China Digital has a few partners in technology development and networks coverage terms.
China's media industry is generally very competitive with new investments coming from western countries. Also the company is in an unfavorable position with main competitors being privately held firms with substantially larger revenues.
Here's the description from companies SEC filing:Overview
China Digital Media Corporation ("CDMC") was previously known as HairMax International, Inc. ("Hairmax"), a Nevada corporation incorporated in 1987. Arcotect Digital Technology Limited, a corporation organized under the laws of Hong Kong, consummated a reverse merger with Hairmax in March, 2005, and Hairmax subsequently changed its name to China Digital Media Corporation. With the termination of the original businesses of Hairmax, all of China Digital Media Corporation's businesses are now located in the People's Republic of China (the "PRC" or ‘China"). Arcotect Digital Technology Limited has changed its name to China Digimedia Holdings Limited ("CDHL"), and is a wholly-owned subsidiary of CDMC.
We are engaged in the business of providing services to the television broadcasting and media industry in China through operations, partnerships and investments. The three main businesses of CDMC are:
• Through a subsidiary, Arcotect (Guangzhou) Limited ("AGL"), converting digital cable television subscribers to digital television and providing various value added and broadband services to the digital subscribers;
• Television advertising sales;
• Television program production.
The Company's business plan is to strengthen its branding and to enlarge its presence and involvement in the media industry. The Company will continue to focus its resources toward replicating its successful migration model to other cities of China, while seeking opportunities to alliance with strong strategic partners.
Cable TV operations and digital broadcast technology development
AGL, a wholly owned foreign subsidiary of CDMC incorporated in China, is the sole contractor and operator of digital television ("DTV") services in Nanhai, Guangdong Province, a city with over 410,000 residential and commercial cable television subscribers.
On February 6, 2004, we signed a 20-year Co-operative Agreement for Total Migration into DTV System for the Nanhai District and subsequently signed a supplementary agreement on July 8, 2005 and May 18, 2007 (collectively, the "Co-operative Agreements") with Nanhai Network Company, a city-owned cable network operator in Guangdong Province. Pursuant to the Co-operative Agreements, the Company is responsible for migrating all cable television subscribers in Nanhai from an analog to a digital system ("Migration") by the end of 2007. As of June 30, 2007, the Company has migrated about 230,000 subscribers into the digital system and the migration program is on schedule.
According to the Co-operative Agreements, AGL is entitled to share the subscription fees paid by all cable television subscribers as well as paid by DTV subscribers for additional services, including pay-TV services, and to receive the subscription fee for any additional STBs.
Under the Co-operative Agreement, the Company is a sole contractor and operator of digital TV in Nanhai. The Company is responsible for supplying all subscribers with a digital set-top-box on a lease basis to subscribers. If subscribers want an additional set-top-box, the subscriber must purchase the set-top-box from the Company. The Company is also responsible for providing operational support services including migration planning, marketing and sales, software development, customer service and logistics administration. The Company's proprietary operating support system automates many of the processes, such as database management, billing, work orders and inventory control, and assists in the operation of a 24/7 call center for technical support and customer care. The city-owned cable company retains management of the broadcasting system and the fiber-optic network and is responsible for compliance with national broadcasting policies.
The broadcast system that decrypts the signal with the Company's set-top-box and appropriate smart cards can carry up to 800 digital channels of pay-TV programs and value added multimedia services. Currently, the services consist of 126 channels, including a 49-channel basic package, 77 pay channels and 3 high definition TV channels bundled into various value added packages, such as Life & Leisure, World Sports, News, Drama and Family.
The Company has deployed an IP (Internet Protocol) based set-top-box which is developed by our wholly owned subsidiary Arable Media Limited, a software developer specialised in middleware products and applications for digital TV set-top box and broadcasting technologies. The Company believes the advanced set-top-box will enable the Company to provide additional value added services which can be deployed in the future; such as targeted advertising, interactive TV programs, online shopping and console games, as well as interactive education services.
During the second quarter of 2007, the Company has started to sell the first value added service through the DTV platform: a real time stock information system. The subscribers can subscribe to receive the real time stock information for the Chinese companies which are listed in the Chinese stock market (namely "A" shares and "B" shares) with charts, analysis and related information on the television set through the Company's developed middleware platform.
TV advertising sales
M-Rider, a company incorporated in China and100% owned by the Company under a trust arrangement, is an advertising sales company engaged in the distribution of television commercials. The Company is responsible for reselling commercial airtime to international and local advertising customers, either directly or through agents and receiving agency fees and services fee. The Company has many years of experience in providing consultancy and media planning services to clients, and assisting them to deliver their messages precisely and professionally to their targeted audiences efficiently. In addition, the Company believes that it can manage advertising resources more effectively to enhance value of the advertising space.
In February, 2007, M-Rider signed a five year sole agent service agreement (the "Sole Agent Agreement") to provide consultation services and manage advertising time slots exclusively with China Yellow River TV Station ("CYR Station"), a television station located in Shanxi Province in China which has a population of over 30 million, starting from January 1, 2007. In addition, M-Rider has a priority to renew the Agreement for an additional five years upon expiration of the Sole Agent Agreement on December 31, 2011.
According to the Sole Agent Agreement, M-Rider shall act as the sole agent and provide consultation services for media planning advisory, sales analysis and strategic planning to CYR Station. In return, M-Rider will get a media services fee based on the revenue generated and a performance bonus at the end of each fiscal year.
TV channel management and program production
On February 2006, HuaGuang, entered into two joint venture agreements with the provincial television station, Guizhou Television Station, for a term of 20 years. Pursuant to the joint venture contracts, the provincial television station will provide the exclusive use of a television channel, including production resources and equipment, while outsourcing its entire advertising air time slots to the two joint ventures for an initial term of five years, extendable by mutual agreement. Guishi Digimedia, a 51% subsidiary of HuaGuang, will serve as the exclusive advertising agent to manage the television commercials. Guishi Huaguang, a 49% owned interest of HuaGuang, will be responsible for sourcing and production content, as well as schedule planning. Currently, over 100 professionals and experienced staff are working on the production, planning and scheduling, and contents sourcing. The channel is focusing on fashion, entertainment, lifestyle and sports, 24 hours a day.
Besides, HuaGuang has made a minority investment in two television series, XiGuan Affairs, with 40 episodes, and The Story of a Small Town, with 24 episodes.
The Company relied on two suppliers for approximately 92% of its purchases for the six months ended June 30, 2007 for the Nanhai TV digitalization project. As of June 30, 2007, accounts payable due to these suppliers amounted to $2,963,717 and $610,599 respectively.
At present, some of our targeted businesses are subject to certain governmental restrictions in the PRC. In order to enable us to invest in certain media sectors such as TV advertising and content productions before government regulations and policies in this field are opened to foreign investors, one of our directors holds the equity interest of HuaGuang while HuaGuang holds the equity interest of M-Rider on behalf of the Company. We are therefore not the direct owner of the programming and advertising operations. We anticipate that this arrangement will be continued until further relaxation of the broadcasting policy in China.
RESULTS OF OPERATIONS
Statements of Operations Items:
Sales
Total revenue for the three months ended June 30, 2007 decreased by $2,394,381 or 54% to $2,076,223 from $4,470,604 for the same period ended June 30, 2006. For six months ended June 30, 2007, we recorded total revenue of $4,281,485, or 48% decrease compared to total revenue of $8,167,325 for the same period last year. The decrease in total net sales was due to (1) the reduction in TV advertising sales after the Company decided to discontinue its agreement to act as the sole advertising agent of a TV channel in Guangzhou during 2007 as such operations had shown during 2006 not to be profitable; (2) reduction in sale of STB as larger scale of Nanhai TV migration process has not yet commenced in the first half of the year in accordance to Network Company's schedule; and (3) no one-time income attributable to reimbursement of operating expenses from Network Company is being recognized in this year.
Gross Profit
Gross Profit for the three months and six months ended June 30, 2007 decreased by $973,958 or 52% to $912,527 and $1,507,138 or 47% to $1,669,798 respectively as compared with the same period last year because of the reduction in TV advertising sales, the increase in depreciation of STB, and the reduction of STB sale and one-time income as described above during the first half year of 2007.
Expenses
Selling, general, administrative and depreciation and amortization (not related directly to generation of revenue) expenses for the three months ended June 30, 2007 increased by $97,769 or 14% to $776,790 and increased by $324,512 or 26% to $1,578,371 for the six months ended June 30, 2007 in comparison with the same period of 2006 which the increase was mainly due to the increase in business activities for the development of new value-added business and corporate expenses.
Minority Interests
Minority interests in the statement of operation represent the minority shareholders' share of the profits in the Company's 49% subsidiary. For the six months ended June 30, 2007, we recognized minority's share of loss of $66,810.
Net Income
The Company had a net loss of $11,135 and net income of $893 for the three months and six months period ended June 30, 2007 respectively, compared to net income of $841,430 and $1,342,698 for the same periods ended June 30, 2006. The decrease in net income was because of the reduction in income from operation, and increase in depreciation, interest expenses and share of loss of the equity JV though offset partially by reduction in provision made for income tax.
Balance Sheet Items:
Current Assets
Current assets of the Company decreased by $0.2 million to $10.8 million during the first six months of 2007. As the Company utilized most of its cash on DTV migration, it has maintained a low level of cash balance of $0.4 million. Accounts receivable decreased by $0.3 million, mainly attributable to the increase in cash received from Nanhai Network Company.
Intangible Assets
Intangible assets increased by $3.9 million during the first six months of 2007 which is the goodwill generated from the acquisition of Maxcomm.
Property and Equipment, Net
The net decrease in property and equipment of the Company of $0.8 million to $11.3 million represented depreciation of STB offset by purchase of STB during the first half of 2007.
Other Assets
Other assets represent deferred finance costs of $298,000 related to commission, legal and financial advisory fees directly attributable to the issuance of the convertible debenture by the Company in 2006. Deferred finance costs are amortized over the life of the debenture of 18 months from November 2006. For the six months ended June 30, 2007, such expenses amortized were $195,600. Other assets also include capitalized software development costs of $614,462 related to the development of middleware of Arable. Such costs have not yet been transferred to the Fixed Assets of the Company and so no amortization was made.
Current Liabilities
Current liabilities of the Company had reduced by $0.6 million to $11.90 million during the first half of 2007 which is mainly due to the reduction in accounts payable by $1.5 million.
Liquidity and Capital Resources
On June 30, 2007, we had cash of $390,115 and a working capital deficit of $960,612. This compares with cash of $472,466 and a working capital deficit of $1,437,167 at June 30, 2006. The decrease in working capital was mainly attributable to the funds raised from the issuance of debentures to finance the Nanhai migration process.
Operating activities had a net generation of cash deficit in the amount of $46,840 during the six months ended June 30, 2007 (2006: $3,804,621). The reduction of cash from operating activities was mainly attributable to settlement of payables due to suppliers.
Net cash used in investing activities for the six months ended June 30, 2007 was $383,700 as compared with net cash used in investing activities of $5,037,702 for the six months ended June 30, 2006. The decrease in net cash used in investing activities was due to the decrease in purchases of STBs in the first half of this year.
Net cash provided by financing activities for the six months ended June 30, 2007 was $329,096 representing funding from related companies (2006: $638,698, of which $387,500 represented funds from a private placement).
We continued to receive cash from Nanhai Network Company according to the project schedule and plan of television digitalization migration. The Company's investment in STBs and smart cards remained the substantial accounts payable at June 30, 2007. For further business expansion and acquisition, the Company is considering various financing methods for funding, although there is no assurance that the Company will be able to raise additional funding on favorable terms, if at all. With the Company's further effort to expedite the collection of receivables and without considering further expansion, the Company is expected to have sufficient cash generated from operating activities to get through its business in the next 12 months.
On a long-term basis, liquidity is dependent on continuation and expansion of operations, receipt of revenues, additional infusions of capital and debt financing. Our current capital and revenues are not sufficient to fund further acquisition and business expansion. The Company is planning to raise capital through debt financing and from bank borrowings and equity financing from potential investors and partners. However, if the Company is unable to raise additional capital, its growth potential is likely to be affected.
Foreign Currency Translation Risk
The Company's major operation is in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the United States dollars ("US$") and the Chinese Renminbi ("RMB"). Provided that the RMB exchange rate against the US$ maintains at a low degree of volatility, the Company does not believe that its foreign currency exchange rate fluctuation risk is significant.
The financial statements of the subsidiaries (whose functional currency is HK$ or RMB) are translated into US$ using the closing rate method. The balance sheet items are translated into US$ using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the year. All exchange differences on currency translations are recorded within equity. Translation gain for the three months and six months ended June 30, 2007 was $26,035 and $118,579 respectively.
