China Digital Animation Development, Inc. - FORM 10-Q/A

Attached files

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EX-32 - RULE 13A-14(B) CERTIFICATION - China Digital Animation Development, Inc.	ex32.htm
EX-31.2 - RULE 13A-14(A) CERTIFICATION - CFO - China Digital Animation Development, Inc.	ex31-2.htm
EX-31.1 - RULE 13A-14(A) CERTIFICATION - CEO - China Digital Animation Development, Inc.	ex31-1.htm

U. S. Securities and Exchange Commission

Washington, D. C. 20549

FORM 10-Q/A

(Amendment No. 1)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File No. 0-50441


CHINA DIGITAL ANIMATION DEVELOPMENT INC. (Name of Registrant in its Charter)

New York	84-1275578
(State of Other Jurisdiction of incorporation or organization)	(I.R.S.) Employer I.D. No.)

15 West 39th Street, Suite 14B, New York, NY 10018
(Address of Principal Executive Offices)

Issuer's Telephone Number: (212) 391-2688

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 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 [X] No [ ]

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes ___ No ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]

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. (Check One)

Large accelerated filer ___ Accelerated filer ___ Non-accelerated filer ___ Smaller reporting company [X]

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:

November 22, 2010

Common Voting Stock: 20,020,000

Amendment No. 1

This amendment is being filed in order to:

Restate the financial statements to reclassify $1,019,457 prepaid rent from leasehold improvements to prepaid expenses and accrue the rent payable for the quarter ended September 30, 2010.

Restate the financial statements to correct the failure to accrue $1,462,270 in expenses resulting from outsourcing of development activities.

Reclassify the results of operations of the Company’s financial data services business as results of a discontinued operation.

Replace “Basis of Presentation” with “Principles of Consolidation” in Note 2 to the Consolidated Financial Statements.

Modify the disclosure in Note 5, “Land Use Right and Other Intangible Assets.”

Expand the disclosure in Note 7, “Income Taxes.”

Modify the disclosure in Note 8, “Segment Information.”

Modify the disclosure in Item 2, “Management’s Discussion and Analysis” to conform to the restated financial statements.

Expand the disclosure in Item 2, “Management’s Discussion and Analysis - Liquidity and Capital Resources” regarding related party loans.

Modify the disclosure in Item 4, “Controls and Procedures.”

No other changes have been made to the disclosure in this report, nor has the information in this report been updated. Reference should be made to reports filed more recently by the Company for more current information.

		PAGE



CONSOLIDATED FINANCIAL STATEMENTS:

	CONSOLIDATED BALANCE SHEETS	2 & 3
	CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME	4
	CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY	5
	CONSOLIDATED STATEMENTS OF CASH FLOWS	6 & 7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		8 - 24

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS	September 30, 2010		June 30, 2010
	(Restated, Unaudited)		(Restated)

Current Assets:
Cash and Cash Equivalents	$	7,550,458	$	6,219,438
Accounts Receivable, net		738,021		976,304
Other Receivables		7,302		3,615
Prepaid Expenses		382,296		501,557

Total Current Assets		8,678,077		7,700,914

Non-current Assets:
Property, Plant and Equipment, net		4,452,567		4,631,314
Land Use Right and Other Intangible Assets, net		2,706,786		2,756,604

Total Assets	$	15,837,431	$	15,088,832

"Continued on next page"

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY	September 30, 2010		June 30, 2010
	(Restated, Unaudited)		(Restated)

Current Liabilities:
Accounts Payable	$	1,503,049	$	34,338
Payroll Payable		6,725		6,648
Tax Payable		276,207		299,800
Loans from Shareholders		286,000		286,000
Accrued Expenses and Other Payable		61,756		50,391

Total Current Liabilities		2,133,738		677,178

Total Liabilities		2,133,738		677,178

Stockholders' Equity:
Common Stock, par value $0.001, 500,000,000 authorized
20,020,000 shares issued and outstanding as of September 30
and June 30, 2010		20,020		20,020
Additional Paid in Capital		6,277,697		6,277,697
Accumulated Other Comprehensive Income		1,989,908		1,872,514
Reserved Fund		705,738		705,738
Retained Earnings		4,710,329		5,535,683

Total Stockholders' Equity		13,703,692		14,411,652

Total Liabilities and Stockholders' Equity	$	15,837,431	$	15,088,832

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(UNAUDITED)

	For the Three Months Ended September 30,
	2010			2009
	(Restated)			(Restated)

Revenues	$	1,805,859		$	1,016,649

Cost of Goods Sold		1,681,341			211,905

Gross Profit		124,518			804,744

Operating Expenses:
Sales Expenses		101,757			57,441
General and Administrative Expenses		573,959			262,909

Total Operating Expenses		675,716			320,350

Income from Operations before Other Income (Expenses)		(551,198	)		484,394

Other Income (Expenses):
Interest Income (Expense), net		2,015			84,595
Gains from Disposal of Fixed Assets		-			(26	)

Total Other Income (Expenses)		2,015			84,570

Income Before Income Taxes		(549,183	)		568,964

Provision For Income Taxes		276,171			144,897

Income (Loss) from Continuing Operations		(825,354	)		424,066

Discontinued Operations:
Income (Loss) from Discountinued Operations		-			79,048
Less: Taxes		-			(19,762	)

Income (Loss) from Discontinued Operations		-			59,286

Net Income		(825,354	)		483,352

Other Comprehensvie Income;
Unrealized Gain (Loss) on Foreign Currency Translation		117,393			89,956

Comprehensive Income	$	(707,960	)	$	573,308

Earnings Per Common Share - Basic and Diluted
Continuing Operations	$	(0.04	)	$	0.02
Discontinued Operations	$	-		$	0.003

Weighted Average Common Share - Basic and Diluted		20,020,000			20,000,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

	Common Stock par value $.0001				Additional		Accumulated Other													Total
					Paid in		Comprehensive		Retained			Reserved		Comprehensive			Minority			Stockholders'
	Shares		Amount		Capital		Income		Earnings			Fund		Income			Interest			Equity
Balance - June 30, 2008		20,000,000	$	20,000	$	6,223,717	$	1,645,487	$	1,600,427		$	112,241				$	64,259		$	9,666,131

Net Income										2,451,614					2,451,614						2,451,614
Reserved Fund										(229,283	)		229,283								-
Foreign Currency Translation Adjustment								39,603							39,603						39,603
Decrease in Minority Interest																		(64,259	)		(64,259	)
Comprehensive Income															2,491,217
Balance - June 30, 2009		20,000,000	$	20,000	$	6,223,717	$	1,685,090	$	3,822,758		$	341,524					-		$	12,093,089

Stock issued for services		20,000		20		53,980															54,000
Net Income										2,077,139					2,077,139						2,077,139
Reserved Fund										(364,214	)		364,214								-
Foreign Currency Translation Adjustment								187,425							187,425						187,425
Comprehensive Income															2,264,564
Balance - June 30, 2010 (Restated)		20,020,000	$	20,020	$	6,277,697	$	1,872,514	$	5,535,683		$	705,738				$	-		$	14,411,652

Net Income										(825,354	)				(825,354	)					(825,354	)
Reserved Fund										-			-								-
Foreign Currency Translation Adjustment								117,393							117,393						117,393
Comprehensive Income															(707,960	)
Balance - September 30, 2010 (Restated, Unaudited)		20,020,000	$	20,020	$	6,277,697	$	1,989,908	$	4,710,329		$	705,738				$	-		$	13,703,692

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Three Months Ended September 30,
Cash Flows From Operating Activities:	2010			2009
	(Restated)			(Restated)

Net Income	$	(825,354	)	$	483,352
Adjustments To Reconcile Net Income To Net Cash
Provided By Operating Activities:
Depreciation and Amortization Expense		344,742			93,614
Loss from Disposal of Fixed Assets		-			26
(Increase) or Decrease in Current Assets:
Accounts Receivable		238,283			297,410
Prepaid Expenses		119,260			4,348
Advanced to Suppliers		-			188,614
Interest Receivable		-			(82,323	)
Other Receivables		(3,687	)		11
Increase or (Decrease) in Current Liabilities:
Accounts Payable		1,468,711			41,319
Rent Payable		-			124,878
Taxes Payable		(23,593	)		(46,010	)
Payroll Payable		77			-
Accrued Expenses and Other Payables		11,365			(8,734	)

Net Cash (Used) Provided by Operating Activities		1,329,804			1,096,506

Cash Flows From Investing Activities:

Purchases of Property, Plant and Equipment		-			(775,032	)
Investment-Long Term		-			(2,295	)

Net Cash (Used) Provided by Investing Activities		-			(777,327	)

"Continued on next page"

The accompanying notes are an integral part of these condensed consolidated financial statements. 

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Three Months Ended September 30,
Cash Flows From Financing Activities:	2010		2009
	(Restated)		(Restated)

Proceeds from Shareholders' Loans		-		26,000

Net Cash (Used) Provided by Financing Activities		-		26,000

Effect of exchange rate changes on cash and cash equivalents		1,216		7,844

Increase (Decrease) in Cash and Cash Equivalents		1,331,020		353,023

Cash and Cash Equivalents - Beginning Balance		6,219,438		2,282,786

Cash and Cash Equivalents - Ending Balance	$	7,550,458	$	2,635,808

Supplemental Disclosures of Cash Flow Information:

Cash Paid During The Three Months for:
Interest Paid	$	-	$	-
Income Taxes Paid	$	415,224	$	215,748

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

On January 30, 2009, Maui General Store, Inc. (the “Company”) changed its name to “China Digital Animation Development, Inc. (CHDA)” to reflect the reverse merger of Heilongjiang Hairong Science and Technology Development Co., Ltd. (“Hairong”) into the Company.

On November 12, 2008 the Company acquired the outstanding capital stock of RDX Holdings Limited ("RDX"), a corporation organized under the laws of the British Virgin Islands. The acquisition was effected by a share exchange between Fu Qiang and Su Jianping, the shareholders of RDX, and the Company (the "Share Exchange"). In exchange for the capital stock of RDX, the Company issued 14,400,000 shares of its common stock to the Messrs. Fu and Su; the issued shares represented 72% of the outstanding shares of the Company.

RDX is engaged in the business of managing the assets and operations of Hairong, a joint stock company organized under the laws of The People's Republic of China. Hairong is primarily engaged in animation design and development and in the production and presentation of cultural events. Hairong operates its business primarily in the PRC with its headquarters in Harbin city, Heilongjiang province.

On June 27, 2008, RDX Holdings entered into five agreements with Hairong and with the equity owners in Hairong. Collectively, the agreements provide RDX exclusive control over the business of Hairong, the right to all revenues obtained by Hairong, and responsibility for all of the expenses incurred by Hairong. The relationship is one that is generally identified as "entrusted management."

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The accompanying unaudited consolidated financial statements include China Digital Animation Development, Inc. and its wholly owned subsidiary, RDX Holdings Limited, as well as its variable interest entity, Heilongjiang Hairong Science and Technology Development Co, Ltd. All significant inter-company transactions and balances have been eliminated in the consolidation.

Reclassification

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported total assets, liabilities, stockholders’ equity or net income.

Use of estimates

In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Variable interest entity

The accounts of Hairong have been consolidated with the accounts of the Company because Hairong is a variable interest entity with respect to RDX, which is a wholly-owned subsidiary of the Company. RDX is party to five agreements dated June 27, 2008 with the owners of the registered equity of Hairong and with Hairong. In summary, the five agreements contain the following terms:

Consulting Services Agreement and Operating Agreement. These two agreements provide that RDX will be fully responsible for the management of Hairong, both financial and operational. RDX has assumed responsibility for the debts incurred by Hairong and for any shortfall in its registered capital. In exchange for these services and undertakings, Hairong pays a fee to RDX equal to the net profits of Hairong. In addition, Hairong pledges all of its assets, including accounts receivable, to RDX. Meanwhile, Hairong's shareholders pledged the equity interests of Hairong to RDX to secure the payment of the Fee.

Proxy Agreement. In this agreement, the shareholders of Hairong granted an irrevocable proxy to the person designated by RDX to exercise the voting rights and other rights of shareholder.

Option Agreement. In this agreement, the shareholders of Hairong granted to RDX the right to purchase all of their equity interest in the registered capital of Hairong or the assets of Hairong. The option may be exercised whenever the transfer is permitted under the laws of the PRC. The purchase price shall be equal to the original paid-in price of the Purchased Equity Interest by the Transferor, unless the applicable PRC laws and regulations require appraisal of the equity interests or stipulate other restrictions on the purchase price of equity interests. The agreement also contains covenants designed to prevent any material change occurring in the legal or financial condition of Hairong without the consent of RDX.

Equity Pledge Agreement. In this agreement, Hairong shareholders agree to pledge all the equity interest in Hairong to RDX as security for the performance of the obligation under the Consulting Services Agreement and the payment of Consulting Services Fees under each agreement.

RDX may terminate the agreements at will. Hairong may only terminate the agreements if (a) there is an unremedied breach by RDX, (b) the operations of RDX are terminated, (c) Hairong loses its business license, or (d) circumstances arise that materially and adversely affect the performance or objectives of the Agreement. The Consulting Services Agreement, under which all revenues are assigned from Hairong to RDX, and the Equity Pledge Agreement have no expiration date. The other three agreements terminate on June 27, 2018 unless extended by the parties.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In sum, the agreements transfer to RDX all of the benefits and all of the risk arising from the operations of Hairong, as well as complete managerial authority over the operations of Hairong. RDX is the guarantor of all of the obligations of Hairong. By reason of the relationship described in these agreements, Hairong is a variable interest entity with respect to RDX because the following characteristics identified in ASC 810-10-15-14 are present:

The holders of the equity investment in Hairong lack the direct or indirect ability to make decisions about the entity’s activities that have a significant effect on the success of Hairong, having assigned their voting rights and all managerial authority to RDX. (ASC 810-10-15-14(b)(1)).

The holders of the equity investment in Hairong lack the obligation to absorb the expected losses of Hairong, having assigned to RDX all revenue and responsibility for all payables. (ASC 810-10-15-14(b)(2).

The holders of the equity investment in Hairong lack the right to receive the expected residual returns of Hairong, having granted to RDX all revenue as well as an option to purchase the equity interests at a fixed price. (ASC 810-10-15-14(b)(3)).

Because the relationship between Hairong and RDX is entirely contractual, the Company’s interest in Hairong depends on the enforceability of those agreements under the laws of the PRC. We are not aware of any judicial decision as to the enforceability of similar agreements under PRC law. However, as the owners of the registered equity of Hairong are our Chairman and his close business associates, we do not believe that there is a significant risk that Hairong will seek to terminate the relationship or otherwise breach the agreements. Accordingly, we believe that consolidation of the financial statements of Hairong with those of the Company is appropriate.

Cash and cash equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains cash and cash equivalents with financial institutions in the PRC. The Company performs periodic evaluation of the relative credit standing of financial institutions that are considered in the Company’s investment strategy.

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents and accounts and other receivables. As of September 30, 2010, major banks located in the PRC held substantially all the Company’s cash and cash equivalents. Hairong’s management believes they are all of high credit quality. With respect to accounts receivable, the management extends credit based on an evaluation of the customer’s financial condition and customer payment practices to minimize collection risk on accounts receivable.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Bad debt reserves

The carrying amount of accounts receivable is reduced by a valuation allowance. The Company's policy is that for accounts receivable amounts that are aged between 6 months and 12 months, the Company records a 3% bad debt reserve. If the receivable is aged over 12 months, the Company reserves 5% of the account as a bad debt allowance. In addition, the Company reviews balances in excess of payment terms. Based on this review, which includes customer credit worthiness and history, general economic conditions and changes in customer payment patterns, the Company estimates the portion, if any, of the balance that will not be collected and records that amount as an additional reserve. Management reviews its valuation allowance on a semi-annual basis.

Construction in progress

Construction in progress represents direct costs of construction or acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed.

Property, plant and equipment

Property, plant and equipment are stated at cost, net of accumulated depreciation. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives:

	Buildings and improvements	40 years
	Machinery, equipment and automobiles	5-10 years

Land use right

According to the law of China, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Land use rights are being amortized using the straight-line method over the lease term of 50 years.

Income taxes

Hairong accounted for income tax under the provisions of FASB ASC 740 "Accounting for Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, whenever necessary, against net deferred tax assets when it is more likely than not that some portion or the entire deferred tax asset will not be realized. There are no deferred tax amounts at September 30, 2010 and June 30, 2010.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue recognition

The Company’s revenue recognition policies are in compliance with FASB ASC 605, “Revenue Recognition.” Sales revenue is recognized when the services are provided and the contracts are performed. The Company considers revenue realized or realizable and earned when (1) it has persuasive evidence of an arrangement, (2) delivery has occurred, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured.

Animation Design and Development

Our animation design and development contracts are unit-price contracts which set forth a price per minute of labor, an estimate of total labor, and the resulting sales price. Revenue is recognized when the outcome of a contract can be estimated reliably and the stage of completion at the balance sheet date can be measured reliably. Revenue is recognized on the percentage of completion method, measured on a units of delivery basis by reference to the contractual unit price (RMB per minute) of work carried out during the period. When the outcome of a contract cannot be estimated reliably, revenue is recognized only when the contract is completed or substantially completed, and pending completion billings are accumulated on our balance sheets.

Cost of goods sold with reference to animation design and development includes direct labor costs and costs associated with any outsourcing of services. Since our animation design department is dedicated to that business, department overhead, including depreciation and amortization of assets, is also recorded as cost of goods sold. When the outcome of a contract can be estimated reliably and the stage of contract completion at the balance sheet date can be measured reliably, costs are charged to the income statement by reference to the stage of completion of the contract activity at the balance sheet date on the same basis as revenue from the contract is recognized. When the outcome of a contract cannot be estimated reliably, costs are recognized only when the contract is completed or substantially completed, and pending completion costs are accumulated on our balance sheet, except that provision is made for expected losses. The normal period of a contract is approximately one to six months.

Membership fees

The Company recognized revenue according to the period of membership by customers, members who paid the membership fees are granted with access rights to a website in a period of one year. The website no longer operates in the calendar year of 2010, and thus there is no membership fee income for the three months ended September 30, 2010.

Fair value of financial instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivable, advances to suppliers, other receivables, accounts payable, accrued expenses, taxes payable, notes payable and other loans payable. Management has estimated that the carrying amounts approximate their fair value due to the short-term nature.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Foreign currency translation

Hairong’s functional currency is the Renminbi (“RMB”). Foreign currency transactions are translated at the applicable rates of exchange in effect at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. Revenues and expenses are translated at the average exchange rates in effect during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated Other Comprehensive Income". Gains and losses resulting from foreign currency translations are included in Accumulated Other Comprehensive Income.

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC, which are determined largely by supply and demand. Translation of amounts from RMB into US dollar has been made at the following exchange rates for the respective years:

September 30, 2010
Balance sheet	RMB 6.6800 to US $1.00
Statement of income and other comprehensive income	RMB 6.7613 to US $1.00

June 30, 2010
Balance sheet	RMB 6.7889 to US $1.00
Statement of income and other comprehensive income	RMB 6.8180 to US $1.00

Statement of cash flows

FASB issued ASC 230, “Statement of Cash Flows,” cash flows from the Company’s operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Earnings (Loss) per share

Basic earnings (loss) per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There are no common stock equivalents available in the computation of earnings (loss) per share at September 30, 2010.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Reserve Fund

Before June 20, 2006, Hairong was required to transfer 15% of its profit after taxation, as determined in accordance with Chinese accounting standards and regulations, to the surplus reserve fund. Subject to certain restrictions set out in the Chinese Companies Law, the surplus reserve fund may be distributed to stockholders in the form of share bonus issues and/or cash dividends. After June 30, 2006, such reserve is no longer mandatory under the Chinese Law but the Company still makes reserve fund contributions for its future development.

Comprehensive Income

Comprehensive income is defined to include changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income and the foreign currency translation gain, net of tax.

New accounting pronouncements

In January 2010, FASB issued ASU No. 2010-06 - Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of its ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its financial statements.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In January 2010, FASB issued ASU No. 2010-02 - Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51." If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for beginning in the first interim or annual reporting period ending on or after December 31, 2009. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its financial statements.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity's involvement in variable interest entities, which will enhance the information provided to users of financial statements. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140. The amendments in this Accounting Standards Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140.The amendments in this Accounting Standards Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In October 2009, the FASB issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently evaluating the impact of this ASU on its financial statements.

In August 2009, the FASB issued an Accounting Standards Update ("ASU") regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The adoption of this ASU did not have a material impact on the consolidated financial statements.

In June 2009, the FASB issued ASC 810, "Amendments to FASB Interpretation No. 46(R)," which changes the approach to determining the primary beneficiary of a variable interest entity ("VIE") and requires companies to more frequently assess whether they must consolidate VIEs. ASC 810 is effective for annual periods beginning after November 15, 2009. The Company does not expect the adoption of ASC 810 will have a material effect on the Company's financial condition, results of operations or cash flows.

In May 2009, the FASB issued ASC 855, "Subsequent Events," which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 is effective for interim reporting periods ending after June 15, 2009. The adoption of ASC 855 did not have a material effect on the Company's financial condition, result of operations or cash flows.

3. ACCOUNTS RECEIVABLE

Accounts receivable are uncollateralized, non-interest bearing customer obligations typically due under terms requiring payment from the invoice date. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the oldest unpaid invoices. As of September 30, 2010 and June 30, 2010, the net accounts receivable were $738,021 and $976,304, respectively.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of September 30, 2010 and June 30, 2010 consisted of the following:

	September 30, 2010			June 30, 2010
Building and Improvement	$	2,283,999		$	2,247,382
Office Furniture and Equipment		1,446,992			1,423,794
Vehicles		355,474			349,775
Construction in Progress		1,495,980			1,471,996
Total Property, Plant and Equipment		5,582,445			5,492,947
Accumulated depreciation		(1,129,877	)		(861,633	)
Total Property, Plant and Equipment, net	$	4,452,567		$	4,631,314

Total depreciation expenses were $251,149 and $72,513 for the three months ended September 30, 2010 and 2009, respectively.

5. LAND USE RIGHT AND OTHER INTANGIBLE ASSETS

The changes in intangible assets and the net book value of intangible assets as of September 30, 2010 and June 30, 2010 were as follows:

	September 30, 2010			June 30, 2010
Cost of intangible assets and land use right	$	3,078,259		$	3,028,908
Less: accumulated amortization		(371,473	)		(272,304	)
Intangible assets and land use right, net	$	2,706,786		$	2,756,604

Total amortization expenses related to intangible assets were $93,593 and $21,101 for the three months ended September 30, 2010 and 2009, respectively.

Based upon current assumptions, the Company expects that, during the next five years, its intangible assets will be amortized according to the following schedule:

Balance at June 30,	Amount
2011	$	208,254
2012		277,672
2013		277,672
2014		277,672
2015		277,672
Thereafter		1,387,845
Total 5 years	$	2,706,786

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

6. STOCKHOLDERS’ EQUITY

As of September 30, 2010, 500,000,000 shares have been authorized and 20,020,000 shares are outstanding.

The Company implemented a 1-for-25 reverse split on January 30, 2009. Retroactive effect is being given to the reverse split in this financial statement. Income statements have retroactively used the new outstanding shares to calculate the EPS. Stated par value in the stockholders’ equity section has been reduced accordingly.

7. INCOME TAXES

The Company has cumulative undistributed earnings of foreign subsidiaries of $5,031,404 as of September 30, 2010. These undistributed earnings are included in consolidated retained earnings and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.

The Company’s VIE, Heilongjiang Hairong, is registered and operates in Heilongjiang, PRC. In accordance with the relevant tax laws and regulations of PRC, Heilongjiang Hairong is subject to income tax at an effective rate of 25% from January 1, 2008 on income reported in the statutory financial statements after appropriated tax adjustments. Because there is no income tax in the British Virgin Islands, RDX is not subject to taxation in its domicile.

The Company had no uncertain tax positions as of September 30, 2010 and June 30, 2010. The following table sets forth the components of the Company’s income before income tax expense and the components of income tax expense for the three months ended September 30, 2010 and 2009:

	September 30, 2010			September 30, 2009
	(Restated)			(Restated)
China Pre-tax Income (Loss)	$	(484,432	)	$	658,638
Domestic Pre-tax Income (Loss)		(64,751	)		(10,626	)
Total Pre-tax Income (Loss)	$	(549,183	)	$	648,012

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

7. INCOME TAXES (continued)

	September 30, 2010		September 30, 2009
	(Restated)		(Restated)
China Income Tax Expense	$	276,171	$	164,659
Domestic Income Tax Expense		-		-
Total Current Income Tax Expense	$	276,171	$	164,659

A reconciliation of tax at United States federal statutory rate to provision for income tax recorded in the financial statements is as follows:

	September 30, 2010			September 30, 2009
	(Restated)
U.S. Statutory Income Tax Rate		34.0	%		34.0	%
Foreign Income not Recognized in the U.S.		(34.0	%)		(34.0	%)
China Statutory Income Tax Rate		25.0	%		25.0	%
Other Items		-			0.41	%(b)
Effective Consolidated Current Income Tax Rate		25.0	%(a)		25.41	%

(a). The Company accrued and paid income tax for the three months ended September 30, 2010 based on an erroneous determination that it had realized taxable income. Despite the subsequent calculation that the Company had incurred a loss during the quarter, PRC law does not permit a refund of the overpayment.

(b). The 0.41% represents $10,626 of the corporate expenses incurred by the Company’s US office that are not subject to PRC income tax for the three months ended September 30, 2009.

The Company was incorporated in the United States. It incurred net operating losses for U.S. income tax purposes for the three months ended September 30, 2010 and 2009. Net operating loss carry forwards for United States income tax purposes amounted to $321,075 and $256,324 as of September 30, 2010 and June 30, 2010, which may be available to reduce future periods’ US taxable income. These carry forwards will expire, if not utilized, beginning in 2029 through 2030. Management believes that the realization of the benefits arising from this loss appear to be uncertain due to Company's limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance at September 30 and June 30, 2010 for the temporary difference related to the loss carry-forwards. Management reviews this valuation allowance periodically and makes adjustments as warranted. At September 30, 2010 and June 30, 2010, the deferred tax assets/ (liabilities) and the related valuation allowance were as follows:

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

7. INCOME TAXES (continued)

	September 30, 2010			June 30, 2010
	(Restated)			(Restated)
U.S. Holding Company Net Operating Loss Carry-forward	$	109,166		$	87,150
China Other Deferred Tax Assets		-			-
Less: Valuation Allowance		(109,166	)		(87,150	)
Net		-			-

8. RISKS AND UNCERTAINTIES

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy.

The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. As of September 30, 2010 and June 30, 2010, substantially all of the Company’s cash and cash equivalents were held by major banks located in the PRC of which the Company’s management believes are of high credit quality. With respect to accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition and customer payment practices to minimize collection risk on account receivable.

9. SUBSEQUENT EVENTS

Management confirmed that no events have occurred subsequent to the balance sheet date and through the date of this report that would require adjustment to or disclosure in the interim financial information referred to above.

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

10. RESTATEMENT

The financial statements of the Company for the three months ended September 30, 2010 and 2009 that are included in this Report have been restated to effectuate changes from the statements filed in the Company’s Annual Report on Form 10-Q for the three months ended September 30, 2010 and 2009. The restatements were:

In the original filing we failed to accrue $124,878 unpaid rental expense as rent payable during the three months ended September 30, 2009 when the expense incurred. The accrual in this restatement resulted in an increase of rent payable and administrative expense by $124,878.

In the original filing $1,019,457 prepaid rent was incorrectly recorded as leasehold improvements. The correction of this error resulted in reclassification of the prepaid rent from property, plant and equipment to prepaid expenses and the amortization of $637,161 as rent expense. The related accumulated depreciation totaling $41,615 was reversed.

In the original filing we failed to accrue $1,462,270 outsourcing costs as accounts payable. The correction of this error resulted in an increase in accounts payable and costs of goods sold by $1,462,270.

The effect of the restatement on specific line items in our Consolidated Balance Sheets as of September 30, 2010 was:

Consolidated Balance Sheets	As Reported		As Restated

Prepaid expenses	$	-	$	382,296
Total Current Assets		8,295,781		8,678,077

Property, plant and equipment, net		5,430,410		4,452,567
Total Assets		16,432,977		15,837,431

Accounts payable		40,779		1,503,049
Loan payable		-		286,000
Total Current Liabilities		385,468		2,133,738

Loan payable		286,000		-
Total Liabilities		671,468		2,133,738

Accumulated other comprehensive income		2,128,409		1,989,908
Retained Earnings		6,683,645		4,710,329
Total Stockholders’ Equity	$	15,761,508	$	13,703,692

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

10. RESTATEMENT (continued)

The effect of the restatement on specific line items in our Consolidated Statements of Operations for the three months ended September 30, 2009 was:

Consolidated Statements of Operations	As Reported		As Restated
General and Administrative Expenses	$	169,612	$	262,909
Income from Operations		688,321		484,394

Income before Income Taxes		772,890		568,964
Provision for Income Taxes		195,879		144,897
Income from Continuing Operations		-		424,066

Income from Discontinued Operations		-		79,048
Income taxes of Discontinued Operations		-		19,762

Net Income		577,011		483,352

Other Comprehensive Income		13,067		89,956
Comprehensive Income		590,078		573,308

Earnings Per Common Share – Basic and Diluted		0.03		0.02

The effect of the restatement on specific line items in our Consolidated Statements of Operations for the three months ended September 30, 2010 was:

Consolidated Statements of Operations	As Reported		As Restated
Cost of Goods Sold	$	236,653	$	1,681,341
Gross Profit		1,569,206		124,518

Selling, General and Administrative Expenses		531,288		675,716

Income from Operations		1,037,918		(551,198	)

Income before Income Taxes		1,039,932		(549,183	)
Net Income		763,762		(825,354	)

Other Comprehensive Income		254,476		117,393
Comprehensive Income		1,018,238		(707,960	)

Earnings Per Common Share – Basic and Diluted		0.05		(0.04	)

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(UNAUDITED)

10. RESTATEMENT (continued)

The effect of the restatement on specific line items in our Consolidated Statements of Cash Flows for the three months ended September 30, 2009 was:

Consolidated Statements of Cash Flows	As Reported		As Restated

Net income	$	577,011	$	483,352

Changes in operating assets and liabilities:
Rent payable		-		124,878
Net cash provided by operating activities		1,096,455		1,096,506

Effect of exchange rate changes in cash		5,600		7,844

The effect of the restatement on specific line items in our Consolidated Statements of Cash Flows for the three months ended September 30, 2010 was:

Consolidated Statements of Cash Flows	As Reported			As Restated

Net income	$	763,762		$	(825,354	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		326,214			344,742

Changes in operating assets and liabilities:
Prepaid expenses		-			119,260
Accounts payable		6,441			1,468,711
Income tax payable		(134,132	)		(23,593	)
Net cash provided by operating activities		1,208,323			1,329,804

Effect of exchange rate changes in cash		122,697			1,216

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

Forward-Looking Statements: No Assurances Intended

In addition to historical information, this Quarterly Report contains forward-looking statements, which are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans to,” “estimates,” “projects,” or similar expressions. These forward-looking statements represent Management’s belief as to the future of China Digital Animation Development, Inc. Whether those beliefs become reality will depend on many factors that are not under Management’s control. Many risks and uncertainties exist that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Item 1A - “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010. Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.

Outline of Our Business

China Digital Animation Development Inc. (“China Digital”), through its operating company, Heilongjiang Hairong Science and Technology Development Co., Ltd., a joint stock company organized under the laws of The People’s Republic of China (“Hairong”), engages primarily in the business of digital animation production. From time to time we also organize cultural productions in China.

The government of China is actively supporting the development of the animation industry in China. Among the stimuli provided for development of the industry:

Heilongjiang Province has developed an Animation Development Area, in which participants in the industry are provided subsidized property. We are currently the beneficiaries of 2,000 square meters in the Animation Development Area, which we occupy rent-free until February 2011.

The local government provides subsidies for animation productions broadcast in China, from 300 RMB per minute for broadcasts on provincial television stations up to 50 million RMB for productions in prime time on China Central Television or overseas mainstream media. Since, as a subcontractor, the Company receives all of its revenue from production fees rather than from sale, broadcast or licensing of animation products, we do not receive any of these government subsidies. We benefit, however, from the overall increase in animation production that these subsidies are intended to yield.

Animation companies receive reductions in value-added tax, income tax, sales tax, and import duties.

Beginning in the quarter ended September 30, 2010, we have re-assessed our position in the animation development marketplace. Our perception was that the animation industry in China has grown to a point at which we will soon be no longer able to compete effectively. In recent years, however, due to the emphasis that the Chinese government has placed on the development of the animation industry, the market has become thick with competition. Management’s decision, therefore, was to re-orient our business model from one based on utilization of a state-of-the-art in-house capacity, to one in which we utilize our long-standing customer contacts and project management skills to obtain and manage project contracts while outsourcing most of the actual development work. With this new business model, we will be able to more selectively choose the projects we work on, as we will no longer have the need to make constant use of an extended staff and expensive facilities.

Results of Operations

Our revenue grew by 78% during the three months ended September 30, 2010, compared to the three months ended September 30, 2009. Revenue for the three months ended September 30, 2009 excludes, however, revenue from our now-terminated financial data services segment. The results of that operation during fiscal 2010 are represented by the section of our Statements of Operations titled “Discontinued Operations.”

Despite the increase in revenue, our gross profit fell by 85%, from $804,744 in the three months ended September 30, 2009 to $124,518 in the three months ended September 30, 2010. The reason for the low profitability was our inability to secure profitable bids on contracts. We outsourced a large portion of the development work in an effort to cut costs. Nevertheless the need to keep our facilities occupied and our remaining staff of animation developers necessitated that we obtain a steady flow of contracts. Toward that end, we devoted a large allocation of resources to marketing, which resulted in a 77% increase in selling expenses to $101,757 in the three months ended September 30, 2010.

Within the past year we have put in service a significant expansion of our animation equipment, which we must now depreciate. As a result, our depreciation and amortization expense for the three months ended September 30, 2010 increased by $251,128 over the same category of expense in the three months ended September 30, 2009. Our operating expenses for the three months ended September 30, 2010, therefore, increased by $355,366 over the same period of the prior year. The result was that, even as we undertook down-sizing operations, our general and administrative expenses more than doubled.

In April 2009 we determined that our cash assets exceeded our immediate needs. Therefore we invested $2.1 million of our cash with an investment management company that contracted to provide us a 15% annual return. Primarily as a result of this investment, we accrued interest income of $84,595 in the three months ended September 30, 2009. In April 2010 the investment management company returned the principal of our investment. Therefore, in the three months ended March 31, 2010, when our cash was deposited in bank accounts only, our interest income was only $2,015.

Our bottom line operating result for the three months ended September 30, 2010 was a net pre-tax loss of $549,183, which compared unfavorably with the $568,964 in pre-tax income that we realized in the first quarter of fiscal 2010. Unfortunately, when we initially calculated our taxable income for the quarter ended September 30, 2010, we erroneously determined that we had taxable income for the quarter. Accordingly, we accrued and paid $276,171 in income tax. We subsequently determined that we had incurred a loss for the quarter. However, under PRC aw the overpaid tax is not refundable. Accordingly, we have accrued that amount of income tax for the quarter on our statement of operations, despite our operating loss.

Our net loss for the first quarter of fiscal 2011, then, reached $825,354, or $.04 per share. In the first quarter of fiscal 2010 we had net income from continuing operations of $424,066, to which we added $59,286 in income from operations that we terminated during that year, for aggregate net income of $483,352, or $.02 per share.

Our business operates entirely in Chinese Renminbi, but we report our results in our SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars results in translation adjustments. While our net income is included in the retained earnings on our balance sheet; the translation adjustments are included in a line item on our balance sheet labeled “accumulated other comprehensive income,” since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. During the three months ended September 30, 2010, the effect of converting our financial results from RMB to U.S. Dollars was to increase our accumulated other comprehensive income by $117,393. During the three months ended September 30, 2009, the effect of converting our financial results from RMB to U.S. Dollars was to increase our accumulated other comprehensive income by $89,956.

Liquidity and Capital Resources

To date, our operations have been funded primarily by capital contributions from Hairong’s management and employees. Approximately 54% of the capital contribution has been made by members of management and their business associates. The remaining 46% was contributed by the employees, acting through a trustee. The Company expects that in the future it will issue equity to the employees to compensate them for their financial contributions to the growth of Hairong, and to incentivize them for future loyalty to Hairong. In addition, the operations of our New York office, including the legal and accounting expenses attendant to our status as a public company, have been funded by loans from either Chief Executive Officer, Fu Qiang, or Fu Zhiguo, a shareholder. These loans are payable on demand and do not bear interest. The Messrs. Fu made the loans to cover the costs of the New York office because the process of obtaining approval from the Chinese government for transfer of funds from China to the U.S. would be burdensome and delay our ability to pay our U.S. expenses. We will continue to rely on loans from Fu Qiang or Fu Zhiguo to pay our U.S. expenses until we can fund those expenses from Dollars obtained by a financing in the U.S. or after government approval of a conversion of a portion of our Renminbi balances into Dollars.

This program of internal financing has left us with a balance sheet that, at September 30, 2010, included no debt, either short-term or long-term, other than the $286,000 loan payable to Fu Qiang and Fu Zhiguo. It also left us with working capital of $6,544,339 at September 30, 2010, a reduction of $479,397 during the quarter. Included in our working capital at September 30, 2010 was $7,550,458 in cash. Since our operations have been cash positive in each of the past three fiscal years - providing $5,277,646 in cash during the 2010 fiscal year, $819,226 in cash during the 2009 fiscal year, and $2,030,233 in cash during the 2008 fiscal year - we believe that our cash resources are adequate to fund our operations for the foreseeable future.

Our operations during the first three months of fiscal 2011 produced $1,329,804 in cash. We had cash flow from operations despite recording a net loss primarily because we expanded our accounts payable by $1,468,711 during the quarter. In addition, the net loss included depreciations expense, as noted earlier. Moreover, during the three months ended September 30, 2010, we reduced our accounts receivable by $238,283.

Currently we have fixed assets with a book value of $7,159,353 on which there is no lien. This provides us the ability to obtain secured debt financing, if we decided to preserve our working capital. Based on this experience, we anticipate that our capital resources will be adequate to fund our operations for the foreseeable future.

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.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2010. Pursuant to Rule13a-15(e) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, “disclosure controls and procedures” means controls and other procedures that are designed to insure that information required to be disclosed by the Company in the reports that it files with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time limits specified in the Commission’s rules. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to insure that information the Company is required to disclose in the reports it files with the Commission is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.

The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report (the “Evaluation Date”). That evaluation revealed that management of the Company on a number of occasions failed to apply appropriate accounting principles when preparing the Company’s financial statements, which resulted in the restatement described in Note 11 to the financial statements. Accordingly, based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were not effective.

Changes in Internal Controls. There was no change in internal controls over financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act or 1934) identified in connection with the evaluation described in the preceding paragraph that occurred during the Company’s first fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1A Risk Factors

There have been no material changes from the risk factors included in the Annual Report on Form 10-K for the year ended June 30, 2010.

Item 6. Exhibits

31.1	Rule 13a-14(a) Certification – CEO
31.2	Rule 13a-14(a) Certification – CFO
32	Rule 13a-14(b) Certification

SIGNATURES

Pursuant to the requirements 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.

	CHINA DIGITAL ANIMATION DEVELOPMENT INC.

Date: November 23, 2011	By: /s/ Sheng Zhai
	Sheng Zhai, Chief Executive Officer

	By: /s/ Hu Yumei
	Hu Yumei, Chief Financial Officer

Attached files

China Digital Animation Development, Inc. Reports

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