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 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 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:




November 22, 2010


Common Voting Stock: 20,020,000








PAGEFINANCIAL STATEMENTS:
1CONSOLIDATED BALANCE SHEETS
2 - 3CONSOLIDATED STATEMENTS OF INCOME
4CONSOLIDATED STATEMENTS OF CASH FLOWS
5 - 6NOTES TO FINANCIAL STATEMENTS
7 - 20




1




CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 
 FOR THE PERIOD ENDED SEPTEMBER 30, 2010 AND YEAR ENDED  JUNE 30, 2010





SEPTEMBER 30,


JUNE 30,ASSETS

2010(Unaudited)Current Assets:Cash and cash equivalents

$
7,550,458


$
6,219,438Accounts Receivable, net


738,021



976,304Employee advances


7,302



3,616Total Current Assets


8,295,781



7,199,358Non-current AssetsProperty, Plant & Equipment, net


5,430,410



5,575,027Land use right and other intangible assets, net


2,706,786



2,756,604Total Non-current Assets


8,137,196



8,331,630Total Assets

$
16,432,977


$
15,530,988


" Continued on next page"




"The accompanying notes are an integral part of these financial statements"


2


CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 
 FOR THE PERIOD ENDED SEPTEMBER 30, 2010 AND YEAR ENDED  JUNE 30, 2010





SEPTEMBER 30,


JUNE 30,LIABILITIES AND STOCKHOLDERS' EQUITY

2010(Unaudited)Current Liabilities:Accounts Payable

$
40,779


$
34,338Payroll  payable


6,725



6,648Tax Payable


276,207



410,339Accrued expenses and other payable


61,756



50,391Total Current Liabilities


385,468



501,717Long-Term Liabilities:Loan Payable


286,000



286,000Total Long-Term Liabilities


286,000



286,000Total Liabilities


671,468



787,717Stockholders' Equity:Common Stock, par value $0.001, 500,000,000 authorized20,020,000 shares issued and outstanding


20,020



20,020Additional Paid in Capital


6,223,697



6,223,697Accumulated other comprehensive income


2,128,409



1,873,933Reserved Fund


705,738



705,738Retained Earnings


6,683,645



5,919,883Total Stockholders' Equity


15,761,508



14,743,271Total Liabilities and Stockholders' Equity

$
16,432,976


$
15,530,988







"The accompanying notes are an integral part of these financial statements"


3


CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited)
 
 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009





2010


2009Revenues

$
1,805,859


$
1,143,915Cost of Goods Sold


236,653



221,352Gross Profit


1,569,206



922,564Operating Expenses:Sales Expenses


101,757



64,631General and Administrative Expenses


429,531



169,612Total Operating Expenses


531,288



234,243Income from Operations before other Incomeand (expenses)


1,037,918



688,321Other Income and (Expense):Interest income


2,015



84,595Gains from Disposal of Fixed Assets


-



(26
)Total Other Income and (Expense)


2,015



84,570Income Before Income Taxes


1,039,932



772,890Provision For Income Taxes


276,171



195,879Income After Provision for Income Taxes


763,762



577,011Other Comprehensvie Income;Unrealized Gain (loss) on Foreign Currency Translation


254,476



13,067Net Comprehensive Income

$
1,018,238


$
590,078Earnings Per Common Share-Basic and Diluted


0.05



0.03Weighted Average Common Share - Basic and Diluted


20,020,000



20,020,000







"The accompanying notes are an integral part of these financial statements"


4


CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009





Three Months EndedSEPTEMBER 30,Cash Flows From Operating Activities:

2010


2009Net Income

$
763,762


$
577,011Adjustments To Reconcile Net Income To Net CashProvided By Operating Activities:Depreciation and Amortization Expense


326,214



93,614Gains from Disposal of Fixed Assets


-



(26
)(Increase) or Decrease in Current Assets:Accounts Receivable


238,283



297,410Prepaid Expenses


-



4,348Advanced to Suppliers


-



188,614Interest Receivable


-



(82,323
)Employee Advanced


(3,686
)


11Increase or (Decrease) in Current Liabilities:Accounts Payable


6,441



41,319Taxes Payable


(134,132
)


(14,790
)Payroll  payable


77



-Accrued Expenses and Other Payables


11,365



(8,734
)Net Cash Provided by Operating Activities


1,208,323



1,096,455Cash Flows From Investing Activities:Purchases of Property and Equipment


-



(775,032
)Net Cash Used in Investing Activities


-



(775,032
)




"Continued on next page"




"The accompanying notes are an integral part of these financial statements"


5




CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009


Three Months EndedSEPTEMBER 30,Cash Flows From Financing Activities:

2010


2009Proceeds from Borrowing


-



26,000Net Cash Used in Financing Activities


-



26,000Effect of exchange rate changes on cash and cash equivalents


122,697



5,600Increase (Decrease) in Cash and Cash Equivalents


1,331,020



353,023Cash and Cash Equivalents -Beginning Balance


6,219,438



2,282,786Cash and Cash Equivalents - Ending Balance

$
7,550,458


$
2,635,808Supplemental Disclosures of Cash Flow Information:Cash Paid During The Years for:Income Taxes Paid

$
415,224


$
215,748






"The accompanying notes are an integral part of these financial statements"


6
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010







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





Basis of Presentation




The accompanying unaudited consolidated financial statement has been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the full fiscal year.


7
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010







2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




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.




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.




8
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010







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. The useful life is 20 years.




Property and equipment




Property 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





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.


9
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010





2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




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.




Revenue recognition




The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104.  Sales revenue is recognized when the services are provided and the contracts are performed.




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.




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.




10
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010





2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




Foreign currency translation (continued)




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 $1.00Statement of income and other comprehensive income
RMB 6.7613 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




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 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 at September 30, 2010.




11
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010





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.




12
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010






2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




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 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.


13
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010




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.




14
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010




2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




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 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 Company's consolidated financial statements.




15
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010






2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




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.




In April 2009, the FASB issued ASC 270, "Interim Disclosures about Fair Value of Financial Instruments," which requires quarterly disclosures of the fair value of all financial instruments that are not reflected at fair value in the financial statements, as well as additional disclosures about the method(s) and significant assumptions used to estimate the fair value. Prior to the issuance of this FSP, such disclosures, including quantitative and qualitative information about fair value estimates, were only required on an annual basis. ASC 270 is effective for interim reporting periods ending after June 15, 2009. The adoption of ASC 270 did not have a material effect on the Company's disclosures.






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.




16
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010




4.  PROPERTY AND EQUIPMENT, NET




Property, Plant & Equipment consisted of the following:




September 30,

2010


June 30,

2010Building and Improvement

$
3,313,456


$
3,250,495Office Furniture & Equipment


1,456,992



1,423,794Vehicles


355,474



349,775Construction in progress


1,495,980



1,471,996Total Property


6,621,902



6,496,060Accumulated depreciation


-1,191,492



-921,033Total Property, net

$
5,430,410


$
5,575,027




Depreciation expense for the three months ended September 30, 2010 was $235,452.






5.  INTANGIBLE ASSETS AND LAND USE RIGHT




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




September 30,

2010


June 30,

2010Cost of intangible assets and land use right

$
3,078,259


$
3,028,908Less: accumulated amortization


-371,473



-272,304Intangible assets and land use right, net

$
2,706,786


$
2,756,604




Total amortization expense related to intangible assets was $94,732 for the three month ended September 30, 2010.




17
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010






6.  INCOME TAXES




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




The Company’s provisions for income taxes for the 3 months ended September 30, 2010 and 2009 as follows:




PRC only:

September 30,

2010


September 30,

2009Current

$
276,171


$
195,879Deferred


-



-Total

$
276,171


$
195,879







7.  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.






8.  SEGMENT INFORMATION




Segment revenue was as follows:




September 30,


September 30,2010


2009Revenue:Membership Fees

$
-


$
127,266Animation Design and Development


1,805,859



1,016,649Consolidated

$
1,805,859


$
1,143,915


18
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010


8.  SEGMENT INFORMATION (continued)




Segment operating income was as follows




September 30,


September 30,2010


2009Operating Income:Membership Fees


-


$
97,271Animation Design and Development

$
1,037,918


$
597,072Consolidated

$
1,037,918


$
694,343





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.







9.  CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS




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.


19
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SEPTEMBER 30, 2010




9.  CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS (Continued)




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 2009, 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.  SUBSEQUENT EVENT




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.






20





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.




·
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.


21


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 also have organized a department dedicated to producing cultural events.  Commencing with the Great Wall Ice Tour, a travelling multimedia entertainment facility constructed of snow and ice, we intend to mine the rich cultural heritage of China to produce and distribute a wide variety of cultural entertainments.




Results of Operations




Our revenue grew by 58% during the three months ended September 30, 2010, compared to the three months ended September 30, 2009.  The growth is even more pronounced in the animation development segment, which provided all of our revenue in the three months ended September 30, 2010, but was abetted by $127,266 in revenue from our now-terminated financial data services segment during the three months ended September 30, 2009.  We recorded no revenue in either period from our cultural productions department, as thermal logistics prevent the Great Wall Ice Tour from touring in the summer months.





Because our current operations are focused on service industries, we record a low cost of goods sold, compared to the cost of goods sold recorded by our now-discontinued network engineering business.  During the three months ended September 30, 2010, our animation development projects yielded a gross margin of 87%, an improvement over the 81% gross margin achieved in the three months ended September 30, 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.





On the other hand, the overhead required to maintain an animation development business is greater than that required by the network engineering business.  We currently have a staff of over 130 employees dedicated to the animation development business, and their salaries are accounted for as general and administrative expense.  In addition, 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 $232,600 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 $297,045 (127%) over the same period of the prior year.  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 $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.


22





Our bottom line operating result for the three months ended September 30, 2010 was net after-tax income of $763,762, a 32% improvement over net income in the three months ended September 30, 2009.  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 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 $254,486.  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 only $13,067.





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 September 30, 2010, included no debt, either short-term or long-term, other than a $286,000 loan payable to one of our shareholders.  It also left us with working capital of $7,910,313 at September 30, 2010, an improvement of $1,212,672 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 $1,208,323 in cash.  Cash flow from operations exceeded net income primarily because net income was negatively affected by depreciation expense, as noted earlier, as well as the fact that during the three months ended September 30, 2010, we reduced our accounts receivable by $238,283.




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 fixed assets with a book value of $8,137,196 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.


23




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 September 30, 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 first fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.




24





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 – 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: November 22, 2010
By: /s/ Fu QiangFu Qiang, Chief Executive OfficerBy: /s/ Hu YumeiHu Yumei, Chief Financial Officer







25


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