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CHINA MEDIA GROUP CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements THIS FOLLOWING INFORMATION SPECIFIES CERTAIN FORWARD-LOOKING STATEMENTS OF MANAGEMENT OF THE COMPANY. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT ESTIMATE THE HAPPENING OF FUTURE EVENTS AND ARE NOT BASED ON HISTORICAL FACT. FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY", "SHALL", "COULD", "EXPECT", "ESTIMATE", "ANTICIPATE", "PREDICT", "PROBABLE", "POSSIBLE", "SHOULD", "CONTINUE", OR SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION HAVE BEEN COMPILED BY OUR MANAGEMENT ON THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND CONSIDERED BY MANAGEMENT TO BE REASONABLE. OUR FUTURE OPERATING RESULTS, HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTY, OR WARRANTY IS TO BE INFERRED FROM THOSE FORWARD-LOOKING STATEMENTS. THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION REPRESENT ESTIMATES OF FUTURE EVENTS AND ARE SUBJECT TO UNCERTAINTY AS TO POSSIBLE CHANGES IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND OTHER CIRCUMSTANCES. AS A RESULT, THE IDENTIFICATION AND INTERPRETATION OF DATA AND OTHER INFORMATION AND THEIR USE IN DEVELOPING AND SELECTING ASSUMPTIONS FROM AND AMONG REASONABLE ALTERNATIVES REQUIRE THE EXERCISE OF JUDGMENT. TO THE EXTENT THAT THE ASSUMED EVENTS DO NOT OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY FROM ANTICIPATED OR PROJECTED RESULTS, AND, ACCORDINGLY, NO OPINION IS EXPRESSED ON THE ACHIEVABILITY OF THOSE FORWARD-LOOKING STATEMENTS. WE CANNOT GUARANTY THAT ANY OF THE ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION ARE ACCURATE, AND WE ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. Critical Accounting Policy and Estimates Our Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our consolidated financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in our Quarterly Report on Form 10-Q for the period ended March 31, 2013. - 2 - -------------------------------------------------------------------------------- Overview DESCRIPTION OF BUSINESS OUR BACKGROUND. The Company was incorporated in Texas on October 1, 2002 and in 2005 changed its business focus to advertising and media in the emerging China market. Under the then new management, the Company commenced to position the Company to capitalize on the growth of the Chinese advertising market where global companies are rushing into China to try to grab and hold the attention of its 1.3 billion citizens. Our mission then was to become one of China's new age media companies through the use of new technologies and devices combined with traditional media of TV, Newspapers, Magazines, Billboards and Internet to reach today's mobile society. In order to facilitate this, the Company established 3 strategic business units being "Advertising", "Telecommunications and Mobile Computing", and "Products and Services". We planned to offer advertising services in China. These advertising services would be targeted across all media thus we will offer our customers selective advertising on specific media for nationwide campaign. China's advertising industry is still young and fragmented. We aim to differ from other advertisers so that we can provide nationwide campaigns across all media spectrum. To this end, we will work to secure strategic ad placements in key cities in China so that our customers will have the ability to launch nationwide campaigns. In June 2012, the Group acquired A-Team Resources Sdn. Bhd. a company that distributes light appliances products in South East Asia and Middle East to strengthen our Products and Services Business Unit. As announced in a Form 8K filed on October 29, 2013, the Company and Samata Ventures Sdn Bhd ("Samata") and Clixster Sdn Bhd ("CSB") (jointly referred to as the "Vendors") entered into a conditional Sales and Purchase Agreement ("SP Agreement") for the Company to acquire 63.2% equity interests in Clixster Mobile Sdn Bhd ("CMSB") from the Vendors. On January 31, 2014 following the fulfillment of all the conditions set forth in and otherwise in accordance with the terms of the SP Agreement, this merger transaction was consummated and CMSB became a subsidiary of the Company. As a result of the closing of the SP Agreement, we will now focus our business plans to pursue the mobile virtual network operator ("MVNO") business and to expand our telecommunication business unit with a focus on provision of mobile telecom service through a MVNO platform initially in Malaysia and then to other regions. Upon the closing of the SP Agreement, the Company issued to Samata and CSB 5,760,898,203 shares and 4,432,711,461 shares in the Company, respectively, for a total issuance of 10,193,609,664 shares in the Company, representing approximately 90.15% in the issued share capital of the Company. On January 31, 2014, Samata transferred 4,301,422,970 to CSB and 1,459,475,233 shares to the newly appointed directors of the Company. After the above transfers, Samata did not hold any shares in the Company and CSB held a total of 8,734,134,431 shares, representing approximately 77.24% in the Company, becoming the new controlling shareholder of the Company. On the same date following the completion of the SP Agreement, the changes to the board of directors were announced in the Form 8K filed on February 6, 2014. On June 17, 2014 CSB transferred 550,000,000 shares to one of the Company's partners and after the transfer SCB held 8,184,134,431 shares representing approximately 72.38% in the Company. On January 15, 2014 the Group disposed of its loss making light appliances and advertising operation. The management believes that this transaction affords the Company the opportunity to streamline its trading operation and focus on its Products and Services Business Unit. At the date of this report, the Group will focus on its Telecommunications and Mobile Business Unit and its Products and Services Business Unit. The Group will terminate its adverting business until a viable advertising business opportunity is available. - 3 - -------------------------------------------------------------------------------- 2013 Products & Services Overview We have established 3 business units namely "Advertising", "Telecommunication and Mobile" and "Product Services". A brief review and description of these three business units' strategies and operations are described below. Advertising Unit On March 13, 2007, the Company acquired 100% of the issued and outstanding shares of Good World Investments Limited, which owns 50% of the registered capital of Beijing Ren Ren Health Culture Promotion Limited ("BRR"). BRR is working with the Chinese Government on a benevolent project named "Great Wall of China Project" to advertise and promote health education and health awareness in China. We believe BRR provides a strategic advertising platform for us to launch our advertising operations in China as it can advertise in hospitals and districts in China. However the capital requirement to activate this project on the national and provincial level will require us to raise at least US$2 million which is difficult given the financial situation of the Group today. Therefore in 2012, we had determined to defocus from the BRR program and to focus on other advertising activities going forward. During the period, the Company did not derive any advertising income from the BRR project. In 2014, the Group divested from its investment in BRR and the Group will suspend the advertising business unit until other advertising opportunities that are synergistic to the Groups business. Telecommunications Unit In 2006, the Company announced the establishment of the Telecommunications and Mobile Computing Division to focus on the new media advertising where we would take advantage of new convergent devices for telecommunications advertising. The business of selling advertising and services through telecommunications media and devices is growing and the Group intends to enter into this business sector. No revenue has been generated from advertising through telecommunications media and devices during this reporting period. Advertising through mobile devices is becoming more prominent to reach the mobile society of today. The goal of the Telecommunications and Mobile Computing Unit is to provide the Company with entry into the new sector of advertising through telecommunication media and devices. Our strategy on gaining access in telecommunication media is through cooperation with existing networks or establishes select networks. However our longer term strategy is to partner with network operators to provide extensive network access for our advertising media. We had secured the distribution rights for M.A.G.I.C. Convergent Device for the territory of China and Hong Kong, and we are still waiting for the delivery of its commercial products in 2013. However, in 2014 we divested from this product and instead we determined to focus on other telecommunication products and services. In 2013, we entered into a conditional agreement to acquire Clixster Mobile Sdn. Bhd. a Mobile Virtual Network Operator ("MVNO") operation in Malaysia. This transaction closed on January 31, 2014. Going forward, we will focus on developing the MVNO business and the branding of Clixster Mobile in Malaysia and then throughout the region. Products Services Units We have commenced a Products Services Unit to build brands recognition and to take advantage of our contacts networks, distribution channel and trading partners. We intended to leverage on our advertising platform to develop our own brands name for select products. This will uniquely position our Product Services for brand awareness as well as develop a long term business unit that will serve both consumers and industries markets. We had a distribution of electronics and light electronics in 2012 but we ran into difficulties and the market conditions changed such that the Company recorded a loss in 2012. In view of our focus on Telecommunications we determined to divest of our investment in Ateam in 2014. Accordingly the sales and operational results were disclosed as Operations held for sale in the Company's condensed consolidated balance sheet and income statement. During this quarter, we realized $67,060 in consulting services revenue from this business unit. - 4 - -------------------------------------------------------------------------------- Industry Overview and Competition Telecommunication Market In Malaysia, the major mobile network operators (MNOs) are Maxis, Celcom and DiGi, and recently U-Mobile. The big 3's combined market size is over 36 million subscribers with a total annual turnover of RM23.8 billion or about USD7.8 billion in 2013. The market breakdown indicated Maxis and Celcom have a mobile subscriber base of 13 million each and DiGi with 11 million.¹ Sectorial industry updates concur that year on year revenue growth has been strong, According to RHB Research Institute Sdn Bhd (RHB Research), it stated that on the year-on-year (y-o-y) basis, the four major telcos in the country namely Telekom Malaysia Bhd (TM) grew 11%; DiGi Telecommunication Bhd (DiGi) surged 9.7%; Celcom Axiata Bhd (Celcom) increased by 8% and Maxis Telecommunication Bhd (Maxis) captured a 4.5% growth. During the first half of 2013, the communication subsector increased by 9.4% (January - June 2012: 9.5%) driven by expansion in the cellular segment on increased use of data services. As at end-June 2013, cellular phone subscriptions grew 9.1% to 42.6 million to reach a penetration rate of 143.4% (end-June 2012 : 10.7%; 39 million; 135.3%), with the prepaid segment dominating 83% of total subscriptions.² The broadband segment continued to expand 6.9% to 6.2 million subscriptions with a penetration rate of 66.8% as at end-June 2013 (end-June 2012; 8.2%; 5.8 million; 63.7%). This was largely due to offerings of bundled services with attractive pricing plans and improved network coverage. Data remained as a growth driver in the industry, and is expected to grow 25% annual moving forward. The growth is fueled by penetration of smartphones and other internet ready devices.² ¹ Annual Reports of Maxis Berhad, DiGi.com Berhad and Axiata Group Berhad ² Malaysia Economic Report 2013/2014 Subscriber Market Mobile penetration in Malaysia has long surpassed the 100.0% mark and is currently hovering around 143%¹; putting her as one of the countries in Asia Pacific with penetration rates above 100%. Out of 32 countries in Asia Pacific, Hong Kong ranked the highest penetration rate of 155.1% followed by Singapore with 153.4%. By 2015, the Malaysian market is expected to reach a mobile subscriber base of over 50 million (as at 2013: 42.6 million¹). Although growth is expected to slow down as the market approaches saturation but it is still expected to register a CAGR of 6.0% from 2011-2015. Riding on increasing demand for internet access, 3G subscriptions reached 14.5 million with an annual growth of 41.0% in 2012 and is expected to cross 18.4 million by December 2013. Broadband internet has also been expanding strongly in recent years and as at first quarter of 2014, reached a 67% household penetration with more than half of households having some form of broadband access.¹ Greater affordability of mobile services, development of platforms and mobile enabled services including mobile payments, information services and educational tools) and entry of non traditional players into the ecosystem including technology companies and content provider are key indicators to the potential future growth opportunities of the market. ¹ MCMC : Pocket Book of Statistics, Q1 2014 Mobile Virtual Network Operator Market The explosive growth of wireless is one of the most striking aspects of the telecom industry since the 1990s. Demand for low-cost and high-value cellular service has been driving the mobile industry towards price wars. As the industry continue to mature, Mobile Network Operators (MNO's) recognize that future growth depends on the pursuit of new markets beyond the conventional method of direct acquisition of new subscribers. The growth driven by bundled service offerings with slashed rates is only a short-term remedy. A new strategic model through alliances with Mobile Virtual Network Operator (MVNO) offered a far sighted solution. The MVNO model is seen as both, a solution as well as an opportunity for MNOs to pursue new markets that present sustainable growth and retention. MVNO's typically do not own a network but lease the network of a service provider that does have a network. An MVNO business consists of managing two key relationships; Mobile Network Operator (MNO) and the end-users. MVNO provides mobile services without owning spectrum and relies on the MNO network infrastructure. Notably, this business arrangement allows smaller service providers to be focused on specific aspects of the mobile business by offering specialized services and enriching the industry service offerings through optimization usage of the network infrastructure. MVNOs provide lower operational costs for mobile operators through billing, sales, customer service, marketing, increase revenue through new applications, value added services and attractive rates. As such, the opportunity for mobile operators to take advantage of MVNOs generally outweighs the competitive threat. Type of MVNO's Discount Provides very low call rates to market segments for example, the foreign workers market Lifestyle Focuses on specific niche market demographics for example on the high income executives with specific interestsAdvertising-funded Earns advertising revenue in order to provide free voice, SMS and data to its subscribers. Ethnic Provides services to certain ethnic groups in the country. For e.g. XOX caters to the Chinese community in Malaysia, other MVNOs like Lycamobile, Lebara, iCard Mobile, Globalcell Mobile and Dialog Vizz who target ethnic communities by providing inexpensive calls to their home country. Data Focuses on selling data subscriptions to end-users. Amazon in US and Dell in Japan are Data MVNOs. Merchantrade in Malaysia is a Data MVNO. - 5 - -------------------------------------------------------------------------------- Examples of other MVNO's in Malaysia Merchantrade A strong presence in the foreign workers' in the country on Celcom network. XOX Focus to serve the Chinese community offering services riding on Maxis network Redtone Serving the small and medium-sized enterprises market segment. A spin-off of Redtone International Bhd riding on Maxis. Tune Talk A lifestyle service offering as sister companies Tune Hotels and Tune Money. Operates on Celcom's network, Smart Pinoy A service zooming into over 700,000 Filipino migrant workers in Malaysia, A JV between Celcom and PLDT Tron Offering a yearlong validity for Tron user community numerous incentives. Rides on DiGi network, MyEvolution Malaysia's first Machine-to-Machine (M2M) MVNO service on DiGi network. Tesco Affinity program via Clubcard (Tesco loyalty card) on Maxis network. SpeakOut Targeting students, youth, business travelers, tourists, migrant workers and telco-blacklisted individuals. Buzz Me A prepaid mobile services operating on U Mobile targeting the urban young market. FRiENDi A joint venture between Virgin Mobile Middle East & Africa and Kumpulan Perangsang Selangor Altel A MVNO under Puncak Semangat, within the Al-Bukhary group, in collaboration with CELCOM. No clear direction or target market Plan of operations OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS. We hope to generate additional revenues in the next twelve months by engaging business operations through internal growth and through strategic acquisitions and cooperative advertising agreements, as described more fully under "Overview" above. We have cash and cash equivalents of $7,672 as of March 31, 2013; an increase from the previous period end of December 31, 2012. In the opinion of management, these funds will not satisfy our working capital requirements to operate at our current level of activity for the next twelve months. To effectuate our business plan, during the next twelve months, we must arrange for adequate funding to implement our plans of increasing our advertising offerings and promote our advertising services, through cooperation agreements and otherwise. Financing and funding Management intends to continue to raise additional financing through debt and equity financing or other means and interests that it deems necessary, with a view to implementing our business plan and building a revenue base. We plan to use the proceeds of such financings to provide working capital to our operations and increase our capital expenditure for marketing and working with our co-operative partners. There can be no assurances that sufficient financing will be available on terms acceptable to us or at all. Our forecast for the period for which financial resources will be needed to support our operations involves risks and uncertainties and actual results could fail as a result of a number of factors. Specifically, we hope to accomplish the steps as set out in this report to implement our business plan in respect of the newly acquired company, Clixster Mobile Sdn. Bhd., in developing and integrating the MVNO business. The success of our plans is subject to our ability to obtain adequate funding. Such additional capital may be raised through public or private equity financing, borrowings, or other sources, such as contributions from our officers and directors. If we are unable to obtain funds necessary to implement our business plan, we may revise or scale back our business plan. We are not currently conducting any research and development activities, other than the continual development of our website. We do not anticipate conducting any other research and development activities in the near future. In the event that we expand our business scope, then we may need to hire additional employees or independent contractors as well as purchase or lease additional equipment and open new office locations. - 6 - -------------------------------------------------------------------------------- Results of operation. FOR THE THREE MONTHS PERIOD ENDED MARCH 31, 2013 COMPARED TO THE THREE MONTHS PERIOD ENDED MARCH 31, 2012 REVENUES. For the three months period ended March 31, 2013, the Group has realized revenue of $67,060 and a cost of revenue of $45,912, achieving a gross profit of $21,148 from its continuing operations and there was no revenue, costs of sales and gross profit in 2012 from the continuing operations. For the three month period ended March 31, 2013, the Group has realized revenue of $135,220 and a cost of revenue of $90,925 achieving a gross profit of $44,295 from its business operations held for sale (Note 6). For the three months ended March 31, 2012, Group has realized revenue of $1,201,436 and a cost of revenue of $810,149 achieving a gross profit of $391,287 from its business operations held for sale (Note 6). OPERATING EXPENSES. For the three month period ended March 31, 2013, from our continuing operations, our gross profit was $21,148 and our total operating expenses were $15,878, all of which were selling, general and administrative expenses. We also had $40,777 in interest expenses and loss from our operations held for sale of $95,221 so that the net loss to our shareholders for the three months period ended March 31, 2013 was $130,728. For the three months ended March 31, 2012 the Group did not realize any results from continuing operation and realized a net profit from our operations held for sale of $271,298 so that the net profit to our shareholders for the three months period ended March 31, 2012 was $271,298. For the three month period ended March 31, 2013, from our operation held for sale, our gross profit was $44,295 and our total operating expenses were $130,544, all of which were general and administrative expenses. We also had $4,907 in interest expenses, $5,331 in write back of interest income, loss on foreign exchange of $371, and bank charges $1,305 and other income of $2,942 so that the net loss to our shareholders for the three months period ended March 31, 2013 was $95,221 (Note 6). This is in comparison to the same period ended March 31, 2012 from operations held for sale, where our gross profit was $391,287 and our total operating expenses were $174,527, all of which were selling, general and administrative expenses. We also had $6,199 in interest expenses and gain on foreign exchange of $16,317 and other income of $44,409 and $11 in interest income, so that the net profit to our shareholders for the three months period ended March 31, 2012 was $271,298 (Note 6). Liquidity and Capital Resources As at March 31, 2013, the Company had cash and cash equivalents totaling $7,672, other current assets of $1039 consisting of trade receivables and prepayments, and assets of operations held for sale of $1,550,364. The total assets of the Company were $1,559,075 as of March 31, 2013. We also had current liabilities of $2,922,210 which were represented by $263 in trade payables, $739,407 in other payables and accruals, $236,504 in option liabilities and $1,946,036 in operations held for sale as of March 31, 2013. We also had $2,000,000 in long-term shareholders loan as of March 31, 2013, making our total liabilities $4,922,210. At present the Company does not have sufficient cash resources to provide for all general corporate operations in the foreseeable future. The Company will be required to raise additional capital in order to continue and expand its operations in fiscal 2013. Going Concern The Company's financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced significant losses from operations in recent periods. For the three months ended March 31, 2013 the Company incurred net losses of $130,728 and has accumulated losses of $6,126,163 as at March 31, 2013. The Company's ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered in developing markets and the competitive environment in which the Company operates. The Company is pursuing financing for its operations and seeking additional investment in the Group. In addition, the Company is seeking to expand its revenue base in its consulting business and in developing and integrating its newly acquired MVNO business in Malaysia. Failure to secure such financing, to raise additional equity capital and to expand its revenue based may result in the Company depleting its available funds and not being able to pay its obligations. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. Off Balance Sheet Arrangements As of March 31, 2013, there were no off balance sheet arrangements. The Company has no off balance sheet obligations nor guarantees and has not historically used special purpose entities for any transactions. - 7 - -------------------------------------------------------------------------------- |