megi_10q-093010.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
or
o TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission File Number: 333-49388
Media Exchange Group, Inc.
(formerly known as China Wireless Communications, Inc.)
(Exact name of registrant as specified in its charter)
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Nevada
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91-196948
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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101 Church Street, Suite 14, Los Gatos, California 95030
(Address of principal executive offices)
(408)827-3083
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss. 232.405 of this chapter) during the preceding 12 (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicated the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date, 249,460,702 shares of common stock are issued and outstanding as of March 31, 2011.
OTHER PERTINENT INFORMATION
When used in this report, the terms “Media Exchange,” the Company”, “ we”, “our”, and “us” refers to Media Exchange Group, Inc., a Nevada corporation, and our subsidiary. The information which appears on our web site is not part of this report.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this report contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, our ability to raise sufficient capital to fund our ongoing operations and satisfy our obligations as they become due, our ability to generate any meaningful revenues, our ability to compete within our market segment, our ability to implement our strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, as well as our annual report on Form 10-K for the year ended December 31, 2009 including the risks described in Part I. Item 1A. Risk Factors of that report. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
Media Exchange Group, Inc.
INDEX
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Page
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PART I – FINANCIAL INFORMATION:
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Item 1.
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Financial Statements
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1 |
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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11
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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16
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Item 4T.
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Controls and Procedures
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16
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PART II – OTHER INFORMATION
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Item 1.
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Legal Proceedings
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Item 1A.
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Risk Factors
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17
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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17
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Item 3.
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Defaults Upon Senior Securities
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Item 4.
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Submission of Matters to a Vote of Security Holders
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Item 5.
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Other Information
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Item 6.
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Exhibits
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17
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Signatures
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18
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Media Exchange Group, Inc.
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September 30,
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December 31,
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ASSETS
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2010
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2009
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(Unaudited)
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(1 |
) |
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Current Assets:
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Cash
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$ |
10,969 |
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$ |
200 |
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Prepaid expenses
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99,750 |
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Total current assets
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110,719 |
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200 |
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Total assets
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$ |
110,719 |
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$ |
200 |
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current Liabilities:
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Accounts payable and accrued expenses
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$ |
287,610 |
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$ |
163,093 |
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Accrued compensation
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1,022,717 |
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696,942 |
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Convertible notes payable and accrued interest- related parties
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647,892 |
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455,865 |
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Convertible notes payable and accrued interest
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1,574,936 |
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856,170 |
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Derivative liabilities
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737,300 |
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22,945 |
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Total current liabilities
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4,270,455 |
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2,195,015 |
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Stockholders' Deficit:
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Preferred stock, $0.01 par value, 1,000,000 shares authorized:
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none issued and outstanding
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- |
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- |
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Common stock, par value $0.001 per share, 250,000,000 shares of common stock authorized,
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234,260,702 issued and outsdanding
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234,261 |
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234,261 |
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Additional paid-in capital
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15,104,403 |
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15,104,403 |
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Accumulated deficit
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(19,498,400 |
) |
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(17,533,479 |
) |
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Total stockholders’ deficit
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(4,159,736 |
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(2,194,815 |
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Total liabilities and stockholders’ deficit
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$ |
110,719 |
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$ |
200 |
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(1) Derived from audited financial statements
See Notes to Unaudited Financial Statements.
Media Exchange Group, Inc.
STATEMENTS OF OPERATIONS
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Three-Month Periods Ended
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Nine-Month Periods Ended
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September 30,
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September 30,
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2010
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2009
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2010
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2009
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(Unaudited)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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Operating expenses:
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Research and development
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$ |
41,667 |
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$ |
- |
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$ |
145,267 |
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$ |
- |
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Selling, general and administrative
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326,891 |
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139,155 |
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1,178,754 |
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519,413 |
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Total operating expenses
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368,558 |
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139,155 |
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1,324,021 |
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519,413 |
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Operating loss
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(368,558 |
) |
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(139,155 |
) |
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(1,324,021 |
) |
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(519,413 |
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Other income(expenses):
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Change in fair value of derivative liabilities
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267,505 |
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15,175 |
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(451,050 |
) |
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(10,590 |
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Interest expense related parties
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(12,082 |
) |
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(3,805 |
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(29,395 |
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(21,419 |
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Interest expense, net
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(123,593 |
) |
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(9,693 |
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(160,455 |
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(38,650 |
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131,830 |
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1,677 |
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(640,900 |
) |
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(70,659 |
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Net loss
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$ |
(236,728 |
) |
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$ |
(137,478 |
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$ |
(1,964,921 |
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$ |
(590,072 |
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Basic and diluted loss per common share
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$ |
(0.00 |
) |
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$ |
(0.00 |
) |
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$ |
(0.01 |
) |
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$ |
(0.00 |
) |
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Basic and diluted weighted average common shares outstanding
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234,260,702 |
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234,260,702 |
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234,260,702 |
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234,260,702 |
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See Notes to Unaudited Financial Statements.
Media Exchange Group, Inc.
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Nine-Month Periods Ended
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September 30,
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2010
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2009
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(Unaudited)
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(Unaudited)
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Cash flows from operating activities:
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Net loss
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$ |
(1,964,921 |
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$ |
(590,072 |
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Adjustments to reconcile net loss to net cash used in operating activities:
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Change in fair value of derivative liabilities
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451,050 |
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10,590 |
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Fair value of derivative liabilities upon issuance of debt for services rendered
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61,248 |
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- |
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Amortization of debt discount
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110,195 |
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- |
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Changes in operating assets and liabilities:
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Prepaid expenses
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(99,750 |
) |
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- |
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Accrued interest
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54,147 |
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38,650 |
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Accrued interest-related parties
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25,507 |
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21,419 |
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Accrued compensation
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713,776 |
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321,041 |
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Accounts payable and accrued expenses
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124,517 |
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28,799 |
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Net cash used in operating activities
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(524,231 |
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(169,573 |
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Cash flows from financing activities:
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Proceeds from notes payable-related parties
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50,000 |
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- |
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Proceeds from notes payable
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485,000 |
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169,500 |
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Net cash provided by financing activities
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535,000 |
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169,500 |
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Net increase (decrease) in cash
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10,769 |
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(73 |
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Cash, beginning of period
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200 |
|
|
|
274 |
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Cash, end of period
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$ |
10,969 |
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$ |
201 |
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Supplemental disclosures of cash flow information:
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Cash paid for interest
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$ |
- |
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$ |
- |
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| |
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Cash paid for income taxes
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$ |
- |
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$ |
- |
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| |
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Non-cash investing and financing activities:
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| |
|
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|
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Issuance of convertible notes payable to satisfy liabilities to related parties
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$ |
123,000 |
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$ |
100,000 |
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| |
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Issuance of convertible notes payable to satisfy liabilities
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$ |
265,000 |
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$ |
- |
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| |
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|
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|
|
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Fair value of derivative liabilities upon issuance of debt for cash received
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$ |
202,057 |
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$ |
- |
|
See Notes to Unaudited Financial Statements.
MEDIA EXCHANGE GROUP, INC.
Notes to Unaudited Financial Statements
Note 1. Organization, Basis of Presentation and Accounting Policies.
Media Exchange Group, Inc. formerly known as China Wireless Communications, Inc. (the “Company”) is a Nevada corporation formed in March 1999. The Company operated as AVL Sys International Inc . (between March1999 and March 2000), I-Track, Inc. (between March 2000 and March 2003, and as China Wireless Communications, Inc. between March 2003 and May 2010. As China Wireless Communications, the Company marketed information technology systems integration and internet protocol services to customers. It also provided IP routing equipment and network cabling and its customers are principally in the People’s Republic of China (“China”). In March 2008, the Company discontinued its operations in China.
The Company’s current plan of operations consists of capitalizing on its digital sport cards delivery to youth and acquiring an operating business. The Company has identified certain acquisition target(s) but has not reached any final agreements. The Company’s current plan of business is to seek merger or acquisition opportunities. The Company’s information technology systems business operations are accounted for as discontinued operations in the accompanying financial statements.
The balance sheet presented as of September 30, 2010 is unaudited. The unaudited financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading. The financial statements and notes included herein should be read in conjunction with the annual financial statements and notes for the year ended December 31, 2009 included in our Annual Report on Form 10-K. The results of operations for the nine-month period ended September 30, 2010 are not necessarily indicative of the results for fiscal 2010.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced substantial losses since its inception ($19.5 million) as well as negative cash flows from its current operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue in existence as a going concern is dependent upon its ability to obtain equity or debt financing and to merge with a company which will generate cash flows from operating activities. Management is unable to determine whether it will be successful in obtaining such equity or debt financing or merge with a company generating cash flows from operations.
Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on the knowledge of current events and actions the Company may undertake in the future, they will differ from actual results. Included in these estimates are assumptions about recovery of assets from discontinued operations and allocation of expenses between continued and discontinued operations.
Cash and Cash Equivalents
The Company considers all highly-liquid debt instruments with original maturities of three months or less to be cash equivalents. There were no cash equivalents at September 30, 2010 and December 31, 2009.
Concentration of Credit Risk
The Company's cash and cash equivalents accounts are held at financial institutions and are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. To reduce its risk associated with the failure of such financial institutions, the Company periodically evaluates the credit quality of the financial institutions in which it holds deposits. As of September 30, 2010 and December 31, 2009, the Company had no deposits in excess of FDIC limits.
Share-Based Compensation
Share-based compensation expenses are reflected in the Company’s statement of operations under selling, general and administrative expenses.
The Company’s computation of fair value of shares issued is based on the price per share as quoted on the over-the counter bulletin or the pink sheets, as applicable, at the date of grant.
Income Taxes
The Company accounts for income taxes under the asset and liability approach for the financial accounting and reporting of income taxes. Deferred taxes are recorded based upon the tax impact of items affecting financial reporting and tax filings in different periods. A valuation allowance is provided against net deferred tax assets when the Company determines realization is not currently judged to be more likely than not.
The Company follows the provisions of the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) No. 740, Income Taxes (“ASC 740”). ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition purposes by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Accordingly, the Company reports a liability for unrecognized tax benefits resulting from the uncertain tax positions taken or expected to be taken on a tax return and recognizes interest and penalties, if any, related to uncertain tax positions as interest expense.
Loss per Common Share and Common Share Equivalent
The Company presents “basic: income (loss) per common share and, if applicable “diluted” income (loss) per share, pursuant to the provisions of ASC 260 “Earnings Per Share”. Basic income (loss) per common share is based on the weighted average number of common shares outstanding in each year and after preferred stock dividend requirements. The calculation of diluted income (loss) per common share assumes that any dilutive convertible shares outstanding at the beginning of each year or the date issued were convertible at those dates, with outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options and warrants for which average period market price exceeds exercise price, less shares that could have been purchased by the Company with related proceeds.
There were no outstanding stock option grants as of September 30, 2010 and December 31, 2009. The outstanding warrants amounted to 12,500,000 at September 30, 2010. The outstanding common share equivalents issuable pursuant to conversion of notes payable amounted to 167,380,000 and 53,930,000 as of September 30, 2010 and December 31, 2009, respectively. Additionally, the chief executive officer obtained rights to 7% of the authorized shares of common stock of the Company which amounted to approximately 17,500,000 shares at September 30, 2010 and December 31, 2009 and 150,000 shares of Preferred Stock, which includes, among other things voting rights equivalent to 450,000,000 shares of the Company’s common stock. The outstanding common share equivalents issuable pursuant to convertible notes and other rights have been excluded from the earnings per share computation due to their anti-dilutive effect.
Derivative Liabilities
The Company assessed the classification of its derivative financial instruments at each measurement dates. The Company’s derivative liabilities consist of embedded features in convertible instruments and rights to unissued shares of the Company’s common stock and to shares of the Company’s Preferred Stock, and determined that such derivatives meet the criteria for liability classification under ASC 815.
ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional (as that term is described).
The Company believes that certain conversion features embedded in certain of its convertible notes payable and rights to the Company’s common stock and preferred stock are not clearly and closely related to the economic characteristics of the Company’s stock price. The Company does not have a sufficient amount of authorized shares to satisfy its obligations under the convertible promissory notes and rights to the shares of common stock. Additionally, while rights to preferred stock have been granted to the Company’s chief executive officer, substantially all the terms were finalized in January 2011 and the shares have not been issued yet. Accordingly, the Company has recognized derivative liabilities in connection with such instruments. The Company uses judgment in determining the fair value of derivative liabilities at the date of issuance at every balance sheet thereafter. The Company uses judgment in determining which valuation is most appropriate for the instrument (e.g., Black Scholes), the expected volatility, the implied risk free interest rate, as well as the expected dividend rate.
Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted FASB ASC 820-Fair Value Measurements and Disclosures, or ASC 820, for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.
ASC 820 defines fair value 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. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
|
Leve l :
|
Observable inputs such as quoted market prices in active markets for identical assets or liabilities |
|
Level 2:
|
Observable market-based inputs or unobservable inputs that are corroborated by market data |
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
|
The Company did not have any Level 2 or Level 3 assets or liabilities as of September 30, 2010 and December 31, 2009 , with the exception of its convertible promissory notes and the derivative liability associated with certain notes payable. The carrying amounts of the convertible promissory notes at September 30, 2010 and December 31, 2009 approximate their respective fair value based on the Company’s incremental borrowing rate.
Cash is considered to be highly liquid and easily tradable as of September 30, 2010 and December 31, 2009, respectively. The derivative liabilities are based on the Company’s quoted trade price per share as traded on the Pink Sheets. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy.
In addition, FASB ASC 825-10-25 Fair Value Option, or ASC 825-10-25, was effective for January 1, 2008. ASC 825-10-25 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value options for any of its qualifying financial instruments.
Impact of Recently Issued Accounting Standards
None.
Note 2. Notes Payable and Notes Payable to Related Parties
| |
September 30,
|
|
December 31,
|
|
| |
2010
|
|
2009
|
|
|
$588,000 and $415,000 Notes payable to related parties, interest rate ranging between 5%and 8% per annum, unsecured and maturing between March 2009 and May 2011. At the Company’s option, the principal is convertible for $313,000 of such notes into shares of the Company’s common stock at a price of $0.004 per share. Includes accrued interest of $66,372 and $40,865 and debt discount of $6,480 and $0.
|
|
$ |
647,892 |
|
|
$ |
455,865 |
|
| |
|
|
|
|
|
|
|
|
|
$1,624,500 and $749,500 Notes payable, interest rate ranging from 5% to 8% interest per annum, unsecured and maturing between February 2008 and September 2011. At the Company’s option, the principal is convertible for $699,500 of such notes into shares of the Company’s common stock at a prices ranging between $0.004 to $0.01 per share. Includes accrued interest of $160,818 and $106,670 and debt discount of $210,382 and $0.
|
|
|
1,574,936 |
|
|
|
856,170 |
|
| |
|
$ |
2,222,828 |
|
|
$ |
1,312,035 |
|
During the nine-month period ended September 30, 2009, the Company issued a note payable to its General Counsel amounting to $100,000 to satisfy compensation liabilities.
During the nine-month period ended September 30, 2010, the Company issued a note payable to a relative of the Company’s Chief Executive Officer and its General Counsel amounting to $123,000 to satisfy compensation liabilities.
During the nine-month period ended September 30, 2010, the Company issued a note payable to consultants aggregating $265,000 to satisfy compensation liabilities.
During the nine-month period ended September 30, 2010 and 2009, the Company generated proceeds by issuing $535,000 and $170,000 notes payable, respectively. During August 2010, the Company issued a note at a discount of $125,000 and was recognized as debt discount during the nine-month period ended September 30, 2010.
Notes payable aggregating $1.7 million were past due at September 30, 2010.
Note 3. Derivative Liabilities
The Company estimated its derivative liabilities under its outstanding contracts at September 30, 2010. The Company is unable to ascertain that it had a sufficient amount of authorized shares to satisfy its obligations under existing convertible promissory notes and rights held by its chief executive officer pursuant to his employment contract with the Company. Additionally, the Company has granted 150,000 shares of its Preferred Stock without finalizing the terms of such preferred stock until January 2011. Furthermore, the Company granted 12,500,000 warrants to a noteholder in August 2010.
The conversion feature of certain convertible promissory notes outstanding at September 30, 2010 have lapsed between December 2008 and January 2011 without conversion or additional consideration provided to the note holders. Accordingly, the Company did not issue additional considerations to such instruments and it believes that there is no liability associated with them. However, the conversion feature of certain notes payable amounting to $510,000 and convertible into approximately 84,150,000 shares of the Company’s common stock , the rights to the shares of common stock and preferred stock have not lapsed and are still outstanding. The Company estimates its liability under such rights using its traded price per share and under the convertible note payable using the binomial method.
The aggregate fair value of derivative liabilities at September 30, 2010 and December 31, 2009 amounted to approximately $738,000 and $23,000, respectively.
During the nine-month period ended September 30, 2010, the Company issued $510,000 notes payable which is convertible into approximately 84,150,000 shares of the Company’s common stock. The fair value of the embedded conversion features for notes payable issued pursuant to services provided, amounted to approximately $61,000 at their respective date of issuance and was recorded as research and development expense and general and administrative expenses for approximately $4,000 and $57,000, respectively, as additional consideration provided for the services of a software engineer and other consultants. The fair value of the embedded conversion features for notes payable issued for cash consideration amounted to approximately $38,000 and was recognized as debt discount.
The fair value of the warrants issued to the noteholder in August 2010 amounted to approximately $161,000 and was recognized as debt discount.
The fair value of the rights and embedded conversion feature were based on the Company’s quoted traded price and the binomial; method, respectively, at each measurement date.
The fair value of the derivative instruments were based on the following assumptions:
| |
|
|
Issuance during
|
|
|
| |
|
|
the nine-month
|
|
|
| |
September 30,
|
|
period ended
|
|
December 31,
|
| |
2010
|
|
September 30, 2010
|
|
2009
|
|
Rights:
|
|
|
|
|
|
|
market value
|
$ 0.020
|
|
N/A
|
|
$ 0.0013
|
| |
|
|
|
|
|
|
Embedded Conversion Feature:
|
|
|
|
|
|
|
Weighted-average effective exercise price
|
$0.01-0.025
|
|
$0.01-0.025
|
|
N/A
|
|
Effective Market price
|
$0.017
|
|
$0.004-.019
|
|
N/A
|
|
Volatility
|
116%
|
|
116%
|
|
N/A
|
|
Risk-free interest
|
0.32%
|
|
0.32-0.4%
|
|
N/A
|
|
Terms
|
1 year
|
|
1 year
|
|
N/A
|
|
Expected dividend rate
|
0%
|
|
0%
|
|
N/A
|
| |
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
Effective exercise price
|
$0.015
|
|
$0.015
|
|
N/A
|
|
Effective Market price
|
$0.017
|
|
$0.02
|
|
N/A
|
|
Volatility
|
116%
|
|
116%
|
|
N/A
|
|
Risk-free interest
|
0.27%
|
|
0.27%
|
|
N/A
|
|
Terms
|
2 years
|
|
2 years
|
|
N/A
|
|
Expected dividend rate
|
0%
|
|
0%
|
|
|
The fair value of derivative liabilities increased by approximately $452,000 between measurement dates during the nine-month period ended September 30, 2010. Such increase is recorded as other expense in the accompanying statement of operations.
Note 4. Commitments and Contingencies.
Legal proceedings
The Company is not a party to certain legal actions, as either plaintiff or defendant, arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company’s business, financial condition or results of operations. However, litigation is inherently unpredictable, and the costs and other effects of pending or future litigation, governmental investigations, legal and administrative cases and proceedings, whether civil or criminal, settlements, judgments and investigations, claims or charges in any such matters, and developments or assertions by or against us relating to the Company or to the Company’s intellectual property rights and intellectual property licenses could have a material adverse effect on the Company’s business, financial condition and operating results.
Compensation-Chief Executive Officer
The compensation of the Company’s Chief Executive Officer is effective March 2008 through December 2009 and is as follows:
|
|
·
|
Base annual compensation of $400,000;
|
|
|
·
|
7% of the authorized shares of the Company;
|
|
|
·
|
7% of all capital raised by the Company;
|
|
|
·
|
7% of the disposition proceeds upon the sale of the Company;
|
|
|
·
|
Incentive compensation based on revenues ranging from $20,000 if revenues range between $0-2 million to $200,000 if revenues are in excess of $10 million;
|
|
|
·
|
$275,000 upon the performance of specific performances, which were accomplished during March 2008.
|
This agreement was modified effective January 1, 2010 as follows:
|
|
·
|
Base annual compensation of $450,000;
|
|
|
·
|
Incentive compensation based on revenues ranging from $20,000 if revenues range between $0-2 million to $200,000 if revenues are in excess of $10 million;
|
|
|
·
|
Monthly stipend for office and residence of $9,000 per month;
|
|
|
·
|
2% of all capital raised by the Company;
|
|
|
·
|
5% of the disposition proceeds upon the sale of the Company.
|
Compensation-General Counsel
The Compensation of the Company’s General Counsel is effective January 1, 2009 and is as follows:
|
|
·
|
Base annual compensation of $204,000;
|
|
|
·
|
Incentive compensation based on revenues ranging from $10,400 if revenues range between $0-2 million to $102,000 if revenues are in excess of $10 million;
|
|
|
·
|
2% of all capital raised by the Company;
|
|
|
·
|
5% of the disposition proceeds upon the sale of the Company;
|
|
|
·
|
Monthly stipend for office of $3,000 per month.
|
Note 5. Subsequent Events
The Company has issued approximately $620,000 notes payable after September 30, 2010, in consideration of both cash and services from investors and vendors, respectively. The Company satisfied its obligations under $52,500 of notes issued during 2008 by issuing 15,200,000 shares of its common stock in August 2010.
Item 2. Management's Discussion and Analysis and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2007. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements. See ‘‘Cautionary Statement Regarding Forward Looking Information’’ elsewhere in this report. Because this discussion involves risk and uncertainties, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
Media Exchange Group, Inc., formerly known as China Wireless Communications, Inc. (the“Company”) is a Nevada corporation formed in March 1999. The Company operated as AVL Sys International Inc. . . (between March 1999 and March 2000), I-Track, Inc. (between March 2000 and March 2003, and as China Wireless Communications, Inc. between March 2003 and May 2010. As China Wireless Communications, the Company marketed information technology systems integration and internet protocol services to customers. It also provided IP routing equipment and network cabling and its customers are principally in the People’s Republic of China (“China”). In March 2008, the Company discontinued its operations in China.
The Company’s current plan of operations consists of acquiring an operating business. The Company identified certain acquisition target(s) but as not reached any final agreements. The Company’s current plan of business is to seek merger or acquisition opportunities. The Company’s information technology systems business operations are accounted for as discontinued operations in the accompanying financial statements.
The Company’s current plan of operations consists of acquiring an operating business. The Company identified certain acquisition target(s) but as not reached any final agreements. The Company’s current plan of business is to seek merger or acquisition opportunities. The Company’s information technology systems business operations are accounted for as discontinued operations in the accompanying financial statements.
We currently license certain rights from a related party (Malibu Entertainment Group, Inc.) an affiliate by means of common ownership and management, to market a youth sports social network under the following brand:
www.myespnhighlights.com
Among other things, this website allows young sports participant to personalize, showcase and share their passion for a professional sport. We work with various national youth sports league to help build their the player database through registrations. The profile control the management and sharing of sport profiles, statistics and content. We use the Capsa platform to ensure support across significant carriers and handset.
| |
|
|
|
|
|
|
|
Increase/
|
|
|
Increase/
|
|
| |
|
Three-Month Periods Ended
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
| |
|
September 30,
|
|
|
in $ 2010
|
|
|
in % 2010
|
|
| |
|
2010
|
|
|
2009
|
|
|
vs 2009
|
|
|
vs 2009
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$ |
41,667 |
|
|
$ |
- |
|
|
$ |
41,667 |
|
|
NM
|
|
|
Selling, general and administrative
|
|
|
326,891 |
|
|
|
139,155 |
|
|
|
187,736 |
|
|
|
134.9 |
% |
|
Total operating expenses
|
|
|
368,558 |
|
|
|
139,155 |
|
|
|
229,403 |
|
|
|
164.9 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(368,558 |
) |
|
|
(139,155 |
) |
|
|
229,403 |
|
|
|
164.9 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income(expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
267,505 |
|
|
|
- |
|
|
|
267,505 |
|
|
NM
|
|
|
Interest expense related parties
|
|
|
(12,082 |
) |
|
|
(3,805 |
) |
|
|
8,277 |
|
|
|
217.5 |
% |
|
Interest expense, net
|
|
|
(123,593 |
) |
|
|
(9,693 |
) |
|
|
113,900 |
|
|
|
1175.1 |
% |
| |
|
|
131,830 |
|
|
|
(13,498 |
) |
|
|
(145,328 |
) |
|
|
-2887 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(236,728 |
) |
|
$ |
(152,653 |
) |
|
$ |
99,250 |
|
|
|
55.1 |
% |
Three-Month Period Ending September 30, 2010 and 2009
Selling, general and administrative expenses
Selling, general, and administrative expenses primarily consists of compensation to officers and consultants incurred in connection with researching and identifying strategic transactions and being a publicly-traded company.
The increase in selling, general, and administrative expenses during the three-month period ended September 30, 2010 when compare to the prior year period is primarily due to increased compensation from additional staff to support our operations and increased compensation to our chief executive officer, pursuant to a new contract effective January 1, 2010.
Interest expense and interest expense to related parties
Interest expense primarily consists of interest on debt.
The increase in interest expense during the three-month period ended September 30, 2010 when compared to the prior year is primarily due to by our weighted-average debt higher during the three-month period ended September 30, 2010 when compared to the comparable prior year period.
Change in fair value of derivative liabilities
The change in fair value of derivative liabilities consists of unrealized gains or losses associated with derivative liabilities at each measurement date. The change in change of fair value of derivative liabilities between the three-month period ended September 30, 2010 when compared to the prior year is attributable to a change in the quoted price per share of common stock, one of the key assumptions used in our valuation of such derivative liabilities, during the three-month period ended September 30, 2010 and 2009, respectively. There was a lower increase in our quoted price per share during the three-month period ended September 30, 2009 which explains why the change in derivative liabilities was lower in the prior year comparable period.
Nine-month Period Ending September 30, 2010 and 2009
Research and development
Research and development consists of consulting fees incurred by the Company in connection with the enhancement of its digital youth sports social network.
The increase in research and development during the nine-month period ended September 30, 2010 when compared to the prior year period is primarily due to our enhancement of our digital youth sports social network which began during that period. We did not incur such expenses during the three-month period ended September 30, 2009.
Selling, general and administrative expenses
Selling, general, and administrative expenses primarily consists of compensation to officers and consultants incurred in connection with researching and identifying strategic transactions and being a publicly-traded company.
The increase in selling, general, and administrative expenses during the nine-month period ended September 30, 2010 when compare to the prior year period is primarily due to increased compensation from additional staff to support our operations and increased compensation to our chief executive officer, pursuant to a new contract effective January 1, 2010.
Interest expense and interest expense to related parties
Interest expense primarily consists of interest on debt.
The increase in interest expense during the nine-month period ended September 30, 2010 when compared to the prior year is primarily due to by our weighted-average debt higher during the nine-month period ended September 30, 2010 when compared to the comparable prior year period.
Change in fair value of derivative liabilities
The change in fair value of derivative liabilities consists of unrealized gains or losses associated with derivative liabilities at each measurement date. The change in change of fair value of derivative liabilities between the nine-month period ended September 30, 2010 when compared to the prior year is attributable to a change in the quoted price per share of common stock, one of the key assumptions used in our valuation of such derivative liabilities, during the nine-month period ended September 30, 2010 and 2009, respectively. There was an increase in our quoted price per share during the nine-month period ended September 30, 2010 while it remained constant between December 31, 2008 and September 30, 2009.
Going Concern
The Company has experienced substantial losses since its inception as well as negative cash flows from its current operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue in existence as a going concern is dependent upon its ability to obtain equity or debt financing and to merge with a company which will generate cash flows from operating activities. Management is unable to determine whether it will be successful in obtaining such equity or debt financing and whether it will be successful in completing a merger with a company generating cash flows.
Liquidity
Our cash balance amounted to approximately $200 at September 30, 2010. We are unable to ascertain that our cash balance will be sufficient to meet our obligations for the next twelve months.
During the nine-month period ended September 30, 2010, we used cash flows in operating activities of approximately $275,000. This is primarily due to our net loss of approximately $1.7 million, adjusted by the following non-cash transactions or changes in operating activities:
|
|
·
|
Change in fair value of derivative liabilities of approximately $720,000;
|
|
|
·
|
Increase of accrued compensation of approximately $554,000 and accrued expenses of $82,000;
|
During the nine-month period ended September 30, 2010 we generated proceeds of approximately $225,000 by issuing notes payable, of which $50,000 were issued to related parties.
During the nine-month period ended September 30, 2009, we used cash flows from operations of approximately $66,000 in our operating activities. This is primarily due to our net loss from operating activities of approximately $385,000, adjusted by the following non-cash transactions or changes in operating liabilities:
|
|
·
|
Increase of accrued compensation of approximately $261,000, accrued interest of approximately $38,000 and accrued expenses of $20,000.
|
During the nine-month period ended September 30, 2009 we generated proceeds of approximately $66,000 by issuing notes payable.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include, but are not limited to the realization of accounts receivables. Actual results will differ from these estimates. Present below are those accounting policies that we believe require subjective and complex judgments that could affect reported results:
Derivative liabilities
ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional (as that term is described).
The Company believes that certain conversion features embedded in certain of its convertible notes payable and rights to the Company’s common stock and preferred stock are not clearly and closely related to the economic characteristics of the Company’s stock price. The Company does not have a sufficient amount of authorized shares to satisfy its obligations under the convertible promissory notes and rights to the shares of common stock. Additionally, while rights to preferred stock have been granted to the Company’s chief executive officer, substantially all the terms were finalized in January 2011. Accordingly, the Company has recognized derivative liabilities in connection with such instruments. The Company uses judgment in determining the fair value of derivative liabilities at the date of issuance at every balance sheet thereafter. The Company uses judgment in determining which valuation is most appropriate for the instrument (e.g., Black Scholes), the expected volatility, the implied risk free interest rate, as well as the expected dividend rate.
Income Tax
We account for income taxes under the asset and liability approach for the financial accounting and reporting of income taxes. Deferred taxes are recorded based upon the tax impact of items affecting financial reporting and tax filings in different periods. A valuation allowance is provided against net deferred tax assets when we determine realization is not currently judged to be more likely than not.
We follow the provisions of the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) No. 740, Income Taxes (“ASC 740”). ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition purposes by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Accordingly, we report a liability for unrecognized tax benefits resulting from the uncertain tax positions taken or expected to be taken on a tax return and recognizes interest and penalties, if any, related to uncertain tax positions as an as interest expense.
Impact of Recently Issued Accounting Standards
None.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) or Rule 15a-15(e) under the Exchange Act) as of September 30, 2010. This evaluation (the “disclosure controls evaluation”) was done under the supervision and with the participation of management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”). Based upon the disclosure controls evaluation, our CEO and CFO have concluded that, as of September 30, 2010, our disclosure controls and procedures were not effective to provide reasonable assurance that the foregoing objectives are achieved.
Changes in Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of management, including the CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting, as of September 30, 2010, based upon the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation under the framework in Internal Control — Integrated Framework, management concluded that our internal control over financial reporting were not effective as of September 30, 2010. We used to have sufficient staff to segregate duties but no longer have the internal resources to do so. Once we have the proper amount of working capital, we will strengthen our internal controls over financial reporting.
There were no changes in our internal controls during the three-month period ended September 30, 2010.
PART II - OTHER INFORMATION
Item 1A. Risk Factors
No significant development.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three-month period ended September 30, 2010, we issued $175,000 notes payable to two individuals for cash consideration. The notes bear interest at rates ranging between 5% and 7% and mature a year after their issuance. The notes are convertible into shares of our common stock at rates ranging between $0.004-$0.025 per share, at our option.
During the three-month period ended September 30, 2010, we issued $470,000 notes to five individuals. The notes bear interest at a rate of 5% to 7% and mature a year after their issuance. The notes are convertible into shares of our common stock at rates ranging between $0.004 and $0.05 per share, at our option.
These transactions exempt from registration under the Securities Act of 1933 in reliance on exemptions provided by Section 3(a)(9) of that act.
|
Exhibit
|
|
|
No.
|
Description |
| |
|
|
|
| |
31.1
|
|
Certification by Joseph R. Cellura, Chief Executive Officer, pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a)
|
| |
|
|
|
| |
31.2
|
|
Certification by Joseph R Cellura, Chief Financial Officer, pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a)
|
| |
|
|
|
| |
32.1
|
|
Certification by Joseph R. Cellura, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
| |
|
|
|
| |
32.2
|
|
Certification by Joseph R. Cellura, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
Media Exchange Group, Inc.
|
|
| |
|
|
|
Date: March 31, 2011
|
By:
|
/s/ Joseph Cellura
|
|
| |
|
Joseph R Cellura
|
|
| |
|
Chief Executive Officer and Chairman of the Board
|
|
18