Notes to Consolidated Financial Statements
(U.S Dollars unless otherwise noted)
|
NOTE 1.
|
DESCRIPTION
OF
BUSINESS
AND
ORGANIZATION
|
China Network Media, Inc. (formerly known
as Metha Energy Solutions Inc.) was incorporated on April 18, 2008 under the laws of the State of Delaware.
Science & Technology World Website
Media Holding Co., Ltd. (“Science & Technology Holding”) was organized under the laws of the British Virgin Island
on February 15, 2011.
Science & Technology World Website
Media Group Co., Ltd. (“Science & Technology Media”) was organized under the laws of the British Virgin Island
on February 15, 2011 to serve as a holding company for the People's Republic of China (the "PRC") operations. On September
16, 2011, Science & Technology Media established Science & Technology World Website Hong Kong Media Holding Co., Ltd.
(“HK Science & Technology”) in Hong Kong to serve as an intermediate holding company.
On January 20, 2012, HK Science and Technology
established Science& Technology World Website Trade (Dalian) Co., Ltd (the “WFOE” or “Science & Technology
Trading”) in the PRC. Its purposes are, among others, a platform for online B2B service.
HK Science and Technology and the WFOE
are considered foreign investor and foreign invested enterprise respectively under PRC law. As a result, HK Science & Technology
and the WFOE are subject to limitations under PRC law on foreign ownership of Chinese companies. According to the Catalogue of
Industries for Guiding Foreign Investment (2011 Revision) (the “Catalogue”), there are four kinds of industries which
are encouraged, permitted, restricted and prohibited for foreign investment. The primary business of Dalian Tianyi Culture Development
Co., Ltd (“Dalian Tianyi”) and Science & Technology World Network (Dalian) Co., Ltd (“Science & Technology
(Dalian)”) are within the category in which foreign investment is currently restricted.
On January 21, 2012, the WFOE respectively
entered into a series of agreements with Dalian Tianyi, Science & Technology (Dalian) and their respective shareholders (“Contractual
Arrangements”). The relationship with Dalian Tianyi, Science & Technology (Dalian) and their respective shareholders
are governed by the Contractual Arrangements. The Contractual Arrangements is comprised of a series of agreements, including Exclusive
Technical Consulting Service Agreements and Operating Agreements, through which WFOE has the right to advise, consult, manage and
operate Dalian Tianyi and Science & Technology (Dalian), and collect 85% of their respective net profits. The shareholders
of Dalian Tianyi and Science & Technology (Dalian) have granted WFOE, under the Exclusive Equity Interest Purchase Agreement,
the exclusive right and option to acquire all of their equity interests respectively in Dalian Tianyi and Science & Technology
(Dalian). Furthermore, the shareholders of Dalian Tianyi and Science & Technology (Dalian) is under the procedure of pledging
all of their equity interests respectively in Dalian Tianyi and Science & Technology (Dalian) to WFOE under the Exclusive Equity
Interest Pledge Agreement, and through the Exclusive Equity Interest Pledge Agreement, WFOE can collect the remaining 15% of Dalian
Tianyi and Science & Technology (Dalian)’s respective net profits.
According to the Power of Attorney executed
by the shareholders of Dalian Tianyi and Science & Technology (Dalian), they exclusively authorized WFOE to perform and exercise
any and all of the shareholder’s rights in Dalian Tianyi and Science & Technology (Dalian).
As a result of the Contractual Arrangements,
under generally accepted accounting principles in the United States, or U.S. GAAP, Science & Technology Media is considered
the primary beneficiary of Dalian Tianyi and Science & Technology (Dalian) (“VIEs”)
On October 29, 2012, Science &
Technology Media entered into a Share Exchange Agreement by and among (i) Science & Technology Holding, (ii) the principal
shareholders of China Network Media, Inc., (iii) China Network Media, Inc., (iv) the shareholders of Science & Technology
Holding and (v) Science & Technology Group.
The acquisition is being accounted for
as a “reverse merger,” and Science & Technology Media is deemed to be the accounting acquirer in the reverse merger.
Consequently, the assets and liabilities and the historical operations that will be reflected in the financial statements prior
to the acquisition will be those of Science &Technology Media and its wholly owned subsidiaries and VIEs, and will be recorded
at the historical cost, and the consolidated financial statements after completion of the acquisition will include the assets,
liabilities and operation of China Network Media, Inc, Science & Technology Media and its wholly owned subsidiaries and VIEs
from the closing date of the acquisition. As a result of the issuance of the shares of common stock pursuant to the Exchange Agreement,
a change in control of occurred as a result of the acquisition.
In connection with the closing of the Exchange
Agreement, Toft ApS, China Network Media, Inc’ principal shareholder, agreed to cancel its 10,000,000 shares of the common
stock that it owned in China Network Media, Inc and to issue 50,000,000 shares to shareholders of Science & Technology Holding,
who acquired a majority interest in China Network Media, Inc, in October 2012 for the purpose of the reverse acquisition of Science
& Technology Media. Additionally, the existing officers and directors from China Network Media, Inc resigned from its board
of directors and all officer positions effective immediately after the closing of the reverse merger. Accordingly, China Network
Media, Inc appointed Mr. Jiang Wei, the former major shareholder of Science & Technology Holding as the Chairman of the Board
and appointed Mr. Peng HuiAn, the former major shareholder of Science & Technology Holding as the Chief Executive Officer.
Science & Technology Media were issued common stock of China Network Media, Inc constituting approximately 95.02% of the fully
diluted outstanding shares. After the RTO, 52,620,030 common stock were outstanding.
China Network Media, Inc’ directors
approved the Exchange Agreement and the transactions contemplated thereby. Simultaneously, the directors of Science & Technology
Media also approved the Exchange Agreement and the transactions contemplated thereby.
As a result of the Exchange Agreement,
China Network Media, Inc acquired 100% of the processing and production operations of Science & Technology Media and its subsidiaries,
the business and operations of which now constitutes its primary business and operations.
China Network Media, Inc., its wholly-owned
subsidiaries and VIEs are collectively referred as “the Company”, “we”, “us”, “our”
for the purposes of these notes.
We operate a
multi-languages portal website that serves to the technology industry and provide advertising opportunities to the companies through
our diverse business network in China. The Company currently operates its website through different versions in China.
As our main target, we provide online
platform to business entrepreneurs and corporations with a B2B marketplace that can help our customers:
|
·
|
Set
their
brand
image
through
online
magazine,
online
corporate
multimedia
advertisement,
Executives
interviews,
institutional
alliances
and flexible
membership
package
that tailor
made based
on what
our customers
need;
|
|
·
|
Set
up customer’s
online
exhibition
to introduce
their
products
to the
public,
where
they have
our tailor-made
corporate
introduction
with 3D
product
description
and factory
facilities
online
show room
;
|
|
·
|
B2B
product
purchase
platform
for companies
and end-users;
|
|
·
|
Online
job opportunity
section
for corporate
clients;
and
|
We currently derive a substantial portion
of our revenues from online advertising membership services. Our advertising membership solutions present corporate users with
attractive opportunities to combine the visual impact and engagement of traditional television-like multimedia advertisements
and online magazines with the interactivity and precise targeting capabilities of the Internet. We strive to promote a novel and
unique advertising environment on our website to attract technology enterprises.
|
NOTE 2.
|
GOING CONCERN AND LIQUIDITY
|
The accompanying
consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company currently
has limited revenue and has accumulated deficit of $2,172,992 and $1,118,344 as of December 31, 2012 and 2011 and losses of $1,054,648
and $790,233 for the years then ended, respectively. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern. As of December 31, 2012, Mr. Jiang Wei, the shareholder of the Company loaned an aggregated amount
of $
988,796 to the Company for its operation, which was subsequently transferred from loan to capital injection in December
2012. There can be no assurance that the Company will be able to obtain additional debt or equity financing on terms acceptable
to it, or if at all. Management plans to fund continuing operations through new financing from related parties and equity financing
arrangements. The Company’s continuation as a going concern is dependent on its ability to meet its obligations, to obtain
additional financing as may be required until 2013 when it can generate sources of recurring revenues and to ultimately attain
profitability. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
|
NOTE 3.
|
VARIABLE
INTEREST
ENTITIES
|
To satisfy PRC laws and regulations, the Company conducts certain
business in the PRC through its Variable Interest Entities (“VIEs”).
The significant terms of the VIE Agreements are summarized
below:
Exclusive Technical Consulting Service
Agreement:
During the term of this Agreement, Science & Technology Trading shall provide the following technical consulting
services to Dalian Tianyi and Science & Technology (Dalian) in accordance with this Agreement: (i) Provision of advanced management
skills to offer a framework for the construction of a new management platform; (ii) Provision of technology information and materials
related to Dalian Tianyi and Science & Technology (Dalian)’s business development and operation. The content of the
technology information and documents may be enhanced or diminished during the performance of this Agreement and upon mutual agreement
to address each Party’s requirements; and (iii) Training of technical and managerial personnel for Dalian Tianyi and Science
& Technology (Dalian) and provision of required training documents. Science & Technology Trading will send technologists
and managerial personnel to Dalian Tianyi and Science & Technology (Dalian) to provide related technology and training services
as necessary. Dalian Tianyi and Science & Technology (Dalian) hereby agrees to accept the technical consulting services provided
by Science & Technology Trading. Dalian Tianyi and Science & Technology (Dalian) further agrees that, during the term
of this Agreement, it shall not accept technical consulting and services from any other party without the prior written consent
of Science & Technology Trading. Science & Technology Trading shall be the sole and exclusive owner of all right, title
and interests to any and all intellectual property rights arising from the performance of this Agreement, including but not limited
to, copyrights, patent, know-how and commercial secrets, whether such intellectual property is developed by Science & Technology
Trading or Dalian Tianyi and Science & Technology (Dalian).
Exclusive Equity Interest Purchase
Agreement:
Under the Exclusive Option Agreements entered into by and among Science & Technology Trading, each of the
PRC Shareholders irrevocably granted to Science & Technology Trading the exclusive right to purchase or designate one or more
persons to purchase all or any portion of the Equity Interest from the PRC Shareholders subject to compliance with legal restrictions
under applicable PRC laws. The PRC Shareholders shall not sell or transfer all or any portion of the Equity Interest to any party
other than Science & Technology Trading and/or the Specified Person.
Equity Interest Pledge Agreement:
Under the Equity Pledge Agreements entered into by and among Science& Technology Trading, the PRC Operating Entities
and each of the PRC Shareholders, the PRC Shareholders pledged all of their equity interests in the PRC Operating Entities as
security to ensure that Science& Technology Trading collects the Consulting Fee under the Service Agreement. The Pledge shall
be effective as of the date that the Pledge is recorded in the register of shareholders of Dalian Tianyi and Science & Technology
(Dalian) and shall remain effective so long as this Agreement remains in effect. During the Term of the Pledge, Science& Technology
Trading shall be entitled to foreclose on the Pledge in accordance with this Agreement in the event that Dalian Tianyi and Science
& Technology (Dalian) fail to pay the Consulting Fees in accordance with the Service Agreement. Science& Technology Trading
shall be entitled to exercise, dispose of or assign the Pledge in accordance with this Agreement.
Powers of Attorney:
The
PRC Shareholders have each executed an irrevocable power of attorney to appoint Science& Technology Trading as their sole
representative with full authority to perform and exercise any and all shareholder’s rights associated with the Equity Interest,
including but not limited to, the right to attend shareholders’ meetings, the right to execute shareholders’ resolutions,
the right to sell, assign, transfer or pledge any or all of the Equity Interest and the right to vote the Equity Interest for
all matters, including but not limited to, the appointment of legal representatives, board members, executive directors, inspectors,
chief managers and other senior management officers and the submission of all the Company’s related documentations to the
competent authorities. The term of each power of attorney is valid so long as such shareholder is a shareholder of the respective
PRC Operating Entity.
As a result of these VIE Agreements, the
Company through its wholly-owned subsidiary, Science& Technology Trading, was granted with unconstrained decision making rights
and power over key strategic and operational functions that would significantly impact the PRC Operating Entities or the VIEs’
economic performance, which includes, but is not limited to, the development and execution of the overall business strategy; important
and material decision making; decision making for merger and acquisition targets and execution of merger and acquisition plans;
business partnership strategy development and execution; government liaison; operation management and review; and human resources
recruitment and compensation and incentive strategy development and execution. Science& Technology Trading also provides comprehensive
services to the VIEs for their daily operations, such as operational technical support, OA technical support, accounting support,
general administration support and technical support for products and services. As a result of the Exclusive Business Cooperation
Agreements, the Equity Pledge Agreements and the Exclusive Option Agreements, the Company will bear all of the VIEs’ operating
costs in exchange for 100% of the net income of the VIEs. Under these agreements, the Company has the absolute and exclusive right
to enjoy economic benefits similar to equity ownership through the VIE Agreements with our PRC Operating Entities and their shareholders.
These contractual arrangements may not
be as effective in providing the Company with control over the VIEs as direct ownership. Due to its VIE structure, the Company
has to rely on contractual rights to effect control and management of the VIEs, which exposes it to the risk of potential breach
of contract by the shareholders of the VIEs for a number of reasons. For example, their interests as shareholders of the VIEs
and the interests of the Company may conflict and the Company may fail to resolve such conflicts; the shareholders may believe
that breaching the contracts will lead to greater economic benefit for them; or the shareholders may otherwise act in bad faith.
If any of the foregoing were to happen, the Company may have to rely on legal or arbitral proceedings to enforce its contractual
rights, including specific performance or injunctive relief, and claiming damages. Such arbitral and legal proceedings may cost
substantial financial and other resources, and result in a disruption of its business, and the Company cannot assure that the
outcome will be in its favor. Apart from the above risks, there are no significant judgments or assumptions regarding enforceability
of the contracts.
In addition, as all of these contractual
arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the
PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures.
The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties
in the PRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore,
these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene
PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce
these contractual arrangements, it may not be able to exert effective control over the VIEs, and its ability to conduct its business
may be materially and adversely affected.
None of the assets of the VIEs can be
used only to settle obligations of the consolidated VIEs. Conversely, liabilities recognized as a result of consolidating these
VIEs do not represent additional claims on the Company’s general assets.
Most of our operations are conducted through
our affiliated companies which the Company controls through contractual agreements in the form of variable interest entities.
Current regulations in China permit our PRC subsidiaries to pay dividends to us only out of its accumulated distributable profits,
if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability
of these Chinese affiliates to make dividends and other payments to us may be restricted by factors that include changes in applicable
foreign exchange and other laws and regulations.
|
A.
|
Under PRC law, our subsidiary may only
pay dividends after 10% of its after-tax profits have been set aside
as reserve funds, unless such reserves have reached at least 50% of
its registered capital. Such cash reserve may not be distributed as
cash dividends.
|
|
B.
|
The PRC Income Tax Law also imposes
a 10% withholding income tax on dividends generated on or after January
1, 2008 and distributed by a resident enterprise to its foreign investors,
if such foreign investors are considered as non-resident enterprise
without any establishment or place within China or if the received
dividends have no connection with such foreign investors’ establishment
or place within China, unless such foreign investors’ jurisdiction
of incorporation has a tax treaty with China that provides for a different
withholding arrangement.
|
As of December 31, 2012, there were no
such retained earnings available for distribution.
The following financial statement amounts
and balances of the VIEs were included in the accompanying consolidated financial statements as of and for the year ended December
31:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Total assets
|
|
$
|
1,311,631
|
|
|
$
|
785,925
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,319,645
|
|
|
$
|
1,734,535
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Revenues
|
|
$
|
383,542
|
|
|
$
|
129,699
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
1,054,648
|
|
|
$
|
790,233
|
|
All of our current revenue is generated
in PRC currency Renminbi (“RMB”). Any future restrictions on currency exchanges may limit our ability to use net revenues
generated in Renminbi to make dividends or other payments in U.S. dollars or fund possible business activities outside China.
Foreign currency exchange regulation in
China is primarily governed by the following rules:
|
·
|
Foreign Exchange
Administration Rules
(1996), as amended in
August 2008, or the Exchange
Rules;
|
|
·
|
Administration Rules
of the Settlement, Sale
and Payment of Foreign
Exchange (1996), or the
Administration Rules.
|
Under the Administration Rules, RMB is
freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related
foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments
and investments in securities outside of China, unless the prior approval of the SAFE is obtained and prior registration with
the SAFE is made. Foreign-invested enterprises like ours that need foreign exchange for the distribution of profits to their shareholders
may affect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designated foreign exchange
banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign-invested
enterprises are permitted to open foreign exchange settlement accounts for current account receipts and payments of foreign exchange
along with specialized accounts for capital account receipts and payments of foreign exchange at certain designated foreign exchange
banks.
|
NOTE 4.
|
SUMMARIES
OF
SIGNIFICANT
ACCOUNTING
POLICIES
|
These consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).
|
b.
|
Principles
of
consolidation
|
The consolidated financial statements
include the financial statements of the Company and its wholly-owned subsidiaries and VIEs. Upon consolidation, all balances and
transactions between the Company and its subsidiaries and VIEs have been eliminated.
The preparation of consolidated financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the reporting period. Management makes these estimates
using the best information available at the time the estimates are made; however actual results could differ from those estimates.
Significant items subject to such estimates and assumptions include valuation allowances for receivables and recoverability of
carrying amount and the estimated useful lives of long-lived assets.
|
d.
|
Cash
and
cash
equivalents
|
Cash and cash equivalents include cash
on hand, cash on deposit with various financial institutions in PRC and all highly-liquid investments with original maturities
of three months or less at the time of purchase. Cash accounts are not insured or otherwise protected. Should any bank or trust
company holding cash deposits become insolvent, or if the Company is otherwise unable to withdraw funds, the Company would lose
the cash on deposits with that particular bank or other financial institutions.
Accounts receivable are recorded at net
realizable value consisting of the carrying amount less an allowance for uncollectible accounts as needed. The allowance
for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing
accounts receivable. The Company determines the allowance based on aging data, historical collection experience, customer
specific facts and economic conditions. Account balances are charged off against the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote. The Company did not have any off-balance-sheet credit
exposure relating to its customers, suppliers or others. As of December 31, 2012 and December 31, 2011, management has determined
that no allowance for doubtful accounts is required.
|
f.
|
Property
and equipment
|
Property and equipment mainly comprise
computer equipment, hardware and office furniture. Property and equipment are recorded at cost less accumulated depreciation with
no residual value.
Depreciation for financial reporting purposes
is provided using the straight-line method over the estimated useful lives of the assets:
Office and other equipment
|
5 years
|
Computers
|
3 years
|
Depreciation expense is included in Selling
and marketing expenses and general and administrative expenses.
When office equipment and electronic
devices are retired or otherwise disposed of, resulting gain or loss is included in net income or loss in the year
of disposition for the difference between the net book value and proceeds received thereon. Maintenance and
repairs which do not improve or extend the expected useful lives of the assets are charged to expenses as incurred.
|
g.
|
Impairment
of long-lived assets
|
Long-lived 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 the asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future
undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount of the asset and its
fair value. There were no impairment losses for the years ended December 31, 2012 and 2011, respectively.
The Company recognizes revenue in accordance
with ASC 605,
Revenue Recognition
. Revenues are recognized when the four of the following criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) the service has been rendered, (iii) the fees are fixed or determinable, and (iv) collectability
is reasonably assured. The recognition of revenue involves certain management judgments. The amount and timing of our revenues
could be materially different for any period if management made different judgments or utilized different estimates.
Online Membership Revenue
Online membership revenue includes revenue
from members for brand advertising services as well as others services.
The Company has the arrangements with nonrefundable
up-front fees model (“the Model”) to recognize revenue for the online membership business. We apply the Model, where
a contract is signed to establish a fixed price for our services to be provided for a period of time as a membership enrollment,
for a majority of our online membership revenue. Revenue is recognized ratably over the membership periods on a straight line basis,
unless evidence suggests that the revenue is earned or obligations are fulfilled in a different pattern, over the contractual term
of the arrangement or the expected period during which those specified services will be performed, whichever is longer. We provide
advertisement placements to our advertising customers on our different Website channels and in different formats, which can include,
among other things, banners, links, logos, buttons, rich media, pre-roll and post-roll video screens, pause video screens and content
integration, as specified in the contracts with the members. The members can choose various on line services from the membership
contracts based on their yearly membership.
For online membership revenue recognition,
we recognize revenue when all revenue recognition criteria are met.
Others Revenues
Other revenues are primarily generated
from online advertisement planning services which introduce our customer’s profile, product, and awareness promotion for
their executive officers to build a better brand name for non-member companies. We follows the guidance of the Securities and
Exchange Commission’s FASB Accounting Standards Codification No. 605 for revenue recognition for others revenues. The Company
recognize others revenue when they are realized or realizable and earned. The Company considers revenue realized or realizable
and earned when it has persuasive evidence of an arrangement that the services have been rendered to the customer, the sales price
is fixed or determinable, the services are rendered and collectability is reasonably assured.
The Company follows ASC 740,
Income
Taxes
, which requires the recognition of deferred tax assets and liabilities for 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, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
The Company adopted ASC 740-10-25,
which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax position. The Company must
recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained
on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized
upon ultimate resolution. Our estimated liability for unrecognized tax benefits, may be affected by changing interpretations of
laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations.
The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases,
appeal or litigation process. The actual benefits ultimately realized may differ from our estimates. As each audit is concluded,
adjustments, if any, are recorded in our financial statements. Additionally, in future periods, changes in facts, circumstances,
and new information may require us to adjust the recognition and measurement estimates with regard to individual tax positions.
Changes in recognition and measurement estimates are recognized in the period in which the changes occur. The Company has elected
to classify interest and penalties related to an uncertain tax position, if and when required, as part of income tax expense in
the combined statements of operations. The Company did not recognize any additional liabilities for uncertain tax positions as
a result of the implementation of ASC 740-10-25.
A party is considered to be related to
the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under
common control with the Company. Related parties also include principal owners of the Company, its management, members of the
immediate families of principal owners of the Company and its management and other parties with which the Company may deal if
one party controls or can significantly influence the management or operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence
the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties
and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests is also a related party.
Basic loss per share is computed by dividing
net loss attributable to common shareholders by the weighted average number of common shares outstanding for all periods.
Diluted earnings per share is computed by dividing net loss attributable to common shareholders by the weighted average number
of shares outstanding, increased by common stock equivalents. Common stock equivalents represent incremental shares issuable
upon exercise of outstanding warrants. However, potential common shares are not included in the denominator of the diluted loss
per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.
|
l.
|
Foreign
currency transactions and
translations
|
An entity’s functional currency
is the currency of the primary economic environment in which it operates, normally that is the currency of the environment in
which the entity primarily generates and expends cash. Management’s judgment is essential to determine the functional currency
by assessing various indicators, such as cash flows, sales price and market, expenses, financing and inter-company transactions
and arrangements. The reporting currency of the Company is United States dollars (“U.S. dollars” or “$”),
and the functional currency of HK Science & Technology is Hong Kong dollars (“HK dollar”). The functional
currency of the Company’s PRC subsidiary and VIEs is the Renminbi (“RMB’), and PRC is the primary economic environment
in which the Company operates. The reporting currency of these consolidated financial statements is the United States dollar.
For financial reporting purposes, the
financial statements of the Company’s PRC subsidiary and VIEs, which are prepared using the RMB, are translated into the
Company’s reporting currency, the United States dollar. Assets and liabilities are translated using the exchange rate at
each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period,
and shareholders' equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded
as a separate component of accumulated other comprehensive income in owners’ equity.
Transactions denominated in currencies
other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of
the transactions. The resulting exchange differences are included in the determination of net loss of the consolidated
financial statements for the respective periods.
The exchange rates used for foreign currency
translation were as follows (US$1 = RMB):
|
|
Period End
|
|
|
Average
|
|
12/31/2012
|
|
|
6.3161
|
|
|
|
6.3198
|
|
12/31/2011
|
|
|
6.3647
|
|
|
|
6.4735
|
|
12/31/2010
|
|
|
6.6118
|
|
|
|
6.7788
|
|
No representation is made that the RMB
amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
Translations adjustments resulting from
this process are included in accumulated other comprehensive loss in the shareholder’s deficit were $34,712 and $26,375 as
of December 31, 2012 and 2011, respectively.
|
m.
|
Fair
Value Measurements
|
The Company applies
the provisions of ASC Subtopic 820-10, Fair Value Measurements, for fair value measurements of financial assets and
financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in
the financial statements. ASC 820 also establishes a framework for measuring fair value and expands disclosures about
fair value measurements.
Fair value is
defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair value measurements for assets and liabilities
required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it
would transact and it considers assumptions that market participants would use when pricing the asset or liability.
ASC 820 establishes
a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of
the fair value hierarchy are as follows:
|
·
|
Level
1 inputs
to
the
valuation
methodology
are
quoted
prices
(unadjusted)
for
identical
assets
or
liabilities
in
active
markets.
|
|
·
|
Level
2 inputs
to
the
valuation
methodology
include
quoted
prices
for
similar
assets
and
liabilities
in
active
markets,
and
inputs
that
are
observable
for
the
assets
or
liability,
either
directly
or
indirectly,
for
substantially
the
full
term
of
the
financial
instruments.
|
|
·
|
Level
3 inputs
to
the
valuation
methodology
are
unobservable
and
significant
to
the
fair
value.
|
There were not transfers between level
1, level 2 or level 3 measurements for the years ended December 31, 2012 and 2011.
As of December 31, 2012, none of the Company’s
nonfinancial assets or liabilities was measured at fair value on a nonrecurring basis.
The carrying values of the Company’s
financial assets and liabilities, including accounts receivables, other current assets, and accrued expenses and other current
liabilities, are a reasonable estimate of fair value because of the short period of time between the origination of such instruments
and their expected realization and if applicable, their stated interest rate approximates current rates available.
|
n.
|
Share-Based
Compensation
|
Pursuant to ASC Topic 718,
Compensation
- Stock Compensation
, the Company measures the cost of employee services received in exchange for an award of stock-based
compensation based on the grant-date fair value of the award. The cost is recognized over the requisite service period, except
for awards granted to employees for past services, which are fully expensed by the grant date.
|
o.
|
Recently
adopted accounting pronouncements
|
In July 2012, the FASB issued revised
guidance on “Testing Indefinite-Lived Intangible Assets for Impairment”. The revised guidance applies to all entities,
both public and nonpublic, that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements.
In accordance with the revised guidance, an entity has the option first to assess qualitative factors to determine whether the
existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is
impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not
that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an
entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform
the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. An entity
also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly
to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any
subsequent period. In conducting a qualitative assessment, an entity should consider the extent to which relevant events and circumstances,
both individually and in the aggregate, could have affected the significant inputs used to determine the fair value of the indefinite-lived
intangible asset since the last assessment. An entity also should consider whether there have been changes to the carrying amount
of the indefinite-lived intangible asset when evaluating whether it is more likely than not that the indefinite-lived intangible
asset is impaired. An entity should consider positive and mitigating events and circumstances that could affect its determination
of whether it is more likely than not that the indefinite-lived intangible asset is impaired. The amendments are effective for
annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted,
including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial
statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been
made available for issuance. We are currently evaluating the impact on our combined financial statements of adopting this guidance.
In February 2013, the FASB issued ASU 2013-02,
“Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”,
The ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements.
However, this ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive
income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented
or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of
net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in
the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net
income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about
those amounts. The guidance is effective prospectively for reporting periods beginning after December 15, 2012 for public entities.
The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position
or results of operations.
The Company does not believe any other
recently issued but not yet effective accounting standards, if currently adopted, would have a material effect of the consolidated
financial position, results of operation and cash flows.
NOTE 5. CONCENTRATION
OF RISK
Credit risk
Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivables The
Company places its cash and cash equivalents with financial institutions, which management believes are of high-credit ratings
and quality.
The Company conducts credit evaluations
of customers and generally does not require collateral or other security from its customers. The Company establishes an allowance
for doubtful accounts primarily based upon the age of the receivables and factors surrounding the credit risk of specific customers.
Concentration
During the year ended December 31, 2012
and 2011, the Company had concentration of sales to one and three customers accounting for 25% and 43%, respectively. For the year
ended December 31, 2012, one customer accounted for 25% of the Company’s sales. For the year ended December 31, 2011, three
customers accounted for 20%, 12% and 11% of the Company’s sales, respectively.
For the year ended December 31, 2012,
one supplier accounted for 28% of the Company’s purchase. For the year ended December 31, 2011, one supplier accounted for
48% of the Company’s purchase.
NOTE
6.
PREPAID EXPENSESAND
OTHER CURRENT ASSETS
At December 31, 2012 and 2011, prepayment
and other current assets consist of:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Prepaid rental, phone and to other vendors
|
|
$
|
10,682
|
|
|
$
|
12,536
|
|
Prepayment to advertisement and internet resources providers
|
|
|
232,682
|
|
|
|
330,730
|
|
Other current assets
|
|
|
43,738
|
|
|
|
42,179
|
|
|
|
$
|
287,102
|
|
|
$
|
385,445
|
|
Prepayment to advertisement and internet
resources providers consists of the deposits required by and made to the telecommunication platform operators for using their
network services.
NOTE
7. PROPERTY AND EQUIPMENT
Property and equipment consists of network
equipment and servers used for hosting Company’s website and furniture, equipment and computers used in the office.
Property and equipment consists of the
following:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Office and other equipment
|
|
$
|
93,958
|
|
|
$
|
58,385
|
|
Computers
|
|
|
62,784
|
|
|
|
50,772
|
|
Property and equipment, cost
|
|
|
156,742
|
|
|
|
109,157
|
|
Less: accumulated depreciation
|
|
|
(77,854
|
)
|
|
|
(41,680
|
)
|
Property and equipment, net
|
|
$
|
78,888
|
|
|
$
|
67,477
|
|
Depreciation expense for the years ended
December 31, 2012 and 2011 were $35,833 and $27,528, respectively.
NOTE
8.
RELATED PARTY TRANSACTIONS
At December 31, 2012 and 2011, the Company
had a balance due to Mr. Jiang Wei, the majority shareholder and Chairman, of nil and $1,067,742, respectively, for advances made
to fund operations. This payable of $988,796 was waived and recognized as additional paid in capital in 2012.
At December 31, 2012 and 2011, the Company
had a balance due to Xie He Si Decoration Co., Ltd, a related company owned by Chairman, of $80,429 and $79,815, respectively,
for advances made to fund operations. This payable is due on demand, is non-interest bearing and has no maturity date.
NOTE
9.
ADVANCED FROM CUSTOMERS
AND DEFERRED REVENUE
Advanced from customers represents customer
payments for membership contracts but memberships have not started. Deferred revenue represents customer payments made in advance
for membership contracts while services have not been fully provided. Membership contracts are typically billed on full basis
in advance and revenue is recognized ratably over the membership period. Deferred revenue, non-current consists of customer payments
made in advance for membership contracts with terms of more than 12 months.
As of December 31, 2012 and 2011, deferred
revenue consisted of the following:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, current
|
|
$
|
748,210
|
|
|
$
|
102,253
|
|
Deferred revenue, non-current
|
|
|
271,352
|
|
|
|
141,841
|
|
Total
|
|
$
|
1,019,562
|
|
|
$
|
244,094
|
|
NOTE
10.
ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
Accrued expenses and other current liabilities
consist of the following:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Payables to third parties
|
|
$
|
1,176,359
|
|
|
$
|
-
|
|
Payroll Payable
|
|
|
32,405
|
|
|
|
21,186
|
|
Other payables
|
|
|
10,890
|
|
|
|
23,176
|
|
Total
|
|
$
|
1,219,654
|
|
|
$
|
44,362
|
|
Payables to third parties represented payments
made by third parties on behalf of some customers.
NOTE
11.
TAXATION
Science & Technology Trading and our
combined VIEs are established in Dalian, Province, PRC, and governed by the Income Tax Law of the PRC concerning privately-held
enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements
after appropriate tax adjustments in 2012 and 2011.
The Company has deferred taxes as the
Company has prepaid enterprise income tax caused by the timing difference between accounting basis and tax basis and the Company
has tax losses in both years ended December 31, 2012 and 2011.
The effective tax rate for the Company
for the years ended December 31, 2012 and 2011 was 25%.
A reconciliation between the income tax
computed at the U.S. statutory rate and the Company’s provision for income tax is as follows:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
US federal rate
|
|
|
35
|
%
|
|
|
35
|
%
|
Taxable losses
|
|
|
1,054,648
|
|
|
|
790,233
|
|
Computed expected income tax benefit
|
|
|
369,127
|
|
|
|
276,582
|
|
Reconciliation items:
|
|
|
|
|
|
|
|
|
Rate differential for domestic earnings
|
|
|
(105,465
|
)
|
|
|
(79,023
|
)
|
(Non-deductible expenses)/non-taxable income
|
|
|
(3,141
|
)
|
|
|
65
|
|
Temporary difference on revenue recognition
|
|
|
-
|
|
|
|
305
|
|
Changes in valuation allowance
|
|
|
(260,521
|
)
|
|
|
(197,623
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
305
|
|
Realization of the net deferred tax assets
is dependent on factors including future reversals of existing taxable temporary differences and adequate future taxable income,
exclusive of reversing deductible temporary differences and tax loss or credit carry forwards. The Company evaluates the potential
realization of deferred tax assets on an entity-by-entity basis. As of December 31, 2012, valuation allowances were provided against
deferred tax assets in entities where it was determined it was more likely than not that the benefits of the deferred tax assets
will not be realized. The Company had deferred tax assets of approximately $260,521 and $197,623 as of December 31, 2012 and December
31, 2011 which consisted of tax loss carry-forwards of $1,042,084 and $790,491, respectively as of December 31, 2012 and 2011,
which can be carried forward to offset future taxable income. The management determines it is more likely than not that these deferred
tax assets could not be recognized, so full allowances were provided as of December 31, 2012 and 2011. The deferred tax assets
arising from net operating losses will expire from 2016 if not utilized.
|
B)
|
Business
Tax and relevant surcharge
|
Revenue of our membership and advertising
planning services are subject to 5% business tax and 0.6% total surcharge of the gross service income. Business tax charged
was included in cost of sales.
The Company pays the business tax and
income tax when the contracts payments are received from customers and estimates the income tax as the full received amounts had
been recognized as revenue. The prepaid business tax and income tax are deductable in the following years.
At December 31, 2012 and 2011 taxes receivable
consists of:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Business tax and surcharges receivable
|
|
$
|
101,412
|
|
|
$
|
29,431
|
|
Income tax receivable
|
|
|
158,762
|
|
|
|
-
|
|
Prepaid taxes
|
|
$
|
260,174
|
|
|
$
|
29,431
|
|
NOTE
12.
SHAREHOLDERS’ DEFICIT AND STATUTORY
RESERVES
On October 29, 2012, Science & Technology Media entered
into a Share Exchange Agreement by and among (i) Science & Technology Holding, (ii) the principal shareholders of China Network
Media, Inc (iii) China Network Media, Inc and (iv) the shareholders of Science &Technology Holding.
As a result of the Exchange Agreement,
China Network Media, Inc acquired 100% of the processing and production operations of Science & Technology Media and its subsidiaries,
the business and operations of which now constitutes its primary business and operations. Specifically, as a
result of the Exchange Agreement on October 29, 2012:
|
£
|
China
Network
Media,
Inc
acquired
and
now
owns
100%
of
the
issued
and
outstanding
shares
of
capital
stock
of
Science
&Technology
Media,
a
British
Virgin
Islands
holding
company
which
controls
Dalian
Tianyi,
Science
&Technology
(Dalian)
and
their
telecommunications
business;
|
|
£
|
China
Network
Media,
Inc
issued
50,000,000
shares
of
common
stock
to
the
shareholders
of
Science
&
Technology
Media
shareholders;
and
|
|
£
|
Science
&
Technology
Media
were
issued
common
stock
of
China
Network
Media,
Inc
constituting
approximately
95.02%
of
the
fully
diluted outstanding
shares.
|
As stipulated by the laws and regulations
for enterprises operating in PRC, the subsidiaries of the Company are required to make annual appropriations to a statutory surplus
reserve fund. Specifically, the subsidiaries of the Company are required to allocate 10% of their profits after taxes, as determined
in accordance with the PRC accounting standards applicable to the subsidiaries of the Company, to a statutory surplus reserve
until such reserve reaches 50% of the registered capital of the subsidiaries of the Company. The Company can use the statutory
surplus reserve to offset deficits, expand its plant or increase capital when and only when the reserve balance exceeds 50% of
the registered capital, and the amount capitalized should be limited to 50% of the statutory surplus reserve. The Company is not
yet subject to the requirement to appropriate statutory reserves as they have not produced a profit to date.
NOTE 13. SHARES GRANTED AND ISSUED TO
EMPLOYEES
On December 21, 2012, the Company granted
total of 3,680,422 shares of the Company’s common stock, par value $0.001 per share to 73 employees. Shares were issued
to 73 employees on December 21, 2012 for the services they rendered without specific payment required.
ASC 820 establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority
to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
are as follows:
•
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
•
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value.
Based on the guidance and background noted
above, no quoted price for those shares as the Company's shares still not active on OTCBB. The Company decided to use Level 2
to measure the fair value of the shares.
The fair value of the shares granted was
$0.004 per share calculated through the application of an income approach technique known as Discounted Cash Flow (“DCF”)
method to devolve the future value of the operation into a present market value. This method eliminates the discrepancy in time
value of money by using a discount rate to reflect all business risks including intrinsic and extrinsic uncertainties in relation
to the operation.
Major assumptions used for measuring the
fair value as follow:
|
•
|
It is assumed that there will be no material change in the existing political, legal, technological,
fiscal or economic condition which may adversely affect the business of the Company;
|
|
•
|
The Company will adhere to the terms that bond with the contracts and agreements;
|
|
•
|
The Company’s competitive advantages and disadvantages will not change significantly during
the period.
|
NOTE 14. SUBSEQUENT EVENTS
On January 16, 2013 and January 17, 2013,
the Company determined to grant equity awards of 5,950 shares and 3,838,830 shares to 2 employees and 37 part-time consultants,
respectively, for the services rendered or will render. The total fair value of these shares at the date of grant was estimated
to be $15,445, which will be amortized in the services periods agreed with the consultants.