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V MEDIA CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) Overview and Corporate History We are one of the fastest growing outdoor advertising companies in China. We own and operate various outdoor media network and provide a full range of integrated outdoor advertising services to our clients, including art design, advertising publishing, daily maintenance and technical upgrading. We believe our well-diversified outdoor advertising media network and our ability to provide advertising services on an integrated basis allow us to target and satisfy client needs at all levels. Founded in 2000, we have grown steadily and expanded our media network into Shenyang, Tianjin, Beijing and Shanghai from our headquarters in Dalian. Our principal executive offices are located at Golden Name Commercial Tower 8th floor, 68 Renmin Road, Zhongshan District, Dalian, P.R. China. We provide clients with advertising opportunities through our diverse media platforms, which include four major proprietary channels: (1) Street Fixture and Display Network, which includes bus and taxi shelters; (2) Mobile Advertisement displayed on mass city transit systems, which includes displays on city buses, metro-trains and train stations; (3) Billboard and Large LED displays along the city's streets and highways; and (4) our proprietary and patented multi-media system, "City Navigator." We have experienced sustainable business growth in recent years. The size of our network has grown significantly over the years since the commercial launch of our advertising network. As of December 31, 2013, the number of bus and taxi shelters on which we operate and carry our advertisements is 810; the number of buses that carry our mobile advertisements is 336; the number of mobile displays through Dalian metro-trains is 38. As of December 31, 2013, we have installed 52 "City Navigator" units across Dalian urban area, 3 mega-screen (126 square meters to 400 square meters, approximately 1,356 square feet to 4,306 square feet) LED screens and 8 metal billboards in Dalian, 4 LED screens in the business district in Shenyang, 2 indoor LED screen (22 square meters, approximately 237 square feet) in Tianjin Railway Station, 1 mega-screen (150 square meters, approximately 1,614 square feet) LED screen in Beijing and 5 outdoor billboards in Shanghai. On March 1, 2012, we also gained the operating right for one LED screen located at No. 1 Times Square in New York City in the United States for twelve months. We successfully extended the lease through August 31, 2014. On July 17, 2012, our name was changed from China New Media Corp. to V Media Corporation through a short form merger pursuant to Section 253 of the General Corporation Law of the State of Delaware by merging a wholly owned subsidiary of the Company into the Company, with the Company as the surviving corporation in the merger. Our trading symbol on the OTC Bulletin Board remains CMDI.OB. 20 --------------------------------------------------------------------------------Subsidiaries of V-Media The following table sets forth information concerning V-Media's subsidiaries: V-Media's Ownership Region of Name of Subsidiary Percentage Operations Primary Business Shenyang Vastitude 100% Shenyang Advertising company Media Co., Ltd. Tianjin Vastitude AD 100% Tianjin Advertising company Media Co., Ltd. Dalian Vastitude 100% Dalian Computer Network Technology Co., exploitation, Ltd. technical service and domestic advertisement Dalian Vastitude 83% Dalian Engineering, design Engineering & Design and construction Co., Ltd. Dalian Vastitude & 70% Dalian Modern Transit Media Advertising company Co., Ltd. Vastitude (Beijing) 60% Beijing Advertising company Technology Co. Shanghai 80% Shanghai Vastitude Advertising & Advertising company Media Co., Ltd. Vastitude Media 100% U.S. Advertising company -US Corporation Factors Affecting Our Results of Operations Domestic Spending and Urbanization The demand for our advertising time slots is directly related to the outdoor advertising spending in northeast China. Advertising spending is largely determined by the economic conditions in our region. The Chinese government is aimed at building a domestic consumer-driven economy, which we believe, will continue to generate demand for outdoor advertising. Expansion of Our Market Presence by Launching City Navigator ® Networks in Other Major Commercial Cities We believe our proprietary multi-media advertising system - City Navigator ® Network is one of the most advanced outdoor advertising platforms available in China. This system combines the latest LED displaying technology, internet and WI-FI technology, and has proven to be very effective in our competition to get access to top tier cities such as Shanghai and Beijing. By using wireless access technology, our LED displays at bus and taxi shelters are able to display real time programs at the control of our centralized computer systems. It consists of a Wi-Fi receiver, large-screen LED display, and web-based touch-screen kiosk which provide the public with information on various aspects of the city life, including travel, traffic, restaurants, shopping, hotels, business, medical and education. In addition, every City Navigator is equipped with Bluetooth, wireless access and printing technology. Users can either print the information or send the information to their cell phones or computers. As City Navigator® Network adopts Wi-Fi technology, users can enjoy its service from any area covered by its Wi-Fi signals. We are aggressively expanding our media platform by launching City Navigator ® Networks in our target cities, such as Tianjin, Qingdao and Shanghai, to create our own cross-region advertising network and enhance our advertising distribution capacity. Promotion of Our Brand Name to Attract a Wider Client Base and Increase Revenues We promote our brand name, [????]TM, through both our own media channels and public channels in North China. We believe that the enhancement of public awareness to our brand name will help broaden our client base, especially in the new marketplace such as Shenyang and Tianjin. As we expand our advertising client base and promote public's awareness to our brand, demand for time slots and advertising space on our network will continue to grow. Upgrade of Our Outdoor Billboard Network with New Digital Display Technology We intend to capitalize recent advances in digital display technology, especially mega-screen LED displays, to meet major institutional clients' needs. Because the LED displays can be linked through centralized computer systems to instantaneously change static advertisements, and are highly visible even during bright daylight, it improves the advertising effects markedly. We plan to build more mega-screen (100 square meters to 500 square meters, approximately 1,076.4 square feet to 5,382 square feet) LED displays at premier locations in our marketplace. 21-------------------------------------------------------------------------------- As we continue to expand our network, we expect to face a number of challenges. We have expanded our network rapidly, and we, as well as our competitors, have occupied many of the most desirable locations in Dalian. In order to continue expanding our network in a manner that is attractive to potential advertising clients, we must continue to identify and occupy desirable locations and to provide effective channels for advertisers. In addition, we must react to continuous technological innovations in the use of wireless and broadband technology in our network, and changes in the regulatory environment, such as the regulations allowing 100% foreign ownership of PRC advertising companies and new regulations governing cross-border investment by PRC persons. We believe that our business model and success in our regional market give us a considerable advantage over our competitors. Our future growth will depend primarily on the following factors: ? Overall economic growth in China, which we expect to contribute to an increase in advertising spending in major urban areas in China where consumer spending is concentrated; ? Our ability to expand our network into new locations and additional cities; ? Our ability to expand our sales force and engage in increased sales and marketing efforts; ? Our ability to expand our client base through promotion of our services; ? Our ability to expand our new systems including large-screen LED display network and City Navigator® Networks. 22--------------------------------------------------------------------------------Results of Operations for the Three-Month Period Ended December 31, 2013 Compared to the Three-Month Period Ended December 31 30, 2012 Revenue The following table shows the revenues of the Company on a consolidated basis: REVENUES Three Months Ended December 31, 2013 2012 Difference % Change Dalian District Street Fixture and Display network $ 1,742,001 $ 1,413,920 $ 328,081 23.2 % City Transit system Display network 835,494 1,130,728 (295,234) (26.1) % Outdoor Billboards 804,079 1,114,472 (310,393) (27.9) % City Navigator 149,442 101,641 47,801 47.0 % Other service income(a) 303,176 1,320,751 (1,017,575) (77.0) % Subtotal for Dalian District $ 3,834,192 $ 5,081,512 $ (1,247,320) (24.5) % Shenyang District Street Fixture and Display network $ 57,547 $ 138,001 $ (80,454) (58.3) % Outdoor Billboards 200,149 322,646 (122,497) (38.0) % Subtotal for Shenyang District $ 257,696 $ 460,647 $ (202,951) (44.1) % Beijing District Outdoor Billboards $ 465,617 $ 5,791 $ 459,826 7940.4 % Subtotal for Beijing District $ 465,617 $ 5,791 $ 459,826 7940.4 % Tianjin District Outdoor Billboards $ 237,249 $ 222,389 $ 14,860 6.7 % Subtotal for Tianjin District $ 237,249 $ 222,389 $ 14,860 6.7 % Shanghai District Outdoor Billboards $ 146 $ 251,879 $ (251,733) (99.9) % Subtotal for Shanghai District $ 146 $ 251,879 $ (251,733) (99.9) % US District Outdoor Billboards $ 692,665 $ - $ 692,665 100 % Subtotal for US District $ 692,665 $ - $ 692,665 100 % Total Revenues $ 5,487,565 $ 6,022,218 $ (534,653) (8.9) % (a) Other service income consisted of income from (i) Construction & Design service provided by Dalian Vastitute Engineering & Design Company and (ii) technique service provided by Dalian Vastitute Network Technology Company to outside customers. 23 --------------------------------------------------------------------------------Revenue Revenues for the three months ended December 31, 2013 were $5,487,565, a decrease of $534,653 or 8.9%, from $6,022,218 for the three months ended December 31, 2012. The decrease in revenue was primarily attributable to the revenue decrease in Shenyang, Shanghai and Dalian district, offset by revenue increases in Beijing, Tianjin and US district. The overall decrease of revenue is due to the change of business strategy. Instead of chasing high revenue, we are more focusing on expanding our profitable business units and segments and downsizing those segments and subsidiaries continuously incurring loss. The other reason for the decrease of revenue is because we lost some real estate clients in this quarter when service term expired. The real estate industry is still under financial pressure thus lowered advertisement budget. We are now developing new customers from banking, food and beverage and other industries to make up the market share loss. We expected that the revenue for the near future will be increased from these customers. For the three months ended December 31, 2013, sales in Dalian district, accounted for 69.9% of our total sales, a decrease of $1,247,320, or 24.5%, to $3,834,192 from $5,081,512 for the three months ended December 31, 2012. For three months ended December 31, 2013, sales in Tianjin district increased by 14,860, or 6.7%, to $237,249 from $222,389 for the three months ended December 31, 2012. Sales in Shanghai District decreased $251,733 or 99.9% to $146 from $251,879 for the three months ended December 31, 2013. The Company is downsizing Shanghai office due to the continuous loss incurred for the past periods. Sales in Shenyang district decreased $202,951 or 44.1% to $257,696 from $460,647 for the three months ended December 31, 2013. Sales in Beijing district increased by $459,826, or 7940.4%, to $465,617 from $5,791 for the three months ended December 31, 2013. Sales revenue in US district increased by $692,665 or 100%, to $692,665 from none for the three months ended December 31, 2013. 24 --------------------------------------------------------------------------------Cost of Revenue Cost of revenue for the three months ended December 31, 2013 were $4,432,472, a decrease of $440,343 or 9.0%, from $4,872,815 for the same period ended December 31, 2012. The decrease in cost of revenue was in proportionate with the decrease of revenue, which was primarily attributable to: (i) Increase in depreciation in the amount of $0.08 million due to increase of property plant and equipment. (ii) The increase in billboard rights of approximately $0.07 million due to increase of billboard rights obtained. (iii) The increase of labor and raw material costs was about $0.59 million. As a percentage of total revenues, cost of revenue accounted for approximately 80.8% and 80.9% for the three months ended December 31, 2013 and 2012, respectively. COST OF REVENUES Three Months Ended December 31, 2013 2012 Difference % Change Dalian District Street Fixture and Display $ 1,069,309 $ 1,176,547 network $ (107,238) (9.1) % City Transit system 921,822 662,897 Display network 258,925 39.1 % Outdoor Billboards 430,233 167,053 263,180 157.5 % City Navigator 139,695 66,515 73,180 110.0 % Other service cost (b) 156,258 966,804 (810,546) (83.8) % Subtotal for Dalian District $ 2,717,317 $ 3,039,816 $ (322,499) (10.6) % Shenyang District Street Fixture and Display $ 55,471 $ (12,107) network $ 67,578 (558.2) % Outdoor Billboards 197,146 473,286 (276,140) (58.3) % Subtotal for Shenyang $ 252,617 $ 461,179 District $ (208,562) (45.2) % Beijing District Outdoor Billboards $ 409,572 $ 261,172 $ 148,400 56.8 % Subtotal for Beijing $ 409,572 $ 261,172 District $ 148,400 56.8 % Tianjin District Outdoor Billboards $ 40,480 $ 28,318 $ 12,162 42.9 % Subtotal for Tianjin $ 40,480 $ 28,318 District $ 12,162 42.9 % Shanghai District Outdoor Billboards $ 133,735 $ 227,460 $ (93,725) (41.2) % Subtotal for Shanghai $ 133,735 $ 227,460 District $ (93,725) (41.2) % United States Outdoor Billboards $ 878,751 $ 854,870 $ 23,881 2.8 % Subtotal for United $ 878,751 $ 854,870 States $ 23,881 2.8 % Total Cost of Revenue $ 4,432,472 $ 4,872,815 $ (440,343) (9.0) % (b) Other service cost attributed by Dalian Vastitute Engineering & Design Company and by Dalian Vastitute Network Technology Company when they provide Construction & Design service and technique service to outside customers, respectively. 25 --------------------------------------------------------------------------------Gross Profit Our gross profit for the three months ended December 31, 2013 decreased by $94,310 or 8.2% to $1,055,093 from $1,149,403 for the same period in 2012. The decrease in gross profit was due to the decrease in revenue during the three months ended December 31, 2013. Our gross margin during the three months ended December 31, 2013 and 2012 were 19.2% and 19.1%, respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses, totaled $1,438,741 during the three months ended December 31, 2013, a decrease of $205,291 or 12.5%, compared to $1,644,032 for the same period ended December 31, 2012. The decrease in our operating expenses was mainly due to decreased selling expense and other costs related to supporting our sales force as the overall advertising market became more competitive, and a decrease in our payroll and administrative costs. Other Income (Expenses) For the three months ended December 31, 2013, we had total other expenses of $245,715, an decrease of $376,873 or 287.3%, compared with the other income of $131,158 during the same period of 2012. The decrease in other income (expenses) was mainly due to the $358,681 decrease in tax refunds during the period. Interest expense on our bank loans for the three months ended December 31, 2013 and 2012, amounted to $297,627 and $259,069, respectively. Net Income (Loss) Attributable to the Company Net loss attributable to the Company was $566,989 for the three months ended December 31, 2013, as compared with the net loss of $445,652 during the three months ended December 31, 2012, representing an increase of 27.2%. The increase in net loss was mainly attributed to our decrease in revenue. Comprehensive Income Our business operates primarily in Chinese Renminbi ("RMB"), but we report our results in U.S. Dollars. The conversion of our accounts from RMB to U.S. Dollars results in translation adjustments. As a result of a currency translation adjustment gain, our comprehensive income was $126,121 during the three months ended December 31, 2013, as compared with $143,158 during the three months ended December 31, 2012, a decrease of 11.9%. 26 --------------------------------------------------------------------------------Results of Operations for the Six-Month Period Ended December 31, 2013 Compared to the Six-Month Period Ended December 31, 2012 Revenue The following table shows the operations of the Company on a consolidated basis for the six months ended December 31, 2013 and 2012: REVENUES Six Months Ended December 31, 2013 2012 Difference % Change Dalian District Street Fixture and Display $ 3,769,841 $ 3,548,220 $ 221,621 6.2 % network City Transit system 1,771,349 2,209,690 (438,341) (19.8) % Display network Outdoor Billboards 2,163,383 1,976,437 186,946 9.5 % City Navigator 202,002 207,113 (5,111) (2.5) % Other service income(a) 322,961 1,455,582 (1,132,621) (77.8) % Subtotal for Dalian District $ 8,229,536 $ 9,397,042 $ (1,167,506) (12.4) % Shenyang District Street Fixture and Display $ 66,708 $ 184,598 $ (117,890) (63.9) % network Outdoor Billboards 344,110 400,674 (56,564) (14.1) % Subtotal for Shenyang District $ 410,818 $ 585,272 $ (174,454) (29.8) % Beijing District Outdoor Billboards $ 1,250,928 $ 714,182 $ 536,746 75.2 % Subtotal for Beijing District $ 1,250,928 $ 714,182 $ 536,746 75.2 % Tianjin District Outdoor Billboards $ 280,564 $ 343,892 $ (63,328) (18.4) % Subtotal for Tianjin District $ 280,564 $ 343,892 $ (63,328) (18.4) % Shanghai District Outdoor Billboards $ 49,645 $ 462,793 $ (413,148) (89.3) % Subtotal for Shanghai District $ 49,645 $ 462,793 $ (413,148) (89.3) % US District Outdoor Billboards $ 917,665 $ - $ 917,665 100 % Subtotal for US District $ 917,665 $ - $ 917,665 100 % Total Revenues $ 11,139,156 $ 11,503,181 $ (364,025) (3.2) % (a) Other service income consisted of income from (i) Construction & Design service provided by Dalian Vastitute Engineering & Design Company and (ii) technique service provided by Dalian Vastitute Network Technology Company to outside customers. 27--------------------------------------------------------------------------------Revenue Revenues for the six months ended December 31, 2013 were $11,139,156, a decrease of $364,025 or 3.2%, from $11,503,181 for the six months ended December 31, 2012. The decrease in revenue was primarily attributable to the revenue increase in Dalian, Shenyang, Tianjin and Shanghai district, offset by revenue increases in Beijing and US district. The overall decrease of revenue is due to the change of business strategy. Instead of chasing high revenue, we are more focusing on expanding our profitable business units and segments and downsizing those segments and subsidiaries continuously incurring loss. The other reason for the decrease of revenue is because we lost some real estate clients in this quarter when service term expired. The real estate industry is still under financial pressure thus lowered advertisement budget. We are now developing new customers from banking, food and beverage and other industries to make up the market share loss. We expected that the revenue for the near future will be increased from these customers. For six months ended December 31, 2013, sales in Dalian district, accounted for 73.9% of our total sales, decreased by $1,167,506, or 12.4%, to $8,229,536 from $9,397,042 for the six months ended December 31, 2012. The decrease is mainly from our construction services and network services. Our construction service and network services generated limited revenue for us in this year due to intensive competition we faced in the market. Sales in Tianjin district decreased by 63,328, or 18.4%, to $280,564 from $343,892 for the six months ended December 31, 2012. Sales in Shanghai District decreased $413,148 or 89.3% to $49,645 from $462,793 for the six months ended December 31, 2013. Revenue decreases in Tianjin and Shanghai is due to more intense competition in those markets. Due to more billboards are constructed near Shanghai airport highway and Tianjin commercial area where our billboards are located, we are facing fierce competition and lost some contracts. Sales in Shenyang district decreased $174,454 or 29.8% to $410,818 from $585,272 for the six months ended December 31, 2013. With a new billboard near train station in Shenyang area at the end of this quarter, we expect more revenue this year comparing to last year. Sales in Beijing district increased by $536,746, or 75.2%, to $1,250,928 from $714,182 for the six months ended December 31, 2013. Beijing subsidiary signed a new client, Wanning Baoan Real Estate Company, bringing RMB200,000 ($32,644) revenue each month. Sales in the US increased $917,665 from none for the six months ended December 31, 2013 compared with six months ended December 31, 2012. The Company signed several contracts for its leased Time Square Billboard since January 2013, including a one-year contract valued at $900,000 effective January 1, 2013 and several short-term contracts. 28 --------------------------------------------------------------------------------Cost of Revenue Cost of revenue for the six months ended December 31, 2013 was $8,637,195, a decrease of $881,316 or 9.3%, from $9,518,511 for the same period ended December 31, 2012. Decrease in cost of revenue is due to: (a) a reduction of rental cost of about $260,000 as the company increased its own bus shelters and outdoor billboards; (b) a reduction in production costs of about $150,000 related to our efforts to streamline ads production process and use more expert production staff; (c) less advertising fees in current quarter since we used more of our own production work. We experienced higher labor costs due to our hiring of expert ads production staff and higher material charges due to price increases, but the effect is offset by savings noted above. COST OF REVENUES Six Months Ended December 31, 2013 2012 Difference % Change Dalian District Street Fixture and Display $ 2,250,623 $ 2,491,599 network $ (240,976) (9.7) % City Transit system 1,519,941 1,494,277 Display network 25,664 1.7 % Outdoor Billboards 1,201,473 697,072 504,401 72.4 % City Navigator 163,642 177,213 (13,571) (7.7) % Other service cost (b) 174,758 1,000,148 (825,390) (82.5) % Subtotal for Dalian District $ 5,310,437 $ 5,860,309 $ (549,872) (9.4) % Shenyang District Street Fixture and Display $ 72,052 $ 79,922 network $ (7,870) (9.8) % Outdoor Billboards 417,438 623,993 (206,555) (33.1) % Subtotal for Shenyang $ 489,490 $ 703,915 District $ (214,425) (30.5) % Beijing District Outdoor Billboards $ 739,995 $ 547,704 $ 192,291 35.1 % Subtotal for Beijing $ 739,995 $ 547,704 District $ 192,291 35.1 % Tianjin District Outdoor Billboards $ 69,507 $ 75,347 $ (5,840) (7.8) % Subtotal for Tianjin $ 69,507 $ 75,347 District $ (5,840) (7.8) % Shanghai District Outdoor Billboards $ 264,992 $ 623,666 $ (358,674) (57.5) % Subtotal for Shanghai $ 264,992 $ 623,666 District $ (358,674) (57.5) % United States Outdoor Billboards $ 1,762,774 $ 1,707,570 $ 55,204 3.2 % Subtotal for United $ 1,762,774 $ 1,707,570 States $ 55,204 3.2 % Total Cost of Revenue $ 8,637,195 $ 9,518,511 $ (881,316) (9.3) % (b) Other service cost attributed by Dalian Vastitute Engineering & Design Company and by Dalian Vastitute Network Technology Company when they provide Construction & Design service and technique service to outside customers, respectively. 29 --------------------------------------------------------------------------------Gross Profit Our gross profit for the six months ended December 31, 2013 increased by $517,291 or 26.1% to $2,501,961 from $1,984,670 for the same period in 2012. The increase in gross profit was due to the decrease in cost of revenue during the six months ended December 31, 2013. Management is actively enforcing cost-saving measures which lead to decreases of cost and expenses in current quarters. With lower rental costs and production costs, we were able to improve our gross margin. Our gross margin during the six months ended December 31, 2013 and 2012 were 22.5% and 17.3%, respectively. We are currently monitoring our operational segments and adjusting our business strategy. We are focusing our resources on the profitable segments and downsize our non-profitable subsidiaries. We had decreased revenue but our gross margin increased. Also, the revenue generated from our Time square billboard improved our overall gross margin compared to last year, when no revenue was generated from that billboard. Selling, General and Administrative Expenses Selling, general and administrative expenses, totaled $2,713,591 during the six months ended December 31, 2013, a decrease of $765,244 or 22.0%, compared to $3,478,835 for the same period ended December 31, 2012. The decrease in SG&A expenses is mainly due to the Company's write off of two-months prepaid rent on the Time Square LED which amounted to $560,000 and was recorded as general and administrative expense in the first quarter of 2012. Other Expenses For the six months ended December 31, 2013, we had total other expenses of $353,800, an increase of $227,539 or 180.2%, compared with the other expenses of $126,261 during the same period of 2012. The increase in other expense was mainly due to the $248,854 decrease in subsidy income during the period. Interest expense on our bank loans for the six months ended December 31, 2013 and 2012, amounted to $551,775 and $540,422, respectively. Net Loss Attributable to the Company Net loss attributable to the Company was $696,877 for the six months ended December 31, 2013, as compared with the net loss of $1,850,341 during the six months ended December 31, 2012, representing a decrease of 62.3%. The decrease in net loss was mainly attributed to our decrease in selling, general and administrative expenses. Comprehensive Loss Attributable to the Company Our business operates primarily in Chinese Renminbi ("RMB"), but we report our results in U.S. Dollars. The conversion of our accounts from RMB to U.S. Dollars results in translation adjustments. As a result of a currency translation adjustment gain, our comprehensive loss was $160,555 during the six months ended December 31, 2013, as compared with $286,853 during the six months ended December 31, 2012, a decrease of 44%. 30 --------------------------------------------------------------------------------Liquidity and Capital Resources We have historically funded our working capital needs from operations, advance payments from customers, bank borrowings, and capital from shareholders. Presently, our principal sources of liquidity are generated from our operations and loans from commercial banks and capital leases. Our working capital requirements are influenced by the level of our operations, the numerical and dollar volume of our sales contracts, the progress of our contract execution, and the timing of accounts receivable collections. Based on our current operating plan, we believe that our existing resources, including cash generated from operations, bank loans and bank notes payable and advances from customers will be sufficient to meet our working capital requirements for our current operations over the next twelve months. Management is actively enforcing cost-saving measures which lead to a decrease of cost and expenses in the current quarter. In order to fully implement our business plan and continue our growth, however, we will require additional capital either from our shareholders or from outside sources. Our long-term liquidity will depend on our ability to refinance our debts. Based on our past experience, we usually can negotiate with the bank to renew our loans on an annual basis. The Company expects to be able to refinance its short term loans based on past experience and the Company's good credit history. In July 2012, we signed an agreement with Bank of Asia, pursuant to which the bank provides a RMB 22 million ($3.6 million) revolving credit line from July 25, 2012 to July 25, 2020. In May 2013, we signed another agreement with China Merchants Bank, pursuant to which the bank will provide a RMB10 million ($1.6 million) revolving credit line to us from May 27, 2013 to May 26, 2014. We also have a line of credit from Bank of China in the amount of $3.48 million. Additionally, our major Shareholder Mr. Guojun Wang will provide personal loans when necessary to provide us with sufficient liquidity for the next 12 months. We are currently monitoring our operational segments and adjusting our business strategy. In order to focus our resources towardsour profitable subsidiaries and segments. We are downsizing our non-profitable subsidiaries. We may not renew billboard rentals, which did not bring us enough cash flow in the past. Instead, we invest in business segments that have higher gross margins. Thus, in this quarter, we had decreased revenue but had higher gross margins, which lead to increased cash provided from operating activities. For the six months ended December 31, 2013, cash provided by operating activities is $3,285,770, compared to $1,958,972 provided by operating activities in the same period of 2012. As of December 31, 2013, the Company's cash and cash equivalents amounted to $1,418,426, a decrease of $729,895 from $2,148,321 as of June 30, 2013, mainly due to more spending on the new billboard use rights. Cash Flow from Operating Activities Net cash provided by operating activities was $3,285,770 for the six months ended December 31, 2013, an increase of $1,326,798 from the net cash provided by operating activities of $1,958,972 for the six months ended December 31, 2012. The increase was mainly due to decrease in the net loss of $1,028,864 and increase of deferred tax provision of $366,265, depreciation and amortization of $625,126 account receivable of $316,596 and other current assets of $230,106, offset by decrease of advance to suppliers of $389,151, taxes payable of $279,390 and other payable of $753,456. Cash Used in Investing Activities Net cash used in investing activities in the six months ended December 31, 2013 was $4,806,978 as compared to net cash used of $3,106,824 for the six months ended December 31, 2012. Cash used in investing activities in the current period was primarily for acquisitions of new outdoor advertising platforms to expand our existing advertising network. Cash Provided by Financing Activities For the six months ended December 31, 2013, net cash provided by financing activities was $761,747 as a result of i) net repayments of third party loans of $916,729; ii) Net proceeds from short-term bank loans of approximately $1.96 million, iii) net repayment of long-term loans of $336,715. Net cash provided by financing activities was $606,417 for the six months ended December 31, 2012, primarily due to proceeds from short-term bank loans of $618,958 and acceptance notes payable of $3,853,411 which were partially offset by a $2,973,107 allocation to restricted cash. Application of Critical Accounting Policies Management's discussion and analysis of its financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles ("US GAAP"). Our financial statements reflect the selection and application of accounting policies, which require management to make significant estimates and judgments. See Note 2 to our consolidated financial statements, "Summary of Significant Accounting Policies." 31 --------------------------------------------------------------------------------Impact of Accounting Pronouncements The Company's management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, will have a material effect on the Company's condensed consolidated financial position, results of operations, or cash flows. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations. |