Notes to Consolidated Financial Statements
(Unaudited)
(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 & TechnologyHolding and (v) Science
& Technology Media.
The acquisition was accounted for as a
“reverse merger,” and Science & Technology Media was deemed to be the accounting acquirer in the reverse merger.
Consequently, the assets and liabilities and the historical operations that would be reflected in the financial statements prior
to the acquisition would be those of Science &Technology Media and its wholly owned subsidiaries and VIEs, and would be recorded
at the historical cost, and the consolidated financial statements after completion of the acquisition would 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.
The shareholders of Science & Technology Media shareholder 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.
On March 19, 2013, the Company submitted
dissolution application for Science & Technology Holding which was approved on April 2, 2013.
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:
¨
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Set their brand image through multiple languages online magazine, online corporate multimedia advertisement, executives interviews, institutional alliances and flexible membership package that tailor made based on what our customers need;
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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 ;
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Develop intelligent leisure retirement industry through building a unique international intelligent technology health leisure endowment industrial district including residential area, holiday resort, spa area etc. ;
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Develop an e-commercial platform to combine the online sales business with above intelligent leisure district and all the branches over the world to provide elderly products and also exclusive products provided by our agents;
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B2B product purchase platform for companies and end-users;
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Online job opportunity section for corporate clients; and
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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 unaudited 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 $1,619,384 and $1,555,510 as of March 31, 2014 and December 31, 2013 and net losses of $63,874
and $147,840 for the three months ended March 31, 2014 and 2013, respectively. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. 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 2014 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.
The principal sources of liquidity are
cash and cash equivalents, short-term investments, loans from shareholders, as well as the cash flows generated from our operations.
As of March 31, 2014, the Company had cash
and cash equivalents of approximately $71,484. As of December 31, 2013, the Company had cash and cash equivalents of approximately
$135,465. Cash and cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly
liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less at
the time of purchase.
The Company believes that the current cash
and cash equivalents combined with proceeds that it expect to generate from operating activities are sufficient to meet anticipated
working capital needs, commitments and capital expenditures over the next twelve months. It may, however, require additional cash
resources due to changes in business conditions and other future developments, or changes in general economic conditions. The shareholders
of the Company also promised that they will provide economic supports to the Company for operation need.
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.
The assets of the variable interest entities
(the “VIEs”) can be used to settle obligations ofthe consolidated entities. 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.
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B.
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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.
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As of March 31, 2014, 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 three months ended
March 31, 2014 and 2013, respectively:
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|
March 31,
2014
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|
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December 31,
2013
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
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Total assets
|
|
$
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286,564
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|
|
$
|
405,321
|
|
|
|
|
|
|
|
|
|
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Total liabilities
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|
$
|
734,604
|
|
|
$
|
793,119
|
|
|
|
For Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(Unaudited)
|
|
|
(Unaduited)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
282,212
|
|
|
$
|
206,228
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(63,874
|
)
|
|
$
|
(147,840
|
)
|
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:
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Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;
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¨
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Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.
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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 State Administration of Foreign Exchange (“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
The accompanying consolidated balance sheet
as of December 31, 2013, which has been derived from audited financial statements, and the unaudited interim consolidated financial
statements as of March 31, 2014 and for the three month period ended March 31, 2014 and 2013 have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures,
which are normally included in financial statements prepared in accordance with United States generally accepted accounting principles
(U.S. GAAP), have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made
are adequate to provide for fair presentation. The interim financial information should be read in conjunction with the Financial
Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2013, previously filed with the SEC.
In the opinion of management, all adjustments
(which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial
position as of March 31, 2014, its consolidated results of operations and cash flows for the three month periods ended March 31,
2014 and 2013, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating
results for the full fiscal year or any future periods.
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b.
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Principles of consolidation
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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.
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d.
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Cash and cash equivalents
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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 March 31, 2014 and December 31, 2013, management has determined
that no allowance for doubtful accounts is required.
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f.
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Property and equipment
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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
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5 years
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Computers
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3 years
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Depreciation expense is allocated among Research
and development expenses, 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.
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g.
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Impairment of long-lived assets
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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 three months ended March 31, 2014 and 2013, 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. The Company
provides 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,
the Company recognizes 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 follow 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.
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
income attributable to common shareholders by the weighted average number of common shares outstanding for all periods. Diluted
loss 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.
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k.
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Foreign currency transactions and translations
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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. The financial statements of HK Science & Technology, which are prepared using
the HK dollar, 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 income (loss) of the consolidated
financial statements for the respective periods.
The exchange rates used for foreign currency
translation were as follows (US$1 = RMB):
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|
March 31,
2014
|
|
|
December 31,
2013
|
|
Balance sheet items, except for equity accounts
|
|
|
6.1644
|
|
|
|
6.1140
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Items in the statements of income and comprehensive income, and statements of cash flows
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|
|
6.1199
|
|
|
|
6.2858
|
|
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 $55,526 at March 31,
2014 and $59,158 at December 31, 2013, respectively.
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l.
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Fair Value Measurements
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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:
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¨
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Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
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|
|
|
|
¨
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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.
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|
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|
|
¨
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Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
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There were no transfers between level 1,
level 2 or level 3 measurements for the three months ended March 31, 2014 and 2013, respectively.
As of March 31, 2014 the Company used Level
2 to measure the fair value of the shares that the Company issued to employees and part-time consultants for the service rendered.
As the Company’s shares were still not active on OTCBB, no quoted price for those shares.
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.
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m.
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Share-Based Compensation
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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.
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n.
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Recently adopted accounting pronouncements
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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 other recently
issued but not yet effective accounting standards from ASU 2014-01 to ASU 2014-08, if currently adopted, would have a material
effect of the consolidated financial position, results of operation and cash flows.
NOTE 5. EARNINGS
(LOSS) PER SHARE
The FASB’s accounting standard for
earnings (loss) per share requires presentation of basic and diluted earnings (loss) per share in conjunction with the disclosure
of the methodology used in computing such earnings (loss) per share. Basic earnings (loss) per share excludes dilution and is computed
by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted
earnings (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock. The Company has no potential dilutive securities as of March 31, 2014.
The following is a reconciliation of the
basic and diluted earnings (loss) per share computations for the three months ended March 31, 2014 and 2013:
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For Three Months Ended March 31,
|
|
|
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2014
|
|
|
2013
|
|
|
|
(Unaudited)
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|
|
(Unaudited)
|
|
Net loss for basic and diluted earnings (loss) per share
|
|
$
|
(63,874
|
)
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|
$
|
(147,840
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in basic and diluted computation
|
|
|
60,392,051
|
|
|
|
60,145,232
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Loss per share:
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|
|
|
|
|
|
|
|
Basic and diluted
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$
|
(0.001
|
)
|
|
$
|
(0.002
|
)
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NOTE 6. 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 three months ended March 31,
2014 and 2013, the Company had concentration of sales to two and four customers accounting for 29% and 65%, respectively. For the
three months ended March 31, 2014, two customers accounted for 15% and 14% of the Company’s sales, respectively. For the
three months ended March 31, 2013, four customers accounted for 23%, 14%, 14% and 14% of the Company’s sales, respectively.
For the three months ended March 31, 2014
and 2013, the top supplier accounted for 26% and 32% of the Company’s purchases, respectively.
NOTE 7. PREPAID
EXPENSES AND OTHER CURRENT ASSETS
At March 31, 2014 and December 31, 2013,
prepayment and other current assets consist of:
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|
March 31,
2014
|
|
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December 31,
2013
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
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Prepaid rental, phone and to other vendors
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|
$
|
4,508
|
|
|
$
|
11,036
|
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Prepayment to advertisement and internet resources providers
|
|
|
33,962
|
|
|
|
75,106
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|
Other current assets
|
|
|
37,438
|
|
|
|
36,708
|
|
|
|
$
|
75,908
|
|
|
$
|
122,850
|
|
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
8. 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:
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March 31, 2014
|
|
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December 31, 2013
|
|
|
|
(Unaudited)
|
|
|
|
|
Office and other equipment
|
|
$
|
101,497
|
|
|
$
|
102,334
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|
Computers
|
|
|
64,816
|
|
|
|
65,351
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|
Property and equipment, cost
|
|
|
166,313
|
|
|
|
167,685
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|
Less: accumulated depreciation
|
|
|
(125,117
|
)
|
|
|
(118,366
|
)
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Property and equipment, net
|
|
$
|
41,196
|
|
|
$
|
49,319
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|
Depreciation expense for the three months
ended March 31, 2014 and 2013 were $7,776 and $11,273, respectively.
NOTE
9. RELATED PARTY TRANSACTIONS
At March 31, 2014 and December 31, 2013,
the Company had a balance due to Xie He Si Decoration Co., Ltd, a related company owned by the Chairman, Mr. Jiang Wei, of $82,927
and $83,088, respectively, for advances made to fund operations. This payable is due on demand, is non-interest bearing and has
no maturity date.
NOTE
10. ADVANCE FROM A CUSTOMER AND DEFERRED REVENUE
Advances from a customer represent customer
payment for membership contract but membership has 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 March 31, 2014 and December 31, 2013,
advances from a customer and deferred revenue consisted of the following:
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|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
(Unaudited)
|
|
|
|
|
Advance from a customer
|
|
$
|
32,444
|
|
|
$
|
81,779
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|
Deferred revenue, current
|
|
|
523,794
|
|
|
|
553,790
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|
Deferred revenue, non-current
|
|
|
4,506
|
|
|
|
11,358
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|
Total
|
|
$
|
560,744
|
|
|
$
|
646,927
|
|
NOTE
11. OTHER CURRENT LIABILITIES
Other current liabilities consist of the
following:
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
(Unaudited)
|
|
|
|
|
Payroll payable
|
|
$
|
40,826
|
|
|
$
|
33,793
|
|
Other payable
|
|
|
26,970
|
|
|
|
11,604
|
|
Total
|
|
$
|
67,796
|
|
|
$
|
45,397
|
|
NOTE
12. 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 2014 and 2013.
The effective tax rate for the Company
for the three months ended March 31, 2014 and 2013 was 10% and 0% respectively.
A reconciliation of the provision for income
taxes determined at the U.S. federal corporate income tax rate to the Company’s effective income tax rate is as follows:
|
|
March 31, 2014
|
|
|
March 31, 2013
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
US federal rate
|
|
|
35
|
%
|
|
|
35
|
%
|
Taxable losses
|
|
|
(58,259
|
)
|
|
|
(147,850
|
)
|
Computed expected income tax benefit
|
|
|
20,391
|
|
|
|
51,744
|
|
Reconciliation items:
|
|
|
|
|
|
|
|
|
Rate differential for domestic earnings
|
|
|
(5,826
|
)
|
|
|
(14,784
|
)
|
Non-deductible expenses
|
|
|
-
|
|
|
|
(1,271
|
)
|
Valuation allowance on deferred tax assets
|
|
|
(20,180
|
)
|
|
|
(35,689
|
)
|
Effective income tax expense
|
|
$
|
(5,615
|
)
|
|
$
|
-
|
|
Income tax expense for the three months
ended March 31, 2014 and 2013 were $5,615 and $nil, respectively.
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 March 31, 2014, 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 which consisted of tax loss carry-forwards, which can be carried forward
to offset future taxable income for five years from the year the loss occurred. 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 March 31, 2014 and December
31, 2013. The deferred tax assets arising from net operating losses will expire from 2018 if not utilized.
|
B)
|
Value Added Tax and relevant surcharge
|
Revenue of our membership and advertising
planning services are subject to 3% value added tax (“VAT”) and 0.36% total surcharge of the gross service income for
the business incurred on and after November 1, 2013.
The Company pays the VAT when the invoices
are issued to customers and estimates the income tax as the full received amounts had been recognized as revenue. The prepaid VAT
and income tax are deductible in the following years.
NOTE
13. 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 accumulated net earnings since inception
NOTE 14. SHARES
GRANTED AND ISSUED TO EMPLOYEES
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. The total fair value of these shares at the date of grant was estimated to be $15,445.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 evaluate 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.
On July 8, 2013 the Company determined
to grant equity awards of 156,140 shares to 13 part-time consultants, for the services rendered. The total fair value of these
shares at the date of grant was estimated to be $4,409.
On July 29, 2013 the Company determined
to cancel 115,128 shares which have been issued to 6 employees, for the contracts terminated. The total fair value of these shares
was estimated to be $461.
On October 24, 2013 the Company determined
to cancel 49,905 shares which have been issued to 6 employees, for the contracts terminated. The total fair value of these shares
was estimated to be $200.
On November 22, 2013 the Company determined
to grant equity awards of 219,200 shares and 40,290 shares to 14part-time consultantsand 2 employees, respectively, for the services
rendered. The total fair value of these shares was estimated to be $7,327.
On February 25, 2014 the Company determined
to cancel 10,000 shares which have been issued to 1 consultant, for the contract terminated. The total fair value of these shares
were estimated to be $40.
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
$0.02824 per share calculated through the application of an income approach technique known as Discounted Cash Flow (“DCF”)
method to evaluate 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 15. COMMITMENTS
The Company’s operating lease commitment
as of March 31, 2014 and December 31, 2013 were $4,508 and $13,634, respectively.
NOTE 16. SUBSEQUENT
EVENTS
On April 8, 2014 the Company determined
to grant equity awards of 2,377,950 and 820,354 shares to 10 part-time consultants and 53 employees respectively, for the services
rendered. The total fair value of these shares at the date of grant was estimated to be $90,305.