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ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPER ATION
We are hereby providing cautionary
statements identifying important factors that could cause our actual
results to differ materially from those projected in forward looking
statements made in this quarterly report on Form 10-QSB. Any statements
that express, or involve discussions as to, expectations, beliefs,
plans, objectives, assumptions or future events or performance (often,
but not always, through the use of words or phrases such as "likely
will result," "are expected to," "will continue,"
"is anticipated," "estimated," "intends,"
"plans" and "projection") are not historical
facts and may be forward-looking statements and involve estimates
and uncertainties which could cause actual results to differ materially
from those expressed in the forward-looking statements.
We caution that the factors described herein could
cause actual results to differ materially from those expressed in
any forward-looking statements and that the investors should not
place undue reliance on any such forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which
such statement is made, and we undertake no obligation to update
any forward-looking statement to reflect events or circumstances
after the date on which such statement is made or to reflect the
occurrence of unanticipated events or circumstances. Consequently,
no forward-looking statement can be guaranteed.
New factors emerge from time to time, and it is
not possible for us to predict all such factors. Further, we cannot
assess the impact of each such factor on our results of operations
or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in
any forward-looking statements.
Overview
China Digital Media Corporation was formerly
known as HairMax International, Inc. (Hairmax),. a Nevada corporation.
It was incorporated in Nevada in 1987. Arcotect Digital Technology
Limited, a corporation organized under the laws of the Hong Kong
SAR of the Peoples Republic of China, consummated a reverse merger
with Hairmax in March, 2005, and Hairmax subsequently changed its
name to China Digital Media Corporation, which is our corporate
name. With the termination of the original businesses of Hairmax,
all of China Digital Media Corporations businesses are now located
mainly in China. Arcotect Digital Technology Limited has changed
its name to China Digimedia Holdings Limited (CDHL), and is a wholly-owned
subsidiary of our company..
Our business plan is to develop our operations
so that they represent one of the fastest growing companies in the
China broadcasting media and Cable TV industry. We have made substantial
progress in reaching our goals to date. After the reverse merger,
we have strengthened our management teams and committed ourselves
to cover three areas of the media industry. These three areas are:
Cable TV operations and Digital TV (DTV) technology
development; TV Channel management and advertising sales; and TV
program production and related content management services. To accomplish
our growth objectives, we plan to utilize investment, mergers, acquisitions
and alliance partnerships. In view of the rapid growth and potential
opportunities of China's media industry, we will continue to invest
our resources into our target media markets across China while looking
for potential distribution partners in the United States and other
countries.
CDHL and the China operating subsidiary Arcotect
Technology (Guangzhou) Limited (AGTL) are the sole contractors and
operators of digital television services in Nanhai, a city in the
Guangdong province. The city of Nanhai has approximately 400,000
paying Cable TV subscribers which it plans to migrate the television
broadcasting system from analog to digital. Thus far, we have migrated
more than 100,000 subscribers from analog television to digital
television by installing a digital STB into subscribers premises.
As at the end of the second quarter of June 30, 2005, Nanhai Network
Company offers 38 basic TV channels. By contrast, we offer 90 TV
channels which are organized into eight packages; including World
Movie, Life & Leisure, World Sports, News Channel, Drama Channel
1, Drama Channel 2, Drama Channel 3 and Family Channel. Since the
Nanhai Government is undergoing a consolidation to regroup its 17
towns into fewer towns and municipalities, the migration process
in these towns would be re-scheduled. As the consolidation will
be completed in July of 2005, our migration schedule should be back
on track soon. We also expect that subscription of additional TV
packages will be increased accordingly. We schedule to migrate 100,000
more subscribers in the second half of 2005. The original date for
completing the whole transformation of television broadcasting system
for 400,000 subscribers is now extended for another six months to
one year. We currently employ approximately 200 people to support
the existing operations.
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Index
In May 2005, we launched the Sunshine e-Government
services. Sunshine e-Government is the first information service
provided by the newly built Digital TV Data Broadcasting Platform
for Nanhai Digital Television services. With a simple click using
a remote control of the digital STB provided by AGTL, TV watchers
can access to various kinds of government information including:
-- Government structure and policy
-- Social affairs and communications
-- Public announcement and government-to-citizen procedures
Sunshine e-Government is one of the services provided
through our TV data broadcasting platform under our Nanhai investment
agreement with the government. We anticipate that commercial services
could be launched after the general acceptance of the Sunshine e-Government
service. The company is currently researching on adding new features
to current and future STB for providing more applications to the
subscribers. Partnerships with several vendors are being negotiated
for developing services under our TV data broadcasting platform.
Because of our forthcoming investment projects,
we have appointed Mr. Tung ZhiYong as Consultant to advise on program
production and acquisition. Mr. Tung was a Vice President of Guangdong
Television Station before retired in 2004. In his over 40 years
experience in the industry, he has produced more than 1,000 episodes
of television programs, movies and series under his supervision
and directorship as well as having won several national television
awards in China. We will continue to appoint more qualified consultants
to assist in our investments, broadcasting operations and programs
production.
At present, some of our targeted businesses are
subject to certain restrictions in the PRC. In order to enable us
to invest in certain media sectors such as TV advertising and contents
production before related regulations and policies are opened up
to foreign investors, we have strategically partnered with a Chinese
registered company, Guangdong HuaGuang DigiMedia Culture Development
Limited (Guangdong HuaGuang), formerly known as Guangdong Pukonyi
Culture Development Limited, to hold investments in programs production
and advertising operations on our behalf. We anticipate that this
arrangement will be continued until the relaxation of broadcasting
policy in China. Before transferring entire equity interest in Guangdong
HuaGuang to us according to the Alliance Agreement, we shall control
and manage the operations of Guangdong HuaGuang and receive 90%
of its gross profit through various level of agreements signed between
our subsidiaries in China and Guangdong HuaGuang. We have been advised
by our Chinese counsel that these arrangements are necessary because
we, a Nevada corporation, are considered a foreign company for the
purposes of Chinese foreign investment laws.
RESULTS OF OPERATIONS
Net Income
We had net income of $705,651 and $1,143,504,
or $.02 and $.04 per common share for the three months and six months
periods ended June 30, 2005, respectively, compared to the net income
of $511,411 and $883,254, or $.03 and $.07 for the same periods
ended June 30, 2004, respectively. The change in net income was
primarily due to an increase in sale from new TV subscribers, and
the share of revenue from commercial TV subscribers and related
gross profit.
Earnings before interest, tax, depreciation
and amortization (EBITDA)
EBITDA for the three months and six months ended June 30, 2005 was
$996,975 and $1,697,766, respectively. The increase of $442,252,
or 80%, from $554,723 for the three months ended June 30, 2004 was
due primarily to the increase in total revenue and gross profit
margin.
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Index
Sales
Revenues increased by $488,601or 59% from $822,210
for the three months ended June 30, 2004 to $1,310,811 for the same
period ended June 30, 2005. For the six months ended June 30, 2005,
we recorded total revenues of $2,304,283, compared to total revenues
of $1,481,519 for the same period ended June 30, 2004. The increase
was primarily due to increase in number of TV subscribers, sales
of Pay-TV and increased revenue from commercial accounts of digitalization
of television signals in the second quarter of 2005 compared to
the comparable period in 2004.
Gross profit margins increased from 78% during
the three months ended June 30, 2004 to 94% during the three months
ended June 30, 2005. The increase was mainly attributable to the
revenue sharing of commercial accounts. Due to the delay of migration
schedule, sales of STB and cost of goods sold decreased accordingly.
Expenses
Selling, general, administrative and depreciation
and amortization expenses for the three months ended June 30, 2005
increased by $394,869 or 303% to $525,272 in comparison with the
three month period ended June 30, 2004. Selling, general, administrative
and depreciation and amortization expenses were $960,064 for the
six months ended June 30, 2005, increased by $647,071, compared
to the same period ended June 30, 2004. Selling, general and administrative
expenses increased by $147,058 due to increase in business activities
to support increased revenue, appointment of additional personnel
for the development of new value-added business and the negotiation
of new business in TV drama production and related activities. Depreciation
and amortization increased by $247,811, due to further purchase
of STB for the migration of analog TV into digital TV project in
Nanhai. We anticipate depreciation and amortization expenses will
continue to increase until the whole of 400,000 existing TV subscribers
are digitalized.
Liquidity and Capital Resources
On June 30, 2005, we had cash of $66,551 and
a working capital deficit of $1,603,438. This compares with cash
of $160,177 and a working capital deficit of $2,215,939 at December
31, 2004. The decrease in cash and increase in working capital deficit
was due to receivable collections from Nanhai Network Company scheduled
to begin from June 2005 and substantial investments in STBs and
smart cards.
Operating activities had a net generation of cash
in the amount of $634,489 during the six months ended June 30, 2005
reflecting an excess of revenues over expenditure and increased
depreciation as mentioned above.
Net cash used in investing activities for the six months ended June
30, 2005 was $1,237,040 as compared with net cash used in investing
activities of $1,474,089 for the six months ended June 30, 2004.
The decrease in net cash used in investing activities is attributable
to fewer purchases of property and equipment during the six months
ended June 30, 2005 compared to the comparable period in 2004.
Net cash provided by financing activities for the
six months ended June 30, 2005 was $508,925 as compared with net
cash provided by financing activities of $972,370 for the six months
ended June 30, 2004. The decrease in net cash provided by financing
activities is attributable to no proceeds from shareholder loan
payable in 2005 compared to a large infusion in 2004.
Receivable collections from Nanhai Network
Company are scheduled to begin from June 2005. The Company's investment
in STBs and smart cards account for the substantial accounts payable
at June 30, 2005. For liquidity and cash requirements, the board
has considered bank loan or issuance of new shares for supportive
funding.
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