U. S. Securities and Exchange Commission


Washington, D. C. 20549





FORM 10-Q





[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended December 31, 2010[   ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 39thStreet, 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:




February 18, 2011


Common Voting Stock: 20,270,000











CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


TABLE OF CONTENTS


DECEMBER 31, 2010








Condensed Consolidated Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of December 31, 2010 (Unaudited) and June 30, 2010
1Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended December 31, 2010 and 2009 (Unaudited)
2Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2010 and 2009 (Unaudited)
3Notes to Condensed Consolidated Financial Statements (Unaudited)
4

















CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS





December 31,


June 30,2010


2010(Unaudited)ASSETSCurrent assetsCash and cash equivalents

$
9,299,039


$
6,219,438Accounts receivable


940,540



976,304Other receivables


14,010



3,616Total current assets


10,253,589



7,199,358Property, plant and equipment, net


5,289,156



5,575,026Land use right and other intangible assets, net


2,671,747



2,756,604Total assets

$
18,214,492


$
15,530,988LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilitiesLoan payable


335,975



286,000Accrued expenses and other payables


122,982



91,378Taxes payable


350,439



410,339Total current liabilities


809,396



787,717Commitments and contingenciesStockholders' equityCommon stock ($0.001 par value, 500,000,000 shares authorized, 20,270,000 shares issued and outstanding at December 31, 2010, 20,020,000 shares issued and outstanding at June 30, 2010)


20,270



20,020Additional paid-in-capital


6,723,447



6,223,697Accumulated other comprehensive income


2,353,439



1,873,933Reserved Fund


1,257,468



705,738Retained earnings


7,050,472



5,919,883Total stockholders' equity


17,405,096



14,743,271Total liabilities and stockholders' equity

$
18,214,492


$
15,530,988






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




1





CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


(UNAUDITED)





Three months ended

December 31,


Six months ended

December 31,2010


2009


2010


2009Revenues

$
2,014,129


$
1,234,375


$
3,819,988


$
2,378,290Cost of goods sold


360,299



697,413


710,904



935,747Gross profit


1,653,830



536,962



3,109,084



1,442,543Operating expensesSelling expenses


113,796



69,742



215,553



134,373General and administrative expenses


288,982



196,367



604,561



348,996Total operating expenses


402,778



266,109



820,114



483,369Income from operations


1,251,052



270,853



2,288,970



959,174Other income (expense)Interest income


7,121



83,952



9,136



168,548Loss from disposal of property, plant and equipment


-



-



-



(26)Total other income (expense)


7,121



83,952



9,136



168,522Income before income taxes


1,258,173



354,805



2,298,106



1,127,696Less: Provision for income taxes


339,616



103,653



615,787



299,532Net income


918,557



251,152



1,682,319



828,164Other comprehensive incomeForeign currency translation gain


225,030



39,397



479,506



52,464Total comprehensive income

$
1,143,587



290,549



2,161,825



880,628Basic and diluted earnings per share

$
0.05



0.01



0.08



0.04Basic and diluted weighted average shares outstanding


20,125,978



20,020,000



20,072,989



20,020,000







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


2





CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





For the six months ended

December 312010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
1,682,319


$
828,164Adjustments to reconcile net income to net cash provided by operating activities:Depreciation


444,826



183,199Amortization


164,399



59,383Changes in operating assets and liabilities:Accounts receivable


63,840



275,417Prepaid expenses


-



(1,342,636
)Advances to suppliers


-



1,443,440Interest receivable


-



(227
)Other receivables


(10,196)



(2,053
)Accrued expenses and other payables


29,874



46,398Taxes payable


(70,949)



(75,735
)Net cash provided by operating activities


2,304,113



1,415,350CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property, plant and equipment


-



(820,723
)Purchase of intangible assets


-



(1,912,803
)Additions to long term investment


-



(9,043
)Net cash used in investing activities


-



(2,742,569
)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from borrowing


49,975



61,000Proceeds from sale of stock


500,000



-Net cash provided by financing activities


549,975



61,000EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS


225,513



52,456NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


3,079,601



(1,213,763)CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


6,219,438



2,282,786CASH AND CASH EQUIVALENTS, ENDING OF PERIOD

$
9,299,039


$
1,069,023SUPPLEMENTAL DISCLOSURES:Cash paid during the period for:Income taxes

$
686,283


$
175,263Interest

$
-


$
-





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


3





CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





1.  ORGANIZATION AND DESCRIPTION OF BUSINESS





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. 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." As a result of entering into the aforementioned agreements, RDX is the primary beneficiary and deemed to control Hairong as a Variable Interest Entity.








2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





a. Basis of presentation





The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.





In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments (consisting only or normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company for the periods presented. The results of operations for the three and six months ended December 31, 2010 are not necessarily indicative of operating results expected for the full year or future interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report of Form 10-K for the year ended June 30, 2010, filed on September 28, 2010 (the “Annual Report”).





b. Principle of consolidation





The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiary RDX, and Hairong, which is deemed to be a variable interest entity of which RDX is the primary beneficiary as defined by ASC 810 “Consolidation of Variable Interest Entities.” All significant inter-company accounts and transactions have been eliminated in consolidation.





c. Reclassification





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


4





CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





d. 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, useful lives of property, plant and equipment and intangible assets, allowance for doubtful accounts and inventory obsolescence. Actual results could differ from those estimates.





e. 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.





f. 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 December 31, 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.





g. Accounts receivable and allowance for doubtful accounts





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 December 31, 2010 and June 30, 2010, the net accounts receivable were $940,540 and $976,304, respectively.





The carrying amount of accounts is reduced by allowance for doubtful accounts receivable, if any. The Company's policy is that for accounts amounts that are aged between 6 months and 12 months, the Company records a 3% allowance for doubtful accounts.  If the receivable is aged over 12 months, the Company reserves 5% of the account as an allowance for doubtful accounts. 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 allowance for doubtful accounts on a semi-annual basis.





There was no allowance made for doubtful accounts as of December 31, 2010 and June 30, 2010.





h. 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.





i. 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 yearsMachinery, equipment and automobiles
5-10 years





5





CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





j. Land use right and other intangible assets





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.





k. 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 December 31, 2010 and June 30, 2010.





l. 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


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 by reference to the value of work carried out during the period. When the outcome of a contract cannot be estimated reliably, revenue is recognized only to the extent of contract costs incurred that it is probable will be recoverable.





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, contract 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. 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 and six months ended December 31, 2010.





m. Fair value measurements and fair value of financial instruments





The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.


6





CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





m. Fair value measurements and fair value of financial instruments - continued





The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:


Level 1 - Quoted prices in active markets for identical assets or liabilities.


Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


Level 3 - Inputs that are generally unobservable and typically reflect managements estimates of assumptions that market participants would use in pricing the asset or liability.





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





n. 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:





December 31, 2010


Balance sheet
RMB 6.5920 to US $1.00Statement of income and other comprehensive income
RMB 6.7042 to US $1.00





June 30, 2010


Balance sheet
RMB 6.7889 to US $1.00Statement of income and other comprehensive income
RMB 6.8180 to US $1.00





o. 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.





p. Earnings (Loss) per share





Basic earnings (loss) per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period.





Diluted earnings per share is 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 for the three and six months ended December 31, 2010 and 2009.


7





CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





q. 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.





r. 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.





s. 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.





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 does not expect the adoption of this ASU to have a material impact on its financial statements.


8





CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





3.  PROPERTY, PLANT AND EQUIPMENT, NET





Property, plant and equipment consist of the following:





December 31,

2010


June 30,

2010Buildings and Improvements

$
3,347,589


$
3,250,495Office Furniture and Equipment


1,466,324



1,423,794Vehicles


360,223



349,775Construction in progress


1,515,965



1,471,9966,690,101



6,496,060Less: Accumulated depreciation


(1,400,945)



(921,034)Property, plant and equipment, net

$
5,289,156


$
5,575,026





Depreciation expense for the three months ended December 31, 2010 and 2009 were $209,374 and $109,910, respectively.





Depreciation expense for the six months ended December 31, 2010 and 2009 were $444,826 and $183,199, respectively.





The Company has considered the capitalized interest for the construction in progress as of December 31, 2010 and the amount is insignificant and not expected to have a material impact on the amount of construction in progress.





4.  LAND USE RIGHT AND OTHER INTANGIBLE ASSETS, NET





Land use right and other intangible assets consist of the following:





December 31,

2010


June 30,

2010Cost of land use right

$
352,316


$
342,098Cost of other intangible assets


2,767,068



2,686,810$
3,119,384


$
3,028,908Less: Accumulated amortization


(447,637
)


(272,304
)Land use right and other intangible assets, net

$
2,671,747


$
2,756,604





Amortization expense for the three month ended December 31, 2010 and 2009 were $69,667 and $39,600, respectively.





Amortization expense for the six month ended December 31, 2010 and 2009 were $164,399 and $59,383, respectively.





The following schedule sets forth the estimated amortization expense for the periods presented:





ESTIMATED AMORTIZATION EXPENSERemainder of the year ending June 30, 2011

$
69,667For the year ending June 30, 2012


139,334For the year ending June 30, 2013


139,334For the year ending June 30, 2014


139,334For the year ending June 30, 2015


139,334





9





CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





5. LOAN PAYABLE





The loan payable consists of two shareholders’ loans from Fu Qiang and Fu Zhiguo, which amounted to $95,975 and $240,000, respectively. The carrying amount of the loan payable approximates their fair values.





6.  INCOME TAXES





Since January 1, 2008, when a new Chinese Tax Law was enacted, Hairong has been subject to income tax at statutory rate of 25 % on income reported in the statutory financial statements after appropriate tax adjustments.





The Company’s provisions for income taxes for the three and six months ended December 31, 2010 and 2009 as follows:





Three months ended

December 31,


Six months ended

December 31,2010


2009


2010


2009Current

$
339,616


$
103,653


$
615,787


$
299,532DeferredTotal

$
339,616


$
103,653


$
615,787


$
299,532





The following is the reconciliation of income taxes at the calculated statutory rates:





Three months ended

December 31,


Six months ended

December 31,2010


2009


2010


2009Income tax calculated at statutory rates

$
314,543


$
88,701


$
574,527


$
282,174Tax effect of parent


25,073



14,952



41,260



17,358Provision for income taxes

$
339,616


$
103,653


$
615,787


$
299,532





Deferred taxes are comprised of the following:





December 31,

2010


June 30,

2010Net operating loss carryforward

$
143,265


$
87,150Less: Valuation allowance


(143,265
)


(87,150
)Total deferred income tax assets

$
-


$
-





The Company was incorporated in United States of America and is subject to United States of America tax law. No provisions for income taxes have been made as the Company has a taxable loss for the three and six months ended December 31, 2010. No tax benefit has been realized since a valuation allowance has offset the deferred tax asset. As of December 31, 2010, the Company had a net operating loss from continuing operations for United States federal income tax purposes of $421,367 which are available to carry back five years or offset future taxable income, if any, through 2030.





7.  STOCKHOLDERS’ EQUITY





In November 2010 the Company sold 250,000 shares of common stock for $500,000 in a private placement to three investors.  As of December 31, 2010 and June 30, 2010, 500,000,000 shares have been authorized and 20,270,000 shares are outstanding.





10





CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)


8.  SEGMENT INFORMATION





Segment revenue was as follows:





Three months ended

December 31,


Six months ended

December 31,2010


2009


2010


2009Revenue:Membership Fees

$
-


$
116,896


$
-


$
244,162Animation Design and Development


2,014,129



877,820



3,819,988



1,894,469Other


-



239,659


-



239,659Consolidated

$
2,014,129


$
1,234,375


$
3,819,988


$
2,378,290





Segment profit was as follows:





Three months ended

December 31,


Six months ended

December 31,2010


2009


2010


2009Operating Income:Membership Fees

$
-


$
97,717


$
-


$
188,966Animation Design and Development


1,358,465



222,470



2,463,149



904,112Other


-



34,618


-



34,618Consolidated

$
1,358,465


$
354,805


$
2,463,149


$
1,127,696





Segment assets were as follows:





December 31, 2010


June 30, 2010Assets:Animation Design and Development

$
17,741,925


$
15,460,691Corporate


472,567



70,297Consolidated

$
18,214,492


$
15,530,988





FASB ASC 280, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. This standard requires segmentation based on our internal organization and reporting of revenue and operating income based upon internal accounting methods. Our financial reporting systems present various data for management to operate the business, including internal profit and loss statements prepared on a basis not consistent with U.S. GAAP. The segments are designed to allocate resources internally and provide a framework to determine management responsibility. Amounts for prior periods have been recast to conform to the current management view. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer.





A reconciliation of the Company’s segment profit to the condensed consolidated income before taxes for the three and six months ended December 31, 2010 and 2009, is as follows:





Three months ended

December 31,


Six months ended

December 31,2010


2009


2010


2009Segment profit

$
1,358,465


$
354,805


$
2,463,149


$
1,127,696Other corporate expenses


(100,292)



-


(165,043)



-Total income before taxes

$
1,258,173


$
354,805


$
2,298,106


$
1,127,696





11




CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





9.  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 December 31, 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.





10.  CONTINGENCIES





Litigation





From time to time, the Company is a party to various legal actions arising in the ordinary course of business.  The Company’s management does not expect the legal matters involving the Company would have a material impact on the Company’s consolidated financial position or results of operations.





11.  SUBSEQUENT EVENT





The Company evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q. No significant events occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our Condensed Consolidated Financial Statements.








12


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.





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 December 2011.





·
The local government provides subsidies for animation productions broadcast in China, from RMB300 per minute for broadcasts on provincial television stations up to RMB50 million for productions in prime time on China Central Television or overseas mainstream media.





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





With this support, we have rapidly developed our animation development business in the past two years.  Currently, our team of 30 animation technicians offers digital animation services to the movie, television and Internet industries, specializing in high end special effects, including 3-D animation.  We also offer non-media businesses animated products for advertising, branding and education purposes.





The animation industry is growing rapidly in China.  Because we have developed a state-of-the-art facility with personnel recognized in the industry, we expect to participate in that growth in a leadership position.  For that reason, we expect that animation development will be the primary source of our revenues for the foreseeable future.





To supplement our animation development business, we previously organized a department dedicated to producing cultural events.  The department produced the Great Wall Ice Tour, a travelling multimedia entertainment facility constructed of snow and ice.  Recently, however, we determined that our focus should be exclusively on animation.  Accordingly, we have terminated our cultural event production activities.








Results of Operations





Our revenue grew by 63% during the three months ended December 31, 2010, compared to the three months ended December 31, 2009, while our revenue grew by 61% during the six months ended December 31, 2010, compared to the six months ended December 31, 2009.  The growth is even more pronounced in the animation development segment, which provided all of our revenue in the three and six months ended December 31, 2010, but was abetted by $116,896 and $244,162 in revenue from our financial data services segment during the three and six months ended December 31, 2009, respectively.


13




Because our current operations are focused on service industries, we record a low cost of goods sold.  We currently have a staff of over 130 employees dedicated to the animation development business, and their salaries are accounted for as cost of goods sold.  In addition, a portion of our depreciation and amortization expense is also accounted for as cost of goods sold.  Nevertheless, during the three months ended December 31, 2010, our animation development projects yielded a gross margin of 82%, an improvement over the 44% gross margin achieved in the three months ended December 31, 2009.  During the six months ended December 31, 2010, our animation development projects yielded a gross margin of 81%, an improvement over the 61% gross margin achieved in the six months ended December 31, 2009.  Our gross margin will vary from one period to another, depending on our success in pricing the animation contracts we perform.  In general, however, we expect our gross margin ratio to remain high.





Our operating expenses increased by 51% from the three months ended December 31, 2009 to the three months ended December 31, 2010, and by 70% from the six months ended December 31, 2009 to the six months ended December 31, 2010.  Selling expenses contributed to the increase, as they have risen approximately in proportion to the expansion of our business.  In addition, within the past year we have put in service significant equipment, which we must now depreciate.  General and administrative costs have increased as a result of the increased depreciation.  We expect general and administrative costs to continue to increase, as we plan to continue to upgrade our equipment.





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 $83,952 and $168,548 in the three and six months ended December 31, 2009, respectively.  In April 2010 the investment management company returned the principal of our investment.  Therefore, in the three and six months ended December 31, 2010, when our cash was deposited in bank accounts only, our interest income was only $7,121 and $9,136, respectively.





Our bottom line operating result for the three and six months ended December 31, 2010 was net after-tax income of $918,557 and $1,682,319, respectively, a 266% and 103% improvement over net income in the three and six months ended December 31, 2009, respectively.  We expect the improvement in our operating results to continue in the foreseeable future, since our animation business is already producing better and more profitable revenue.





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 and six months ended December 31, 2010, the effect of converting our financial results from RMB to U.S. Dollars was to increase our accumulated other comprehensive income by $225,030 and $479,506, respectively.  During the three and six months ended December 31, 2009, the effect of converting our financial results from RMB to U.S. Dollars was to increase our accumulated other comprehensive income by only $39,397 and $52,464, respectively.





Liquidity and Capital Resources





To date, our operations have been funded 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.





This program of internal financing has left us with a balance sheet that, at December 31, 2010, included no debt, either short-term or long-term, other than a $335,975 loan payable to two of our shareholders.  It also left us with working capital of $9,444,193 at December 31, 2010, an improvement of $3,032,552 during the six months period ended December 31, 2010.  Included in our working capital at December 31, 2010 was $9,299,039 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.


14





Our operations during the first six months of fiscal 2011 produced $2,304,113 in cash.  Cash flow from operations exceeded net income primarily because net income was negatively affected by depreciation and amortization expenses, as noted earlier, as well as the fact that during the six months ended December 31, 2010, we reduced our accounts receivable by $63,840.  Our cash reserves were supplemented in November 2010, when we sold 250,000 shares of common stock for $500,000 in a private placement to three investors.





We expect to fund additional upgrades to our film and animation production facilities during the next twelve months.  We expect the overall cost of these capital improvements to be approximately 27 million RMB (approximately $4 million).  At present, we anticipate that we will finance these projects from our capital resources.  However, if we are able to obtain financing on favorable terms, we may use external financing for one or more of the projects.  Currently we have property, plant and equipment, land use right and other intangible assets, net with a book value of $7,960,903 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.  Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s system of disclosure controls and procedures was effective as of December 31, 2010 for the purposes described in this paragraph.





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 second fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.


15





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 2.        Unregistered Sale of Securities and Use of ProceedsRegistrant





(a) Unregistered sales of equity securities





On November 23, 2010 China Digital Animation Development, Inc. completed the sale of 250,000 shares of its common stock to three investors.  The shares were sold for $2.00 per share in cash for total proceeds of $500,000. The sale of the securities was exempt from registration with the Securities and Exchange Commission pursuant to Rule 506, by reason of the fact that there was no general solicitation in connection with the offering, and the fact that the purchasers were accredited investors with sufficient knowledge and experience to be capable of evaluating the merits and risks of the investment, who were purchasing for investment for their own accounts.  There was no underwriter.





(c) Purchases of equity securities





The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the 2nd quarter of fiscal 2011.







Item 6.       Exhibits




31.1
Rule 13a-14(a) Certification – CEO31.2
Rule 13a-14(a) Certification – CFO32
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: February 18, 2011
By: /s/ Fu QiangFu Qiang, Chief Executive OfficerBy: /s/ Hu YumeiHu Yumei, Chief Financial Officer, Chief Accounting Officer







16