2012
   
June 30,
2011
 
             
 Wang, Caiqin
  $ 119,124     $ 116,038  
 Ma, Ming
    69,537       -  
 Wang, Guojun
    66,433       42,259  
      Total
  $ 255,094     $ 158,297  

The above stockholders provide funds for the Company’s operations for advertising material and equipment purchase. These amounts due are generally unsecured, non-interest bearing and due upon demand.
 
NOTE 15 - STOCKHOLDERS’ EQUITY

Warrants
 
On November 23, 2009, prior to and in conjunction with the Merger, Fortune-Rich entered into a Securities Purchase Agreement (“SPA”) with an institutional investor and pursuant to the SPA, Fortune-Rich issued 10,415,000 shares of its common stock in exchange for $3,500,000 in cash. These shares of Fortune-Rich were convertible into 5,497,933 shares of the common stock of the Company upon completion of the Merger mentioned above. In addition, the investor was entitled to receive 6,249,000 warrants of Fortune-Rich, which were exchanged for 3,298,760 warrants of the Company upon the completion of the Merger with an exercise price of 0.95. These warrants are exercisable immediately for the same number of common shares of the Company.

The warrants, which were assumed by the Company upon the Merger, expire in four years. The warrants issued in connection with the Merger meet the conditions for equity classification pursuant to ASC 815, “Derivatives and Hedging”; therefore, these warrants were classified as equity and included in Additional Paid-in Capital.



22

 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 15 - STOCKHOLDERS’ EQUITY (Continued)

On March 7, 2011, the Company granted its independent director, Stephen Monticelli warrants to purchase up to 50,000 shares of the Company’s common stock at an exercise price of $1.80 per share. The Warrant Shares for the first year (up to an aggregate total of 16,666 shares) will be vested following a full year of service as a Non-Executive Director. The Warrant Shares for the second year (up to an aggregate total for years one and two of 33,333 shares) will be vested following a second full year of service as a Non-Executive Director. The Warrant Shares for years three through five (up to an aggregate total for all five years of 50,000 shares) will be vested following the third full year of service as a Non-Executive Director.

The fair value of warrants granted was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: expected life 4.19 years, expected volatility 197%, dividend yield 0.00%, risk free interest rate 0.83% and the exercise price of $1.8. The fair value of the warrants to the director was $18,988 at the grant date. There were no estimated forfeitures as the Company has a short history of issuing options. Related stock compensation expenses recognized were $11,872 and -0- for the nine months ended March 31, 2012 and 2011, respectively.

The following is a summary of the status of warrant activities for the nine months ended March 31, 2012:

   
Warrants
   
Weighted Average
   
Average Remaining
 
   
Outstanding
   
Exercise Price
   
Life in years
 
Outstanding, June 30, 2011
   
3,348,760
   
$
0.96
     
2.40
 
Granted
   
-
     
-
     
-
 
Forfeited
   
-
     
-
     
-
 
Exercised
   
-
     
-
     
-
 
Outstanding, March 31, 2012
   
3,348,760
   
$
0.96
     
1.68
 
Exercisable, March 31, 2012
   
3,315,426
   
$
0.95
     
1.65
 


NOTE 16 – EARNINGS PER SHARE

As of March 31, 2012, the Company had 1,000,000 shares of preferred stock issued and outstanding, that have not been included in diluted weighted average shares calculation because pursuant to the Merger agreement, no preferred shares can be converted to any securities as of March 31, 2012.


23
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
NOTE 16 – EARNINGS PER SHARE (Continued)

The Company’s outstanding warrants to acquire 3,298,760 shares of common stock at exercise price of $0.95, were not included in the diluted weighted average shares calculation, because they are anti-dilutive.
 
The warrants issued on March 7, 2011 to acquire 50,000 shares of common stock with an exercise price of $1.80, were not included in the diluted weighted average shares calculation, because they are anti-dilutive.

The following table sets forth earnings per share calculation for the nine months and three months ended March 31, 2012 and 2011:
 
   
For the nine months ended
   
For the three months ended
 
   
March 31,
   
March 31,
 
   
2012
   
2011
   
2012
   
2011
 
Basic earnings per share
                       
Net income (loss) attributable to China New Media Corp.
  $ 1,040,868     $ 3,733,481     $ (442,227 )   $ 1,390,863  
                                 
Weighted average number of common shares outstanding - Basic
    27,550,701       27,550,701       27,550,701       27,550,701  
                                 
Earnings (loss) per share-Basic
  $ 0.04     $ 0.14     $ (0.02 )   $ 0.05  
                                 
Diluted earnings per share
                               
Net income (loss) attributable to China New Media Corp.
  $ 1,040,868     $ 3,733,481     $ (442,227 )   $ 1,390,863  
                                 
Weighted average number of common shares outstanding -Basic
    27,550,701       27,550,701       27,550,701       27,550,701  
Effect of diluted securities-warrant
            646,203                  
Weighted average number of common shares outstanding - Diluted
    27,550,701       28,196,904       27,550,701       27,550,701  
                                 
Earnings (loss) per share-Diluted
  $ 0.04     $ 0.13     $ (0.02 )   $ 0.05  
 
NOTE 17 – SEGMENT INFORMATION

ASC 280, "Segment Reporting", establishes standards for reporting information about operating segments on a basis consistent with the Company's internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company's business segments.

 

 24
 
 

 
CHINA NEW MEDIA CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 

NOTE 17 – SEGMENT INFORMATION (Continued)

The Company is an outdoor advertising company in China which provides a full range of integrated outdoor advertising services including art design, advertising publishing, daily maintenance and technical upgrading. The Company's chief operating decision maker ("CODM") has been identified as the CEO who reviews the financial information of separate operating segments when making decisions about allocating resources and assessing performance of the group. Based on management's assessment, the Company has determined that its operating segments can be categorized by geographic locations as well as the format of the outdoor media platforms.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The CODM evaluates performance based on each reporting segment's revenues, cost of revenues, and gross profit. Selling expenses and G&A expenses are not separated reviewed to each segment. The CODM does not review balance sheet information to measure the performance of the reportable segments, nor is this part of the segment information regularly provided to the CODM.

Revenue and cost of revenues by segment were as follows:
 
   
For three months ended March 31, 2012
 
   
Dalian District
   
Shenyang District
   
Beijing District
   
Tianjin District
   
Shanghai District
   
Total
 
                                     
Revenue
  $ 2,824,527     $ 340,287     $ 710,369     $ 79,985     $ 116,259     $ 4,071,427  
Cost of Revenue
    (1,998,846 )     (55,641 )     (374,288 )     (51,161 )     (303,319 )     (2,783,255 )
Gross Profit
  $ 825,681     $ 284,646     $ 336,081     $ 28,824     $ (187,060 )   $ 1,288,172  
                                                 
   
For three months ended March 31, 2011
   
   
Dalian District
   
Shenyang District
   
Beijing District
   
Tianjin District
   
Shanghai District
   
Total
 
                                                 
Revenue
  $ 4,983,472     $ 110,840     $ -     $ 57,184     $ 251,230     $ 5,402,726  
Cost of Revenue
    (2,072,982 )     (69,497 )     (15,281 )     (40,579 )     (144,231 )     (2,342,570 )
Gross Profit
  $ 2,910,490     $ 41,343     $ (15,281 )   $ 16,605     $ 106,999     $ 3,060,156  
                                                 
                                                 
   
For nine months ended March 31, 2012
   
   
Dalian District
   
Shenyang District
   
Beijing District
   
Tianjin District
   
Shanghai District
   
Total
 
Revenue
                                               
Cost of Revenue
  $ 10,412,143     $ 1,069,635     $ 1,414,975     $ 331,801     $ 448,806     $ 13,677,360  
Gross Profit
    (5,052,249 )     (571,449 )     (710,802 )     (179,141 )     (674,849 )     (7,188,490 )
    $ 5,359,894     $ 498,186     $ 704,173     $ 152,660     $ (226,043 )   $ 6,488,870  
                                                 
   
For nine months ended March 31, 2011
   
   
Dalian District
   
Shenyang District
   
Beijing District
   
Tianjin District
   
Shanghai District
   
Total
 
Revenue
                                               
Cost of Revenue
  $ 13,122,311     $ 477,851     $ -     $ 124,139     $ 846,963     $ 14,571,264  
Gross Profit
    (5,427,579 )     (281,497 )     (45,788 )     (68,580 )     (481,164 )     (6,304,608 )
    $ 7,694,732     $ 196,354     $ (45,788 )   $ 55,559     $ 365,799     $ 8,266,656  
 
 
 
25
 
 

 
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Overview
 
We are one of the fastest growing outdoor advertising companies in China. Through our contractual arrangements with our affiliates in China, we own and operate one of the largest outdoor advertising networks in northeast China with a strong market presence in Dalian and Shenyang, the two most popular commercial cities in Northeast China. We provide a full range of integrated outdoor advertising services to our clients, including art design, advertising display, daily maintenance and technical upgrading. We believe our well-diversified outdoor advertising media network and our ability to provide advertising services on an integrated basis allow us to target and satisfy client needs at all levels. Founded in 2000, we have grown steadily and expanded our media network into cities of Shenyang, Tianjin, Beijing and Shanghai from our headquarters in Dalian.
 
We provide clients with advertising opportunities through our diverse media platforms, which include four major proprietary channels: (1) Street Fixture and Display Network, which includes bus and taxi shelters; (2) Mobile Advertisement displayed on mass city transit systems, which includes displays on city buses, metro-trains and train stations; (3) Billboard and Large LED displays along the city’s streets and highways; and (4) our proprietary and patented multi-media system, “City Navigator.”
 
We have experienced sustainable business growth in recent years. The size of our network has grown significantly over the years since the commercial launch of our advertising network. As of March 31, 2012, the number of bus and taxi shelters on which we operate and carry our advertisements is 810; the number of buses that carry our mobile advertisements is 336; the number of mobile displays through Dalian metro-trains is 35. As of March 31, 2012, we have installed 52 “City Navigator” units across Dalian urban area, 3 mega-screen (126 square meters to 400 square meters, approximately 1,356 square feet to 4,306 square feet) LED screens and 8 metal billboards in Dalian, 4 LED screens in the business district in Shenyang, 1 indoor LED screen (22 square meters, approximately 237 square feet) in Tianjin Railway Station, 1 mega-screen (150 square meters, approximately 1,614 square feet) LED screen in Beijing and 5 outdoor billboards in Shanghai. On March 1, 2012, we also gained the operating right for one LED screen located at No. 1 Times Square of New York city in the United States.
 
Our principal executive offices are located at Golden Name Commercial Tower 8th floor, 68 Renmin Road, Zhongshan District, Dalian, P.R. China. Our telephone number is 86-411-82728168.
 
Subsidiaries of V-Media
 
The following table sets forth information concerning V-Media’s subsidiaries:
 
Name of Subsidiary
V-Media’s
Ownership Percentage
 
Region of Operations
 
Primary Business
Shenyang Vastitude Media Co., Ltd.
100%
 
Shenyang
 
Advertising company
Tianjin Vastitude AD Media Co., Ltd.
100%
 
Tianjin
 
Advertising company
Dalian Vastitude Network Technology Co., Ltd.
60%
 
Dalian
 
Computer exploitation, technical service and domestic advertisement
Dalian Vastitude Engineering & Design Co., Ltd.
83%
 
Dalian
 
Engineering, design and construction
Dalian Vastitude & Modern Transit Media Co., Ltd.
70%
 
Dalian
 
Advertising  company
Vastitude (Beijing) Technology Co.
60%
 
Beijing
 
Advertising company
Shanghai Vastitude Advertising & Media Co., Ltd.
80%
 
Shanghai
 
Advertising company
 
26
 
 

 
Factors Affecting Our Results of Operations
 
Factors that can affect our sales are as follows:
 
Increasing Domestic Spending in Outdoor Advertising

The demand for our advertising time slots is directly related to the outdoor advertising spending in northeast China. The increase in advertising spending is largely determined by the economic conditions in our region. According to the latest statistics on China’s advertising expenditure from CTR Market Research, a respected research institution specializing in the China market, China’s total advertising expenditure in 2010 rose 13% from a year ago. Although the increase of the consumer price inflation may post pressure on the country’s overall economic development in 2011, advertising rates in 2011 still rose by 13% year over year, equal to the rate of increase over the same period in 2010. The Chinese government is aimed at building a domestic consumer-driven economy, which we believe, will continue to generate demand for outdoor advertising.  
 
Expansion of Our Market Presence by Launching City Navigator ® Networks in Other Major Commercial Cities
 
We believe our proprietary multi-media advertising system – City Navigator ® Network is one of the most advanced outdoor advertising platforms available in China. This system combines the latest LED displaying technology, internet and WI-FI technology, and has proven to be very effective in our competition to get access to top tier cities such as Shanghai and Beijing.
 
By using wireless access technology, our LED displays at bus and taxi shelters are able to display real time programs at the control of our centralized computer systems. It consists of a Wi-Fi receiver, large-screen LED display, and web-based touch-screen kiosk which provide the public with information on various aspects of the city life, including travel, traffic, restaurants, shopping, hotels, business, medical and education.  In addition, every City Navigator is equipped with Bluetooth, wireless access and printing technology. Users can either print the information or send the information to their cell phones or computers. As City Navigator® Network adopts Wi-Fi technology, users can enjoy its service from any area covered by its Wi-Fi signals.  We are aggressively expanding our media platform by launching City Navigator ® Networks in our target cities, such as Tianjin, Qingdao and Shanghai, to create our own cross-region advertising network and enhance our advertising distribution capacity.
 
Promotion of Our Brand Name to Attract a Wider Client Base and Increase Revenues
 
We promote our brand name, [国域无疆]TM, through both our own media channels and public channels in North China. We believe that the enhancement of public awareness to our brand name will help broaden our client base, especially in the new marketplace such as Shenyang and Tianjin. As we expand our advertising client base and promote public’s awareness to our brand, demand for time slots and advertising space on our network will continue to grow.
 
Upgrade of Our Outdoor Billboard Network with New Digital Display Technology
 
We intend to capitalize recent advances in digital display technology, especially mega-screen LED displays, to meet major institutional clients’ needs. Because the LED displays can be linked through centralized computer systems to instantaneously change static advertisements, and are highly visible even during bright daylight, it improves the advertising effects  markedly.  We plan to build more mega-screen (100 square meters to 500 square meters, approximately 1,076.4 square feet to 5,382 square feet) LED displays at premier locations in our marketplace.
 
27
 
 

 
 
As we continue to expand our network, we expect to face a number of challenges. We have expanded our network rapidly, and we, as well as our competitors, have occupied many of the most desirable locations in Dalian. In order to continue expanding our network in a manner that is attractive to potential advertising clients, we must continue to identify and occupy desirable locations and to provide effective channels for advertisers. In addition, we must react to continuous technological innovations in the use of wireless and broadband technology in our network, and changes in the regulatory environment, such as the regulations allowing 100% foreign ownership of PRC advertising companies and new regulations governing cross-border investment by PRC persons.
 
We believe that our business model and success in our regional market give us a considerable advantage over our competitors.  Our future growth will depend primarily on the following factors:
 
Overall economic growth in China, which we expect to contribute to an increase in advertising spending in major urban areas in China where consumer spending is concentrated;
 
Our ability to expand our network into new locations and additional cities;
 
Our ability to expand our sales force and engage in increased sales and marketing efforts;
 
Our ability to expand our client base through promotion of our services;
 
Our ability to expand our new systems including large-screen LED display network and City Navigator® Networks which commenced operation in the third quarter of 2009.
  
Results of Operations for the Three-Month Period Ended March 31, 2012 Compared to the Three-Month Period Ended March 31, 2011

Revenue   

The following table shows the operations of the Company on a consolidated basis for the three months ended March 31, 2012 and 2011:

REVENUES
 
Three Months Ended March 31,
 
   
2012
   
2011
   
Difference
   
% Change
 
Dalian District
                       
    Street Fixture and Display network
 
$
1,095,256
   
$
1,799,705
   
$
(704,449
)    
(39.1
%)
    City Transit system Display network
   
563,234
     
1,050,076
     
(486,842
)    
(46.4
%)
Outdoor Billboards
   
823,513
     
1,478,201
     
(654,688
)    
(44.3
%)
City Navigator
   
324,130
     
521,355
     
(197,225
)    
            (37.8
%)
    Other service income(a)
   
18,394
     
134,135
     
(115,741
)    
(86.3
%)
Subtotal for Dalian District
 
$
2,824,527
   
$
4,983,472
   
$
(2,158,945
)    
(43.3
%)
                                 
Shenyang District
                               
    Street Fixture and Display network
 
$
53,858
   
$
12,044
   
$
41,814
     
347.2
%
Outdoor Billboards
   
286,429
     
98,796
     
187,633
     
189.9
%
Subtotal for Shenyang District
 
$
340,287
   
$
110,840
   
$
229,447
     
207
%
                                 
Beijing District
                               
   Outdoor Billboards
 
$
                       710,369
   
$
                                     -
   
$
 710,369
     
             100
%
Subtotal for Beijing District
 
$
                       710,369
   
$
                                     -
   
$
 710,369
     
             100
%
                                 
Tianjin District
                               
   Outdoor Billboards
 
$
79,985
   
$
57,184
   
$
22,801
     
          39.9
%
Subtotal for Tianjin District
 
$
79,985
   
57,184
   
$
22,801
     
         39.9
%
                                 
Shanghai District
                               
   Outdoor Billboards
 
$
                       116,259
   
$
                        251,230
   
$
(134,971
)    
     (53.7
%)
Subtotal for Shanghai District
 
$
                       116,259
   
$
                        251,230
   
$
  (134,971
)    
          (53.7
%)
                                 
Total Revenues
 
$
4,071,427
   
$
5,402,726
   
$
(1,331,299
)    
(24.6
%)
 
(a) Other service income is consisted of income from (i) Construction & Design service provided by Dalian Vastitute Engineering & Design Company and (ii) technique service provided by Dalian Vastitute Network Technology Company to outside customers.
 
28
 
 

 
Revenue
 
Our total revenues for the three months ended March 31, 2012 were $4,071,427, a decrease of $1,331,299 or 24.6%, from $5,402,726 for the three months ended March 31, 2011. The decline in revenue was primarily attributable to a decrease in contracting demand from advertisers under unfavorable macro economic conditions. Advertisers from certain industries, such as real estate, significantly reduced their advertising budgets in the third quarter of 2012. Since we maintained our expansion strategy of getting advertising platforms at desired location, we expect to regain the revenue growth momentum as we further develop the new market.

For the three months ended March 31, 2012, sales in Dalian district, accounted for 69.4% of our total sales, decreased by $2,158,945, or 43.3%, to $2,824,527 from $4,983,472 for the three months ended March 31, 2011. The decrease is mainly due to advertisers in certain industry, especially real estate clients, significantly reduce their advertising spending during the quarter.

Overall sales in Shenyang district increased by $229,447, or 207%, to $340,287 from $110,840 for the three months ended March 31, 2011. In Shenyang, sales generated from street furniture and display network increased 347.2%, or $41,814 compared with same period in 2011, and sales generated from billboards including LED screens increased 189.9%, or $187,633 compared with same period in 2011. The increased sales reflected the Company’s focused effort on developing Shenyang market, as Shenyang will be the host city for the upcoming 12th National Games of the People’s Republic of China in 2013.
 
For three months ended March 31, 2012, sales in Tianjin district increased by 22,801, or 39.9%, to $79,985 from $57,184 for the three months ended March 31, 2011.

Sales revenue in Shanghai District decreased $134,971 or 53.7% to $116,259 from $251,230 for the three months ended March 31, 2011. The decline was primarily attributable to the unfavorable macro outdoor advertising market conditions in Shanghai.

For three months ended March 31, 2012, the Company also generated sales revenue of $710,369 from its Beijing District compared with none for the three months ended March 31, 2011.

Cost of Revenue
 
Cost of revenue for the three months ended March 31, 2012 were $2,783,255, an increase of $440,685 or 18.8%, from $2,342,570 for the same period ended March 31, 2011. The increase in cost of revenue was primarily attributable to increased depreciation of advertising equipment as we secured more advertising platforms during this quarter, and increase in labor and raw material cost.  As a percentage of total revenues, cost of revenue accounted for approximately 68.4% and 43.4% for the three months ended March 31, 2012 and 2011, respectively.
 
COST OF REVENUES
   
Three Months Ended March 31,
 
     
2012
   
2011 
   
  Difference 
   
% Change
Dalian District
                         
      Street Fixture and Display network
 
$
767,837
  $
691,827
  $
76,010
   
11
%
      City Transit system Display network
   
402,557
   
617,533
   
(214.976
)  
(34.8
%)
      Outdoor Billboards
   
576,186
   
493,528
   
82,658
   
16.7
%
      City Navigator
   
226,648
   
150,678
   
75,970
   
        50.4
%
      Other service cost (b)
   
25,618
   
119,415
   
(93,797
)  
(78.5
%)
            Subtotal for Dalian District
 
$
1,998,846
 
2,072,981
 
(74,135
)  
(3.6
%)
                           
Shenyang District
                         
      Street Fixture and Display network
 
$
9,962
  $
5.907
 
4,055
   
68.6
%
      Outdoor Billboards
   
45,679
   
63,590
   
(17,911
)  
(28.2
%)
            Subtotal for Shenyang District
 
$
55,641
 
69,497
 
(13,856
)  
(19.9
%)
                           
Beijing District
                         
      Outdoor Billboards   $ 374,288   $ 15,282   359,006     2,349.2
            Subtotal for Beijing District
 
$
   374,288
 
                    15,282
 
   359,006
   
        2,349.2
%