UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-K





(Mark One)





( X )
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.FOR THE FISCAL YEAR ENDED JUNE 30, 2011(   )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the transition period from _________ to __________








Commission File Number 0-50441





CHINA DIGITAL ANIMATION DEVELOPMENT, INC.


(Exact Name of Registrant as Specified in Its Charter)





New York
84-1275578(State or other jurisdiction of
(I.R.S. Employerincorporation or organization)
Identification No.)





15 West 39thStreet, Suite 14B, New York, NY 10018


(Address of principal executive offices)





212-391-2688


(Issuer's telephone number)





Securities Registered Pursuant to Section 12(b) of the Exchange Act: NONE





Securities Registered Pursuant to Section 12(g) of the Exchange Act:





COMMON STOCK, $0.001 PAR VALUE


(Title of Class)





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 406 of the Securities Act.    Yes __ No √





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes __ No √





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  √   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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained,  to the best of registrant's  knowledge,  in definitive proxy or information  statements incorporated  by reference  in Part III of this Form 10-K or any  amendment to this Form 10-K. [ ]





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





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





As of December 31, 2010, the last day of the registrant’s most recent fiscal second quarter, the aggregate market value of the common stock held by non-affiliates was $52,327,000, based upon the closing sale price on December 31, 2010 of $3.55 per share.





As of October 13, 2011, there were 20,290,000 shares of common stock outstanding.





Documents incorporated by reference: NONE








PART I





FORWARD-LOOKING STATEMENTS: NO ASSURANCES INTENDED





In addition to historical information, this Annual 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 Section 1A of this Report, entitled “Risk Factors.” 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.







ITEM 1.  BUSINESS





The Entrusted Management Agreements




China Digital Animation Development, Inc. (the “Company,”) was a shell company for several years prior to 2008.  In November 2008 the Company acquired ownership of RDX Holdings Limited, an entity organized under the laws of the British Virgin Islands in May 2006.  Until June 2008 RDX Holdings had conducted no business activity.  On June 27, 2008, RDX Holdings entered into five agreements with Heilongjiang Hairong Science and Technology Development Co., Ltd., a corporation organized in the People’s Republic of China (“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.”




The purpose of the “Entrusted Management Agreements” is to transfer to RDX Holdings full responsibility for the management of Hairong, as well as all of the financial benefits and liabilities that arise from the business of Hairong.  Each of the agreements has a term of ten years.  A summary of the five agreements follows:




§
Consulting Services Agreement.  In this agreement RDX Holdings undertakes to provide Hairong advice and assistance with respect to all aspects of its business.  In exchange for the services, Hairong will pay RDX Holdings, on a quarterly basis, a fee equal to its revenue.  Payment shall be effected by causing all revenue realized by Hairong to be paid into the bank account of RDX Holdings.  The Agreement contains covenants regarding the operations of Hairong that are designed to assure that Hairong undertakes no significant business activity without the consent of RDX Holdings.




§
Operating Agreement.  In this agreement RDX Holdings agrees to guarantee all of the obligations, financial and otherwise, undertaken by Hairong.  At the same time, Hairong pledges all of its assets to RDX Holdings as a counter-guarantee.  To preserve the value of the counter-guarantee, Hairong agrees not to effect any transaction that would affect its assets without the approval of RDX Holdings.  The shareholders of Hairong agree in this Agreement that RDX Holdings will be entitled to name all of the officers and directors of Hairong.




1







§
Equity Pledge Agreement.  In this agreement, the shareholders of Hairong have pledged their equity interests in Hairong as security for the obligations of Hairong under the Consulting Services Agreement.  During the term of the pledge (which extends for two years past the term of the Consulting Services Agreement), the shareholders are barred from transferring any interest in the equity in Hairong.




§
Option Agreement.  In this agreement the shareholders of Hairong grant to RDX Holdings an option to purchase their equity interests in Hairong, if permitted by the laws of the People’s Republic of China.  The purchase price will equal the registered capital of Hairong – i.e. 32,270,283 RMB (approximately $5,062,640).




§
Proxy Agreement.  In this agreement the shareholders of Hairong have given to RDX Holdings a proxy to vote their shares at any meeting of the shareholders of Hairong.






Heilongjiang Hairong Science and Technology Development Co., Ltd.




Hairong was organized in 1999.   From 1999 until 2006 Hairong was engaged exclusively in the business of developing and installing business networks and related software.  Since 2007, however, Hairong gradually transformed the nature of its business operations.  Hairong terminated its network installation business at the end of fiscal 2009.  During the year ended June 30, 2009 and into the year ended June 30, 2010 Hairong derived a significant portion of its revenue from the online delivery of financial information.  However during fiscal 2010 Hairong terminated that business as well.  During fiscal 2010, Hairong derived revenue from
its production of a travelling ice sculpture show, but likewise terminated that business.  Today, therefore, Hairong is exclusively involved in providing animation development and production services.




Animation Production




Our 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.




Our Digital Animation Department originated in 2003 when Dahai Lu established the “Nataku” studio.  The core design and management team that he brought together in 2003 joined Hairong in 2008 as the foundation for our entry into the digital animation industry.  Among the members of the team are:




·
Dahai Lu.  Prior to organizing the Nataku studio, Mr. Lu had been working in the animation industry since 1998.  In 1999 he participated in the production of “Thru the Moebius Strip.”  Currently he serves as General Manager of our Digital Animation Department.




·
Zhang Cheng.  Mr. Cheng was one of the original members of the Nataku studio.  A specialist in animation production, he has participated in the design of Blizzard’s online game, the Heroes of JinYing online game, and the French animated “Tiantian.”  Currently he supervises our “Tritans” production group.




2


·
Yu Ming.  A specialist in pre-production modeling, Mr. Yu previously participated in the Heroes of JinYing project and the “Farm Kids” project.




·
Ying Min Zou.  A specialist in post-production effects, Ms. Zou previously participated in the French “Tiantian” and the film “Kung Fu King.”




We supplement the skills of our design team by carefully developing “partner” relations with top quality animation design firms in China and abroad.  In recent years Beijing Wanfang Xinxing Digital Animation, Inc. subcontracted the “Q Dog” and “Red Square” projects to us, in each of which we provided post-production editing and effects.  We have also produced the “Tritans” animation series in joint venture with Monstrous, a design studio located in Singapore.  These relationships permit us to leverage our skills to participate in larger scale productions, despite our
relatively modest size.




The focus of our animation activities is high-end special effects for film, television and Internet productions, including online gaming.  To enter this field, we have invested over $5.3 million in equipment and software, including such advanced devices as a motion capture photoelectric device, a three dimensional scanner, a non-linear video editing system, and QUADRO FX core graphics workstations.




The demand for skilled animation technicians in China is intense.  To meet our needs, therefore, we opened a school for animation training at the beginning of 2009.  During that year, the staff of our Animation Development Department trained a student body of 42 in animation technology and the production of special effects.  Students paid from 6,000 to 15,000 Renminbi ($894 to $2235) for a course of instruction lasting 30 to 60 days.  Upon completion of the course, qualified students were invited to join our own studio.  During the 2010 fiscal year, we closed the school to students so that we could complete its outfitting.  During fiscal
year 2011, however, we determined that the school would remain closed.




As fiscal year 2011 drew to a close, we re-assessed our position in the animation development marketplace.  Our perception was that the animation industry in China has grown to a point at which we will soon be no longer able to compete effectively.  Management made a decision that we should again re-orient the business focus of our company.  So while we have by no means abandoned the animation development business, we have worked quickly to reduce our commitment of financial resources to that business.  Currently we bid for contracts with the intention of outsourcing the bulk of the development work.  To reorient our business model in this manner,
we liquidated a large portion of our animation development property and equipment, and reduced our animation development staff to a modest crew.




With our existing cash resources and the proceeds obtained from liquidating some of our animation development property and equipment, we have invested in three media projects:




·
On June 15, 2011 we agreed to invest 19,710,000 RMB ($3,092,000) in production of a made-for-television movie titled “Yuan Da Qian Cheng.”  We were at the same time engaged to provide animation production services for the movie.




·
On June 20, 2011 we agreed to invest 19,000,000 RMB ($2,980,000) in production of a made-for-television movie titled “Xu’s Legal Marriage.”




·
On June 23, 2011 we agreed to invest 38,500,000 RMB ($6,040,000) in production of a general circulation movie titled “Xiao Naao Tian Gong.”




3


To date, we have paid 44,327,500 RMB ($6,954,000) on account of these investments.  The production of all three is scheduled to be completed within one year.  At that time, on the two projects in which we are non-participating investors, we are entitled to recoup our investment plus a 20% profit  from the income earned by the properties before other participants share in income.  In the “Yuan Da Qian Cheng” project, for which we are providing both cash and development services, we are entitled to a share in the profits from distribution.




Employees




We currently have 27 employees.  10 employees are involved in administration.  17 are dedicated to animation development activities.







ITEM 1A   RISK FACTORS





Investing in our common stock involves risk. You should carefully consider the risks described below together with all of the other information contained in this Report, including the financial statements and the related notes, before deciding whether to purchase any shares of our common stock. If any of the following risks occurs, our business, financial condition or operating results could materially suffer. In that event, the trading price of our common stock could decline and you may lose all or part of your investment.





Ourbusiness plan has taken a new direction, the results of which are not predictable.




Within the past four years, Hairong’s business has been completely reformulated several times.  We first terminated our traditional line of business - network engineering and software design, then terminated the successor line of business - financial data services.  Until recently we were focused on animation production, but we have now dramatically cut back our involvement in that industry.  Currently, the greater portion of our assets are investment in three media production projects, in only one of which are we active participants.  The future direction of our business is under
development.  Accordingly,  it is not possible for an investor to anticipate the future direction of the Company, or to make a reasonable evaluation of the Company’s business prospects.





If we do not re-allocate our cash resources to a business venture within the next year, we may become subject to regulation under the Investment Company Act.





Because the majority of the Company’s assets currently consist of minority investments, we may be classified as an investment company.  Because it is our plan to enter into a new business within the next year and re-allocate our assets to that business, we are exempt for the meantime from regulation under the Investment Company Act.  If we fail to re-allocate our assets, however, we may be forced to operate our Company pursuant to the restrictive requirements of the Investment Company Act.  This event, if it occurred, could severely limit the scope of business opportunities that we could pursue, which could limit
our prospects for future success.


4


We expect to issue a substantial portion of the Company’s equity to our employees.





The growth of Hairong was funded by our management, but also by our employees, who contributed approximately 46% of the capital used to develop Hairong to its current condition.  The terms of that contribution have never been made concrete; but there is an expectation that shares in the U.S. public company that now has beneficial ownership of Hairong will be issued to our employees in compensation.  That issuance, when it occurs, will dilute the interest of our existing shareholders in China Digital Animation Development Inc.





We rely on contractual arrangements with Hairong for our China operations, which may not be as effective in providing control over Hairong as direct ownership.




Because PRC regulations restrict our ability to carry on business in China through a directly-owned subsidiary, our business is defined by a contractual relationship with Hairong, an entity in which China Digital Animation Development Inc. has no equity ownership interest.  We will rely on contractual arrangements to control and operate this business. These contractual arrangements may not be as effective in providing control over Hairong as direct ownership. For example, if Hairong failed to perform under its agreements with us, we would have to rely on legal remedies under Chinese law, which we cannot be sure would be available. In
addition, we cannot be certain that the individual equity owners of Hairong would always act in the best interests of China Digital Animation Development.





The limitations of the legal environment in China currently expose us to the problem of competition by counterfeit.




The Copyright Law of the PRC and the regulations adopted under it are fundamentally similar to U.S. copyright law, with the significant difference that to register a copyright for digital material in the PRC, one is required to file the source code, an unsatisfactory situation that makes us unwilling to obtain the benefits of copyright registration.  Nevertheless, as in the U.S., a copyright is enforceable in the PRC without registration.  However, there is very limited judicial experience in enforcing copyright law.  This makes it difficult at times to determine the extent to which we can enforce the rights provided by
the law.  Most important, the level of deference to copyright that is customary in the U.S. is only gradually being achieved in the PRC, after a long period in which unlicensed republication of copyrighted material was widely considered acceptable.  Because of this environment, the animations that we produce and the movies in which we invest are at risk of theft, which diminishes their value to us.





Our business and growth will suffer if we are unable to hire and retain key personnel that are in high demand.




Our future success depends on our ability to attract and retain highly skilled engineers, technical, marketing and customer service personnel, especially qualified personnel for our operations in China. Qualified individuals are in high demand in China, and there are insufficient experienced personnel to fill the demand.  Therefore we may not be able to successfully attract or retain the personnel we need to succeed.





We have limited business insurance coverage.




The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.


5





Our bank deposits are not insured.




There is no insurance program in the PRC that protects bank deposits, in the way that bank deposits in the U.S. are given limited protection by the FDIC.  If the bank in which we maintain our cash assets were to fail, it is likely that we would lose most or all of our deposits.





We may have difficulty establishing adequate management and financial controls in China.




The People’s Republic of China has only recently begun to adopt the management and financial reporting concepts and practices with which investors in the United States are familiar.  We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company.  If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S.
standards.




We are also subject to the rules and regulations of the United States, including the SEC.  We expect to incur significant costs associated with our public company reporting requirements, costs associated with applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC. If we cannot assess our internal control over financial reporting as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.





Our operations are subject to PRC laws and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations thereof, may have a material and adverse effect on our business.




Our principal operating subsidiary, Hairong is required to comply with PRC laws and regulations. Unlike the common law system prevalent in the United States, decided legal cases have little value as precedent in China. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business and the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws. However, because these laws and regulations are
relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation.


6





Capital outflow policies in China may hamper our ability to pay dividends to shareholders in the United States.




The People’s Republic of China has adopted currency and capital transfer regulations. These regulations require that we comply with complex regulations for the movement of capital. Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange. We may be unable to obtain all of the required conversion approvals for our operations, and Chinese regulatory authorities may impose
greater restrictions on the convertibility of the RMB in the future. Because most of our future revenues will be in RMB, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit our ability to fund our business activities outside China or to pay dividends to our shareholders.





ITEM 1B   UNRESOLVED STAFF COMMENTS




Not Applicable.





ITEM 2.  DESCRIPTION OF PROPERTY





Our executive offices are located at #69 Ganshui Road, Xiangfang District, City of Harbin, P.R. China.  The facility, which we own, has 661 m2 of office space.




We also lease an office in New York City from which we carry on our investor relations activities.




We expect that our current facilities will be adequate for our operations for the forseeable future.




ITEM 3. LEGAL PROCEEDINGS





None.





ITEM 4.  RESERVED


7





PART II





ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.





(a) Market Information




On January 30, 2009 we implemented a 1-for-25 reverse split of our common stock.  All references in this Report to a number of shares issued or outstanding prior to January 30, 2009 have been adjusted to retroactively reflect the effect of the reverse split.







Our common stock is listed for quotation on the OTC Bulletin Board system under the symbol “CHDA.”  The following table sets forth for the respective periods indicated the prices of the common stock, as reported by the OTC Bulletin Board.  Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.





BidQuarter Ending
High
LowSeptember 30, 2009
$   4.95
$  2.30December 31, 2009
$  4.40
$  2.00March 31, 2010
$   2.95
$  1.05June 30, 2010
$   2.95
$  2.15September 30, 2010
$   3.70
$  2.00December 31, 2010
$  3.55
$  3.00March 31, 2011
$   4.20
$  2.00June 30, 2011
$   2.60
$  1.50





(b) Shareholders




On October 12, 2010 there were approximately 2,932 holders of record of our common stock.





(c)  Dividends




Since the Company’s incorporation, no dividends have been paid on our Common Stock. We intend to retain any earnings for use in our business activities, so it is not expected that any dividends on our common stock will be declared and paid in the foreseeable future.





(d)  Securities Authorized for Issuance Under Equity Compensation Plans





The information set forth in the table below regarding equity compensation plans (which include individual compensation arrangements) was determined as of June 30, 2011.


8





Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plansEquity compensation plans approved by security holders
0
N.A.
0Equity compensation plans not approved by security holders
0
N.A.
0Total.
0
N.A.
0





(e)  Sale of Unregistered Securities




China Digital Animation did not effect any unregistered sales of equity securities during the quarter ended June 30, 2011.





(f) Repurchase of Equity Securities




China Digital Animation did not repurchase any of its equity securities that were registered under Section 12 of the Securities Act during the quarter ended June 30, 2011.







ITEM 6.  SELECTED FINANCIAL DATA





Not applicable.





ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS





All of our revenue in the year ended June 30, 2011 was earned by our animation developers; they also generated most of our revenue in the year ended June 30, 2010.  A substantial portion of our expenses in fiscal 2011, however, arose from our efforts to reduce our financial commitment to in-house animation development and re-orient our business model to make more extensive use of subcontractors.





Our revenue in fiscal 2011 grew by 36% from animation development revenue recorded in fiscal 2010.  As the year reached its end, however, we moved quickly to reduce our exposure in that business, generating only $1,015,607 in revenue in the 4th quarter.  The reason for our decision to sharply reduce our financial commitment to the industry is evident in the profitability, or lack thereof, of our animation operations in fiscal 2011.  Whereas the contracts that we fulfilled in fiscal 2010 had yielded a profit margin of 59%, the contracts we fulfilled in fiscal 2011 cost us more than we were
paid for our efforts.  The result was that we incurred a gross loss of $311,848 for fiscal 2011.





The reasons for the loss were our need to keep our facilities occupied and our large staff of animation developers busy, which necessitated that we obtain a steady flow of contracts.  Toward that end, we devoted a large allocation of resources to marketing, which resulted in a 59% increase in selling, general and administrative expense to $1,333,133 in fiscal 2011.  In recent years, however, due to the emphasis that the Chinese government has placed on the development of the animation industry, the market has become thick with competition.  Despite the funds and efforts that we devoted to marketing, in fiscal 2011 we found it impossible to secure the quantity of
contracts that we required at bid prices that would yield profits to us.  Moreover, due to constant and rapid improvements in the equipment and software used in our industry, to remain competitive would require us to devote continual capital expenditures for upgrades and additions to our animation production facilities.  Management’s decision, therefore, was to re-orient our business model from one based on utilization of a state-of-the-art in-house capacity, to one in which we utilize our long-standing customer contacts and project management skills to obtain and manage project contracts while outsourcing most of the actual development work.   With this new business model, we will be able to more selectively choose the projects we work on, as we will no longer have the need to make constant use of an extended staff and expensive
facilities.


9





The cost of that downsizing of our production capability is reflected in the “other expenses” that we incurred in fiscal 2011.  We abandoned the construction project that we had undertaken to expand our operations, and so incurred a $1,375,838 write-off of the construction costs that we had capitalized.  That loss was somewhat offset by the gain of $415,613 that we realized when we sold the land use right underlying that construction project.  However, the disposal of the animation equipment that became excess when we reduced our animation staff from 205 to 17 resulted in an additional loss of $1,306, 179.





After recording the expenses of downsizing, we realized a pre-tax loss of $3,878,583 in fiscal 2011, which compared unfavorably with the $2,469,595 in pre-tax income that we realized in fiscal 2010.  Unfortunately, neither the write-off expenses nor many of the production costs we incurred are deductible for purposes of Chinese income tax.  As a result, despite incurring a sizeable loss under U.S. accounting principles, we had over $3.0 million in taxable income under Chinese accounting principles, on which we are obliged to pay tax at the 25% Chinese corporate rate.  As a result, we accrued income tax of $774,171 for fiscal 2011, greater even that we accrued in
fiscal 2010.





Our net loss for fiscal 2011, then, reached $4,652,754, or $.23 per share.  In fiscal 2010 we had net income from continuing operations of $1,793,535, to which we added $337,605 in income from operations that we terminated during that year, for aggregate net income of $2,131,140, or $.11 per share, for fiscal 2010.





For the coming year, the greater portion of our assets will be invested in film and television program production.  The value of broadcasting rights and license of films and TV programs has increased, and the sales from distribution of copies of films and TV series over the internet have also jumped in the past few years.  In June 2011, we entered into three collaborative arrangements requiring us to invest a total of RMB 77,210,000 (approximately $12.19 million) in television program production.  As of June 30, 2011, we have paid RMB 44,327,500 (approximately $6.9 million).  The production for all three arrangements ends within one year, at which time the
Company will obtain back its investment cost plus 20% of return on investment for two of the arrangements.  For one of the arrangements, the Company is entitled to its pro-rata share of the profits from distribution of the TV series. Our current plan is to re-dedicate the proceeds of the investments to our animation development business.  Management will spend the interim period, however, reviewing the Company’s prospects in that industry and determining the appropriate future course for our business.


10





Our business operates 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, which are reported as a middle step between net income and comprehensive income.  The net income is added to the retained earnings on our balance sheet; while the translation adjustment is added to a line item on our statement of stockholders equity 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 year ended June 30, 2011, the
unrealized gain on foreign currency translations added $628,830 to our accumulated other comprehensive income.





Liquidity and Capital Resources





To date, our operations have been funded primarily by capital contributions from Hairong’s management and employees.  Approximately 54% of the capital contribution has been made by members of management and their business associates.  The remaining 46% was contributed by the employees, acting through a trustee.  The Company expects that in the future it will issue equity to the employees to compensate them for their financial contributions to the growth of Hairong, and to incentivize them for future loyalty to Hairong.





In addition, the operations of our New York office, including the legal and accounting expenses attendant to our status as a public company, had, until June 2011, been funded by a $500,000 private placement of common stock in November 2010 and in part by loans from Fu Qiang, who was our Chief Executive Officer until early in June 2011, and Fu Zhiguo, who is a shareholder.  These loans were payable on demand and do not bear interest.  The Messrs. Fu made the loans to cover the costs of the New York office because the process of obtaining approval from the Chinese government for transfer of funds from China to the U.S. would be burdensome and delay our ability to pay our U.S.
expenses.  We will continue to rely on loans from affiliates to pay our U.S. expenses until we can fund those expenses from Dollars obtained by a financing in the U.S. or after government approval of a conversion of a portion of our Renminbi balances into Dollars.





This program of internal financing has left us with a balance sheet that, at June 30, 2011, included no debt, either short-term or long-term, other than the $345,975 in loans payable to either Fu Qiang or Fu Zhiguo.  It also left us with working capital of $7,280,888 at June 30, 2011, an improvement of $257,152 during the year.  Included in our working capital at June 30, 2011 was $6,188,598 in short-term investments, specifically investments in two media production projects, and $669,529 in deferred production costs that represent our cash contribution to a media project in which we are both participating and investing.  These investments represent our efforts to
achieve a reasonable return on our cash resources, better at least than the 0.4% interest offered by China’s banks, while we determine the future direction of our Company.


11





Despite the loss of $4,652,754 that we incurred in fiscal 2011, our operations used only $1,789,179.  The disparity occurred because the loss was swelled by the write-offs of asset values attendant to the downsizing of our animation business.  In addition, we reduced our accounts receivable by $576,058 as our level of operations fell, and we used $470,933 in prepaid credits that we had funded in prior years, both of which events reduced our cash usage.





Going forward, we have a contractual obligation to provide an additional 32,882,500 RMB ($5,159,000) to fund the three media production projects in which we have invested.  We have not yet determined how we will fund those obligations.





Critical Accounting Policies and Estimates





In preparing our financial statements we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values.  In our preparation of the financial statements for the year ended June 30, 2011, there were two estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results.  These were:





·
The determination to record at full value our investment in three media production projects.  The determination was based on our estimation that the projects will yield cash to us equal or exceeding the book value of our investment.





·
The determination, explained in Note 2f to the Consolidated Financial Statements, to record no bad debt reserve as of June 30, 2011.  This determination was based on application of our standard evaluation of accounts receivable, which resulted in a high level of confidence regarding the collectability of our receivables.





Impact of Accounting Pronouncements





There were no recent accounting pronouncements that have had a material effect on the Company’s financial position or results of operations.





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 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





Not Applicable.





12





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.








Index to the Consolidated Financial Statements





PageF-1

Report of Independent Registered Public Accounting Firm - 2011.F-2

Report of Independent Registered Public Accounting Firm - 2010.F-3

Consolidated Balance Sheets as of June 30, 2011 and 2010 (restated).F-4

Consolidated Statements of Operations and Comprehensive Income for the Fiscal Years Ended June 30, 2011 and 2010 (restated).F-5

Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years Ended June 30, 2011 and 2010 (restated).F-6

Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2011 and 2010 (restated).F-7 to F-26

Notes to Consolidated Financial Statements.











13


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To the Board of Directors and


Stockholders of China Digital Animation Development, Inc.





We have audited the accompanying consolidated balance sheet of China Digital Animation Development Inc as of June 30, 2011, and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for the year ended June 30, 2011. China Digital Animation Development, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Digital Animation Development, Inc. as of June 30, 2011, and the results of its operations and its cash flows for the year ended June 30, 2011 in conformity with accounting principles generally accepted in the United States of America.





/s/ EFP Rotenberg, LLP








EFP Rotenberg, LLP


Rochester, New York


October 13, 2011








F-1





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Board of Directors and


Stockholders of China Digital Animation Development, Inc.





We have audited the accompanying consolidated balance sheets of China Digital Animation Development, Inc .and its subsidiaries  as of June 30, 2010 and the related consolidated statements of income, consolidated stockholders’ equity and consolidated comprehensive income, and consolidated cash flows for the year then ended. China Digital Animation Development, Inc. management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.




We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Digital Animation Development, Inc and its subsidiaries as of June 30, 2010, and the results of its consolidated operations and its consolidated cash flows for the year ended June 30, 2010 in conformity with accounting principles generally accepted in the United States of America.





As discussed in Note 11 to the consolidated financial statements, the Company restated its consolidated financial statements for the year ended June 30, 2010 as a result of several accounting issues disclosed in that Note.





/s/ P.C.LIU, CPA, P.C.


Flushing, NY





September 20, 2010, except for Note 11, as to which the date is October 10, 2011








F-2


CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS





June 30,


June 30,2011


2010ASSETS


(Restated)Current assets:Cash and cash equivalents

$
17,903


$
6,219,438Accounts receivable


434,749



976,304Other receivables


4,108



3,615Advance to suppliers


25,992


-Short term investments


6,188,598



-Deferred production costs


669,529



-Tax refund receivable


333,421



-Prepaid expenses


43,900



501,557Total current assets


7,718,200



7,700,914Property, plant and equipment, net


1,274,527



4,631,314Land use right and other intangible assets, net


2,332,316



2,756,604Total assets

$
11,325,043


$
15,088,832LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:Accounts payable

$
-


$
34,338Loan payable


345,975



286,000Accrued expenses and other payables


91,337



57,040Taxes payable


-



299,800Total current liabilities


437,312



677,178Total liabilities


437,312



677,178Stockholders' Equity:Preferred stock ($0.001 par value, 5,000,000 shares authorized, no share issued or outstanding at June 30, 2011 and 2010)


-



-Common stock ($0.001 par value, 100,000,000 shares authorized, 20,270,000 shares issued and outstanding at June 30, 2011, 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


2,501,344



1,872,514Reserved Fund


1,156,476



705,738Retained earnings


486,194



5,589,685Total stockholders’ equity


10,887,731



14,411,654Total liabilities and stockholders' equity

$
11,325,043


$
15,088,832








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


F-3





CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME





Years endedJune 30,2011


2010(Restated)Revenue

$
7,005,038


$
5,133,890Cost of revenue


7,316,886



2,100,700Gross (loss) profit


(311,848
)


3,033,190Operating expensesSelling, General and Administrative expenses


1,335,133



838,575Total operating expenses


1,335,133



838,575(Loss) income from continuing operations before other income (expenses)


(1,646,981
)


2,194,615Other income (expenses)Interest income


29,754



275,005Loss from disposal of property, plant and equipment


(1,306,179
)


-Impairment loss on construction in progress


(1,375,838
)


-Gain from disposal of intangible assets


415,613



-Other income (expense)


5,048



(25
)Total other income (expenses)


(2,231,602
)


274,980(Loss) income before continuing operations before income taxes


(3,878,583
)


2,469,595Less: Provision for income taxes


774,171



676,060Net (loss) income from continuing operations


(4,652,754
)


1,793,535Discontinued Operations:Gain from discontinued operations


-



450,140Less: income taxes


-



(112,535
)Income from discontinued operations


-



337,605Net (loss) income


(4,652,754
)


2,131,140Other comprehensive incomeForeign currency translation gain


628,830



187,425Total comprehensive (loss) income

$
(4,023,924
)

$
2,318,565Basic and diluted (loss) earnings per share:Continuing Operations

$
(0.23
)

$
0.09Discontinued Operations


-



0.02$
(0.23
)

$
0.11Basic and diluted weighted average shares outstanding


20,170,685



20,020,000








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


F-4





CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY








Accumulated Other








TotalCommon stock


Additional


Comprehensive


Reserved


Retained


Stockholders’Shares


Amount


Paid-in Capital


Income


Fund


Earnings


EquityBalance, June 30, 2009


20,020,000


$
20,020


$
6,223,697


$
1,685,089


$
341,524


$
3,822,759


$
12,093,089Net income for the year


-



-



-



-



-



2,131,140



2,131,140Reserved Fund


-



-



-



-



364,214



(364,214
)


--Foreign currency translation adjustment


-



-



-



187,425



-



-



187,425Balance, June 30, 2010


20,020,000



20,020



6,223,697



1,872,514



705,738



5,589,685



14,411,654Sales of common stock


250,000



250



499,750



-



-



-



500,000Net loss for the year


-



-



-



-



-



(4,652,753
)


(4,652,753
)Reserved Fund


-



-



-



-



450,738



(450,738
)


-Foreign currency translation adjustment

-


-


-



628,830


-


-



628,830Balance, June 30, 2011


20,270,000


$
20,270


$
6,723,447


$
2,501,344


$
1,156,476


$
486,194


$
10,887,731





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


F-5





CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS





Years endedJune 30,2011


2010(Restated)Cash flow from operating activities:Net (loss) income

$
(4,652,754
)

$
2,131,140Adjustments to reconcile net income to net cash provided by operating activities:Depreciation


638,310



570,919Amortization


229,563



200,938Foreign currency exchange gain


(5,047
)


-Loss from disposal of property, plant and equipment


1,306,179



-Impairment loss of construction in progress


1,375,838



-Gain from disposal of intangible assets


(415,613
)


-Changes in operating assets and liabilities:Accounts receivable


576,058



412,294Prepaid expenses


470,933



(417,354
)Advance to suppliers


(25,348
)


1,443,440Interest receivable


-



54,786Other receivables


679



(1,382
)Deferred production costs


(652,932
)


-Tax refund receivable


(325,155
)


-Accounts payable


(34,338
)


5,119Accrued expenses and other payables


12,450



(14,572
)Payroll payable


-



6,648Income tax payable


(288,002
)


85,329Net cash (used in) provided by operating activities


(1,789,179
)


4,477,305Cash flows from investing activitiesPurchase of property, plant and equipment


-



(1,248,122
)Proceeds from sales of property, plant and equipment


180,603



-Acquisition of intangible assets


-



(1,914,900
)Proceeds from sales of intangible assets, net of $321,012 taxes paid associated

with the disposal


735,145



-Short-term investments in TV program production contracts


(6,035,185
)Additions to long term investment


-



2,191,457Net cash used in investing activities


(5,119,437
)


(971,565
)Cash flows from financing activitiesProceeds from borrowing


59,975



281,000Proceeds from sale of stock


500,000



-Net cash provided by financing activities


559,975



281,000Effect of exchange rate changes in cash


147,106



149,912Net increase in cash and cash equivalents


(6,201,535
)


3,936,652Cash and cash equivalents, beginning of year


6,219,438



2,282,786Cash and cash equivalents, end of year

$
17,903


$
6,219,438




Supplemental Disclosures:Cash paid during the year for:Income taxes

$
1,369,922


$
801,955Interest

$
-


$
-





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


F-6
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.





Variable Interest Entity





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




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




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




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




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


F-7
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





1.  ORGANIZATION AND DESCRIPTION OF BUSINESS (Continued)





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




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




-
The holders of the equity investment in Hairong lack the direct or indirect ability to make decisions about the entity’s activities that have a significant effect on the success of Hairong, having assigned their voting rights and all managerial authority to RDX.  (ASC 810-10-15-14(b)(1)).-
The holders of the equity investment in Hairong lack the obligation to absorb the expected losses of Hairong, having assigned to RDX all revenue and responsibility for all payables.  (ASC 810-10-15-14(b)(2).-
The holders of the equity investment in Hairong lack the right to receive the expected residual returns of Hairong, having granted to RDX all revenue as well as an option to purchase the equity interests at a fixed price.  (ASC 810-10-15-14(b)(3)).





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





The carrying amount and classification of Hairong’s assets and liabilities included in the Consolidated Balance Sheets are as follows:




June 30,

2011


June 30,

2010(Restated)Total current assets

$
7,702,677


$
7,630,617Total assets


11,309,520



15,018,535Total current liabilities*


322,120



461,096Total liabilities*

$
322,120


$
461,096




* Including intercompany accounts of $300,000 and $0 as at June 30, 2011 and June 30, 2010 be eliminated in consolidation.


F-8
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





a. Principle of consolidation





The accompanying 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.





b. 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.





c. Reclassification





Depreciation and amortization expenses of $517,154 and $186,280 of for the year ended June 30, 2010 have been reclassified from general and administrative expenses to cost of goods sold to conform to the current period presentation.  Loan payable of $286,000 as of June 30, 2010 has been reclassified from long term liabilities to current liabilities.  $6,648 of payroll payable as of June 30, 2010 has been reclassified from accrued expenses and other payables to payroll payable.  Such reclassifications had no impact on previously reported total assets, liabilities, stockholders’ equity or net income.





d. 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-9
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





e. 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 June 30, 2011, substantially all the Company’s cash and cash equivalents are deposited at major banks located in the PRC. The Company’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.





f. 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 June 30, 2011 and June 30, 2010, the net accounts receivable were $434,749 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 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.





There was no allowance made for doubtful accounts as of June 30, 2011 and 2010.





g. Short-term Investments and Deferred Production Costs





In June 2011, we entered into three collaborative arrangements for total of RMB 77,210,000 (approximately $11.9 million) investment in television programs production.  As of June 30, 2011; we have paid RMB 44,327,500 (approximately $6.9 million).  The production for all three arrangements ends within one year.





The Company’s accounting policy is to evaluate the income statement classification for amounts due from or owed to other participants of the collaborative arrangements based on the nature of each activity.  For arrangements where the Company is responsible for the initial investment and entitle to a fixed return on investment and the other participants manage the day-to-day production and distribution activities as well as bear any additional cost overrun, the Company determines that it is not the principal in the transaction and therefore records the fixed return on investment as investment income. The initial investment is recorded as short-term investment. For two of the
arrangements, the Company will recoup its investment cost plus 20% of return on investment before the other participant at the end of the contract period.


F-10
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





For arrangements where we jointly participate in production and distribution, as well as sharing the profit and loss in the arrangements, the Company records its pro-rata share of the distribution revenue as gross revenue and associated distribution costs in cost of revenue. The initial investment in the production of the TV program is recorded as deferred production costs on the consolidated balance sheets.





h. 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




i. Other intangible assets





Other intangible assets include purchased software and are being amortized using the straight-line method over the lease term of 10 years.





j. Income taxes





The Company 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 June 30, 2011 and 2010.





k. 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.


F-11
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Animation Design and Development




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





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





Membership fees




The Company recognized revenue according to the period of membership by customers, members who paid the membership fees are granted with access rights to a website in a period of one year. The website no longer operates in the calendar year of 2010, and thus there is no membership fee income for the year ended June 30, 2011.





l. 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.





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.


F-12
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





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 management’s 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.





m. Foreign currency translation





The Company’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:





June 30, 2011


Balance sheet
RMB 6.4635 to US $1.00Statement of income and other comprehensive income
RMB 6.6278 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





F-13
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





n. 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.





o. 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 (loss) 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 year ended June 30, 2011 and 2010.





p. 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.





q. 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.





r. Recently Adopted Accounting Pronouncements





In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that provide 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 adoption of this update did not have a material impact to the Company’s financial results as they relate only to additional disclosures.


F-14
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





In December 2010, FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business
combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this amendment did not have a material impact to the Company’s financial position.





s. Recently Issued Accounting Pronouncements Not yet Adopted





In December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this Update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this Update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than
not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the
amendments should be included in earnings.  This standard is not currently applicable to the Company because the Company currently does not have reporting units with zero or negative carrying amounts.





In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about the fair value measurements. The amendments include the following:


F-15
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





ü
Those that clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements.


ü
Those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.





The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. Nonpublic entities may apply the amendments in this Update early, but no earlier than for interim periods beginning after December 15, 2011.





The Company is currently evaluating the impact, and do not expect the adoption of this amendment have a material impact on the Company’s financial position and results of operations.





In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The presentation option under current GAAP to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated.





The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. Early adoption is permitted because compliance with amendments is already permitted. The Company already complies with this presentation.





F-16
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





3.  PROPERTY, PLANT AND EQUIPMENT, NET





Property, plant and equipment consist of the following:





June 30,

2011


June 30,

2010(Restated)Buildings and Improvements

$
1,741,653


$
2,247,382Office Furniture and Equipment


221,208



1,423,794Vehicles


128,277



349,7752,091,138



4,020,951Less: Accumulated depreciation


(816,611
)


(861,633
)1,274,527



3,159,318Construction in progress


-



1,471,995Property, plant and equipment, net

$
1,274,527


$
4,631,314





Depreciation expense for the year ended June 30, 2011 and 2010 were $638,310 and $570,919, respectively.





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. Management determined that the construction in progress will not provide future benefit to the Company; therefore, the entire construction in progress balance was impaired as of June 30, 2011. Impairment loss expense for the year ended June 30, 2011 and 2010 were $ 1,375,838 and $0, respectively.





During the year ended June 30, 2011, the Company disposed property, plant and equipment with net book value totaled $1,486,782 and recorded a loss on disposal of $1,306,179.





4.  LAND USE RIGHT AND OTHER INTANGIBLE ASSETS, NET





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





June 30, 2011

At Cost


Accumulated

Amortization


NetAnimation Software

$
2,808,391


$
484,516


$
2,323,875Other Software


13,671



5,230



8,441$
2,822,062


$
489,746


$
2,332,316June 30, 2010

At Cost


Accumulated

Amortization


NetLand Use Right

$
342,098


$
23,593


$
318,505Animation Software


2,673,795



245,034



2,428,761Other Software


13,015



3,677



9,338$
3,028,908


$
272,304


$
2,756,604





F-17
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.  LAND USE RIGHT AND OTHER INTANGIBLE ASSETS, NET (CONTINUED)





During the year ended June 30, 2011, the Company sold its land use right with net book value of $327,654 and recorded a gain on disposal of $415,613.





Total amortization expenses related to intangible assets were $229,563 and $200,938 in fiscal 2011 and 2010, respectively.





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





For the year ending June 30,2012


282,2062013


282,2062014


282,2062015


282,2062016


282,206Thereafter


921,2862,332,316





5.  LOAN PAYABLE





June 30, 2011


June 30, 2010Loan payable to shareholder, Fu Zhiguo

$
260,000


$
240,000Loan payable to former shareholder, Fu Qiang


85,975



46,000$
345,975


$
286,000





The loan payable is interest free and the Company intends to repay this note when repayment is demanded.  The carrying amount of the loan payable approximates their fair values.





6.  INCOME TAXES





Hairong is subject to income tax at the PRC 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 year ended June 30, 2011 and 2010 as follows:


For the years endedJune 30,2011


2010(Restated)Current – PRC and US

$
774,171


$
676,060Deferred – PRC and US


-



-Total

$
774,171


$
676,060





F-18
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.  INCOME TAXES (Continued)





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


For the years ended

June 30,2011


2010(Restated)Income tax calculated at statutory rates

$
(969,646
)

$
617,399Tax effect of parent


85,836



58,661Unrecognized tax benefit of current year tax losses


1,215,294



-Permanent differences*


442,686



-Provision for income taxes

$
774,171


$
676,060





*Permanent differences represent non-deductible entertainment expenses and impairment loss on construction in progress.





Deferred taxes are comprised of the following:




June 30,


June 30,2011


2010(Restated)Net of operating loss carryforward

$
1,419,182


$
87,150Less: Valuation allowance


(1,419,182
)


(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 provided for the U.S. parent company as it has a taxable loss for the year ended June 30, 2011. No tax benefit has been realized since a valuation allowance has offset the deferred tax asset. As of June 30, 2011, the Company had a net operating loss from continuing operations for United States federal income tax purposes of $599,669 which are available to carry back five years or offset future taxable income, if any, through 2030.  The valuation allowance for deferred tax assets as of June 30, 2011 and 2010 was $203,887 and $87,150,
respectively.  The change in total allowance for the year ended June 30, 2011 and 2010 was an increase of $116,737 and $79,779, respectively.





Hairong incurred net operating loss from continuing operations for PRC income tax purpose of $4,984,746 during and as of the year ended June 30, 2011, which are available to carry forward to offset future taxable income, if any, through 2016.  The valuation allowance for deferred tax assets as of June 30, 2011 and 2010 was $1,215,295 and $0, respectively. The change in total allowance for the year ended June 30, 2011 and 2010 was an increase of $1,215,295 and $0, respectively.





The Company has permanently reinvested earnings in its foreign subsidiary. At June 30, 2011, $1,604,208 of accumulated earnings was permanently reinvested. At current tax rates, additionalfederal income taxes (net of available tax credits) of approximately $545,000 would become payable if such income were to be repatriated.


F-19
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





6.  INCOME TAXES (Continued)





The Company did not recognize any interest or penalties related to unrecognized tax benefits for the years ended June 30, 2011, 2010 and 2009.  The Company had no uncertain positions that would necessitate recording of tax related liability.  The Company is subject to examination by the respective tax authorities.





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 June 30, 2011 and June 30, 2010, 100,000,000 shares have been authorized.  As of June 30, 2011 and 2010, 20,270,000 shares and 20,020,000 shares are outstanding, respectively.





In May 2011, Fu Qiang, the Company’s former Chairman and Chief Executive Officer, entered into a Resignation and Stock Transfer Agreement with Ieong Waifong and the Company. Pursuant to the Agreement, Fu Qiang transferred to Ieong Waifong five million shares of the Company;s common stock, representing 24.7% of the outstanding shares. Fu Qiang transferred the shares to Ieong Waifong without compensation. However, in the same Agreement Ieong Waifang granted to the Company an option to purchase the shares for a price of $.001 per share. The Company may exercise the option at any time prior to December 31, 2020. Ieong Waifong is not an employee or agent of the Company, nor does he have any
other relationship with the Company other than ownership of the shares transferred to him by Fu Qiang.





The option can be settled only in shares and there are no circumstances under which any other settlement arrangement would arise.  Accordingly, pursuant to ASC 815-15-25-20, the “purchased call option that enables the issuer of an equity instrument (such as common stock) to reacquire the equity instrument would not be considered to be a derivative instrument by the issuer of the equity instrument.”





8.  SEGMENT INFORMATION





Segment revenue was as follows:




2011


2010Revenue:




(Restated)Animation Design and Development

$
7,005,038


$
5,133,890Consolidated revenue

$
7,005,038


$
5,133,890





F-20
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





8.  SEGMENT INFORMATION (Continued)





Segment profit was as follows:





For the years ended

June 30,2011


2010Segment profit:




(Restated)Animation Design and Development

$
(1,646,981
)

$
2,194,615Consolidated segment profit

$
(1,646,981
)

$
2,194,615





Segment assets were as follows:


June 30


June 30,2011


2010Assets:




(Restated)Animation Design and Development

$
4,451,394


$
15,018,535TV Programs Production


669,529



-Corporate


6,204,120



70,297Consolidated assets

$
11,325,043


$
15,088,832





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 consolidated income before taxes for the years ended June 30, 2011 and 2010, is as follows:





For the years ended

June 30,2011


2010(Restated)Segment (loss) profit

$
(3,535,238
)

$
2,194,614Other corporate (expenses) income


(343,345
)


274,981Total (loss) income before taxes

$
(3,878,583
)

$
2,469,595





F-21
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





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 June 30, 2011 and 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.





The Company has the following concentrations of business with suppliers constituting 10% or greater of net purchases:





For the years endedJune 30,2011



2010Beijing Chenyang Animation Technologies Company

40.55%



*Beijing Star Animation Studio

39.32%



*Harbin Cheng Xin Electronic Technology Co., Ltd.

*



28.69%Harbin Gong Dai Wai Tung Innovative Information Technology Co., Ltd.

*



71.31%




* Constitute less than 10% of the Company's purchase value.





The amount of the Company’s accounts payable for these two suppliers are nil as of June 30, 2011.




F-22
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9.  RISKS AND UNCERTAINTIES (CONTINUED)





The Company has the following concentrations of business with customers constituting 10% or greater of the Company’s sales value:





For the years endedJune 30,2011



2010Beijing Wanfang Xingxing Digital Tech.


14.02%



*Harbin Sinwen Animation Co., Ltd.


12.82%



10.60%Benxi Yige Amination Design Ltd.


*



22.89%Shenzhen Global Digital Tech Co., Ltd.


36.62%



21.71%Shanghai Amination Production Co., Ltd.


34.36%



18.55%Guoji Trading Co., Ltd


*



11.65%





* Constitute less than 10% of the Company's sales value.





The Company has not experienced any significant difficulty in collecting its accounts receivable in the past and is not aware of any financial difficulties of its major customers.  The Company’s accounts receivable value for the customers constituting 10% or greater of the Company’s sales value as of June 30, 2011:





Amount


PercentageBeijing Wanfang Xingxing Digital Tech.

$
100,565



25.90
%Shenzhen Global Digital Tech Co., Ltd.


102,112



26.29
%Shanghai Amination Production Co., Ltd.


185,658



47.81
%$
388,335



100.00
%





10.  EARNINGS PER SHARE





Basic earnings per share are computed on the basis of the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the year using the if-converted method for the convertible notes and preferred stock and the treasury stock method for warrants and options.  The following table sets forth the computation of basic and diluted net (loss) income per share:





For The Years EndedJune 30,2011


2010(Restated)Net (loss) income

$
(4,652,754
)

$
2,131,140Basic weighted-average common shares outstanding


20,170,685



20,020,000Dilutive effect of options, warrants, and contingently issuable shares


-



-Diluted weighted-average common shares outstanding


20,170,685



20,020,000(Loss) earnings per share – basic and diluted:Continuing Operations

$
(0.23
)

$
0.09Discontinued Operations


-



0.02$
(0.23
)

$
0.11





For the year ended June 30, 2011 and 2010, no options, warrants, and contingently issuable shares were included in the calculation of the Company’s diluted (loss) earnings per share because the Company did not have these financial instruments.




F-23
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





11.           RESTATEMENT





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





·
The results of operations of the Company’s network engineering business and its financial data services business, both of which were terminated before the reporting date for fiscal 2010, have been reclassified as discontinued operations.




·
$275,006 in interest earned on an investment has been reclassified from “Gain From Investment” to “Interest Income.”




·
$1,003,113 prepaid rent was incorrectly recorded as leasehold improvements, resulted in reclassification from property, plant and equipment to prepaid expenses and $501,557 was amortized as rent expense. The related accumulated depreciation totaling $59,400 was reversed.




The effect of the restatement on specific line items in our Consolidated Balance Sheet for the year ended June 30, 2010 was:




Balance Sheet

As Reported


As RestatedPrepaid expenses

$
-


$
501,557Total Current Assets


7,199,358



7,700,914Property, plant & equipment, net


5,575,027



4,631,314Total Assets


15,530,988



15,088,832Income tax payable


410,339



299,800Loan payable


-



286,000Total Current Liabilities


501,717



677,178Loan payable


286,000



-Total Liabilities


787,717



677,178Accumulated other comprehensive income


1,873,933



1,872,514Retained Earnings


5,919,884



5,589,685Total Stockholders’ Equity

$
14,743,271


$
14,411,654




F-24
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11.           RESTATEMENT (CONTINUED)







The effect of the restatement on specific line items in our Statement of Operations for the year ended June 30, 2010 was:





Statements of Operations

As Reported


As RestatedRevenues

$
6,087,486


$
5,133,890Cost of Goods Sold


1,657,885



2,100,700Gross Profit


4,429,601



3,033,190Selling, General and Administrative Expenses


1,344,581



838,575Income from Operations


3,085,020



2,194,615Interest Income


--



275,006Gain from Investment


275,006



--Income from Continuing Operations before Income Taxes


3,360,001



2,469,595Provision for Income Taxes


898,662



676,060Income from Continuing Operations


2,461,339



1,793,535Income from Discontinued Operations


--



337,605Other Comprehensive Income

$
2,573,294


$
2,318,565Earnings Per Common Share – Basic and DilutedContinuing Operations

$
0.13


$
0.09Discontinued Operations


-



0.02$
0.13


$
0.11





F-25
 CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





11.           RESTATEMENT (Continued)





The effect of the restatement on specific line items in our Consolidated Statement of Cash Flows for the year ended June 30, 2010 was:







As Reported


As RestatedNet income

$
2,461,339


$
2,131,140Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


629,904



771,857Changes in operating assets and liabilities:Prepaid expenses


84,202



(417,354
)Income tax payable


195,868



85,329Net cash provided by operating activities


5,277,646



4,477,305Cash flows from investing activitiesPurchase of property, plant and equipment


(2,251,235
)


(1,248122
)Purchase of intangible assets


(1,635,415
)


(1,914,900
)Net cash used in investing activities


(1,695,193
)


(971,565
)Effect of exchange rate changes in cash


73,198



149,912







F-26




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





Not applicable.





ITEM 9A. CONTROLS AND PROCEDURES





(a)           Evaluation of Disclosure Controls and Procedures.




The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.




The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report (the “Evaluation Date”). That evaluation revealed that management of the Company on a number of occasions failed to apply appropriate accounting principles when preparing the Company’s financial statements, which resulted in the restatement described in Note 11 to the financial statements as well as errors in the presentation of the Company’s financial results for the interim quarters of fiscal
2011.  Accordingly, based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were not effective.





(b)           Changes in Internal Controls.




The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of the year covered by this annual report, and they
have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.





(c)
Management’s Report on Internal Control over Financial Reporting.




Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.  We have assessed the effectiveness of those internal controls as of June 30, 2011, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control – Integrated Framework as a basis for our assessment.




40




Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.




A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified one material weaknesses in our
internal control over financial reporting.  This material weakness consisted of:




a.           Lack of expertise in U.S accounting principles among the personnel in our Chinese headquarters.  Our books are maintained and our financial statements are prepared by the personnel employed at our executive offices in the City of Harbin.  Few of our employees have experience or familiarity with U.S accounting principles.  The lack of personnel in our Harbin office who are trained in U.S. accounting principles is a weakness because it could lead to improper classification of items and other failures to make the entries and adjustments
necessary to comply with U.S. GAAP.




Management is currently reviewing its staffing and their training in order to remedy the weaknesses identified in this assessment.  To date, we are not aware of significant accounting problems resulting from these weaknesses; so we have to weigh the cost of improvement against the benefit of strengthened controls.  However, because of the above conditions, management’s assessment is that the Company’s internal controls over financial reporting were not effective as of June 30, 2011.







ITEM 9B  . OTHER INFORMATION





None.


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PART III





ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The officers and directors of the Company are:





Position/Title
Age
Director SinceSheng Zhai
Chairman, Chief Executive Officer, Director
31
2010John McFadden
Director
66
2010Shaoqiu Xia
Director
64
2010Hu Yumei
Chief Financial Officer
42
--





The following sets forth biographical information regarding the Company’s directors.





Sheng Zhai.  Since 2007Mr. Zhai has been employed as General Manager of Heilongjiang Hairong Science & Technology Development Co., Ltd. which is the operating subsidiary of China Digital Animation Development, Inc.  From 2002 to 2007 Mr. Zhai was employed as Sales Director of BSI China, the China Branch of the British Standards Institute.  In 2002 Mr. Zhai was awarded a Bachelor’s Degree with a concentration in enterprise management by the Central University of Finance and Economics.  In 2004 he received a master’s degree in
finance from the same institution.





John J. McFadden. Mr. McFadden contributes to the Board his 40 years of experience in public and corporate finance as well as his insights into corporate management.  Mr. McFadden has been self-employed since 1999 as a consultant, providing consultation to his clients regarding both investment banking and energy matters.  From 1996 until 1998 Mr. McFadden was employed as the Senior Managing Director of Cambridge Holding and Cambridge Partners, LLC, a private investment company.  From 1968 until 1996 Mr. McFadden was employed by The First Boston Corporation with a variety of responsibilities in
corporate finance and public finance, including service as Vice President and Treasurer.  In 1967 Mr. McFadden was awarded a B.A. degree by St. Bonaventure University.  Mr. McFadden serves as a member of the board and Chairman of the Audit Committee for Advanced Battery Technologies, Inc. (NASDAQ:  ABAT).





Shaoqiu Xia.  Since 1993 Mr. Xia has been employed as Deputy Secretary in the Government of the City of Harbin, China.  During the eight years immediately preceding his entry into government service, Mr. Xia was employed as President of Harbin Electrical and Mechanical Production Company.  Mr. Xia contributes to the Board his familiarity with business practices in China, in particular government regulation of business practices in China, as well as his familiarity with electronic manufacturing processes.  Mr. Xia currently also serves as a member of the
Board of Directors of Advanced Battery Technologies, Inc. (NASDAQ:  ABAT).  Mr. Xia was awarded a Bachelors Degree in Science in 1967 by the Shenyang Industrial University.


42





Hu Yumei.   Ms. Hu has been employed as Chief Financial Officer of Hairong and its predecessor since 2006, with responsibilities for both the accounting and the finance departments.  From 1986 to 2003 Ms. Hu served as Chief Financial Officer of Harbin XinYang Group, which was engaged in the construction industry.  In 1986 Ms. Hu was awarded a Bachelor’s Degree with a concentration in Economics by the Heilongjiang Province Economy Institute of Cadres Management.





All of our directors hold offices until the next annual meeting of the shareholders of the Company, and until their successors have been qualified after being elected or appointed.  Officers serve at the discretion of the board of directors.





Audit Committee; Compensation Committee; Nominating Committee





We have certain standing committees of the Board, each of which is described below.





The Audit Committee consists of John J. McFadden and Shaoqiu Xia.  Mr. McFadden serves as the chairman of the Audit Committee.  The Board has determined that each of the members of the Audit Committee satisfies the independence requirements of the NASDAQ Stock Market.  The Audit Committee oversees our accounting and financial reporting processes and procedures, reviews the scope and procedures of the internal audit function, appoints our independent registered public accounting firm and is responsible for the oversight of its work and the review of the results of its independent audits.  The Audit Committee met
once during fiscal 2011.





The Board of Directors has determined that John J. McFadden, who serves as Chairman of the Audit Committee, is an audit committee financial expert by reason of his experience in corporate finance and investment banking.  Mr. McFadden is an independent director, within the definition of that term applicable to issuers listed on the NASDAQ Stock Market.





The Compensation Committee consists of John J. McFadden and Shaoqiu Xia.  Mr. Xia serves as chairman of the Compensation Committee.  The Board has determined that each of the members of the Compensation Committee satisfies the independence requirements of the NASDAQ Stock Market.  The Compensation Committee oversees the Company’s policies regarding compensation and benefits, evaluates the performance of the Company’s executive officers, reviews and approves the compensation of the Company’s executive officers, and sets the compensation for members of the Board of Directors.  The Compensation
Committee met once during fiscal 2011.





The Nominating and Corporate Governance Committee consists of John J. McFadden and Shaoqiu Xia.  Mr. McFadden serves as chairman of the Nominating and Corporate Governance Committee.  The Board has determined that each of the members of the Nominating and Corporate Governance Committee satisfies the independence requirements of the NASDAQ Stock Market.  The Nominating and Corporate Governance Committee makes recommendations to the Board regarding nominees to be submitted to our shareholders for election at each annual meeting of shareholders, selects candidates for consideration by the full Board to fill any vacancies on
the Board, and oversees all of our corporate governance matters.  The Nominating and Corporate Governance Committee did not meet during fiscal 2011.


43





Procedure for Nominating or Recommending for Nomination Candidates for Director





The Nominating and Corporate Governance Committee will consider candidates recommended by shareholders. Any shareholder who intends to present a director nomination proposal for consideration at the 2012 Annual Meeting of shareholders and intends to have that proposal included in the proxy statement and related materials for the 2012 Annual Meeting, must deliver a written copy of the proposal to our Company’s principal executive offices no later than the deadline, and in accordance with the notice procedures specified in the applicable requirements of SEC Rule 14a-8.





If a shareholder does not comply with the Rule 14a-8 procedures, the Company would not be required to include the nomination proposal as a proposal in the proxy statement and proxy card mailed to shareholders.  For a shareholder’s nominee to be considered for nomination as a Director, the shareholder should give timely notice of their nomination in writing to the Secretary of our Company.  To be timely, written suggestions for candidates, accompanied by a written consent of the proposed candidate to serve as a director if nominated and elected, a description of his or her qualifications and other relevant biographical information, should be delivered for consideration by the
Nominating and Corporate Governance Committee prior to the next Annual Meeting to the Secretary of the Company, 15 West 39th Street, Suite 14B, New York, NY 10018 not less the 10th day following the day on which public announcement of the date of such meeting is first made.  The Nominating and Corporate Governance Committee may request that the shareholder submitting the proposed nominee furnish additional information to determine the eligibility and qualifications of such candidate.





Code of Ethics





The Company has adopted a Code of Ethics that applies to its executive officers.  A copy of the Code of Ethics was filed as exhibit 14 to the Current Report on Form 8-K filed on May 4, 2010.





Section 16(a) Beneficial Ownership Reporting Compliance





None of the officers, directors or beneficial owners of more than 10% of the Company’s common stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during the year ended June 30, 2011, except that Messrs. Zhai, McFadden and Xia failed to file a Form 3.





ITEM 11.  EXECUTIVE COMPENSATION





The following table sets forth all compensation awarded to, earned by, or paid by the companies that are currently subsidiaries of China Digital Animation to Fu Qiang, the Company’s Chief Executive Officer until May 27, 2011, and to Hu Yumei, its Chief Financial Officer, for services rendered in all capacities to the Company during the years ended June 30, 2011, 2010 and 2009.  There were no other executive officers whose total salary and bonus for the fiscal year ended June 30, 2011 exceeded $100,000.


44





Year

Salary


Bonus


Stock

Awards


Option

Awards


Other

CompensationFu Qiang
2011

$
70,000



--



--



--




(1)2010

$
8,772



--



--



--




(1)2009

$
8,772



--



--



--




(1)Hu Yumei
2011

$
10,982



--



--



--



--2009

$
6,100



--



--



--



--2008

$
5,263


_______________________________


(1)
Until his resignation, Hairong permitted Fu Qiang to use for personal business an automobile purchased by Hairong for $168,621.




Employment Agreements





All of our officers and directors serve on an at-will basis.





Compensation of Directors





China Digital entered into a Service Agreement with John McFadden.  The agreement provides that during his tenure on the Board, the Company will pay Mr. McFadden $2,000 per month plus $1,000 per meeting, and issue him 10,000 shares of common stock per year.





China Digital entered into a Service Agreement with Shaoqiu Xia.  The agreement provides that during his tenure on the Board, the Company will pay Mr. Xia 10,000 RMB per year and issue him 10,000 shares of common stock per year.





The following table summarizes the total compensation earned by all non-employee Directors during the year ended June 30, 2011:





Director Summary Compensation for Fiscal 2010


Name

Fee Earned or

Paid in Cash($)


All Other

Compensation ($)(1)


Total ($)Andrew Mininger(2)

$
36,000


$
33,200


$
69,200John McFadden

$
24,000


$
25,200


$
49,200Shaoqiu Xia

$
1,569



--


$
1,569




(1)
Represents the market value on date of grant of common stock issued to the director.(2)
Mr.. Mininger resigned from the Board in July 2011.


45




Equity Grants




The following tables set forth certain information regarding the stock options acquired by the Company’s Chief Executive Officer and Chief Financial Officer during the year ended June 30, 2011 and those options held by him and her on June 30, 2011.





Option Grants in the Last Fiscal Year




Number of

securities

underlying

option
Percent

of total

options

granted to

employees

in fiscal
Exercise

Price
Expiration
Potential realizable

value at assumed

annual rates of

appreciation

for option termgranted
year
($/share)
Date
5%
10%Sheng Zhai
--
--
--
--
--
--Hu Yumei
--
--
--
--
--
--


The following tables set forth certain information regarding the stock grants received by the executive officers named in the table above during the year ended June 30, 2011 and held by them unvested at June 30, 2011.





Unvested Stock Awards in the Last Fiscal Year




Number of

Shares That

Have Not

Vested
Market Value

of Shares That

Have Not

VestedSheng Zhai
--
--Hu Yumei
--
--








ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





The following table sets forth information known to us with respect to the beneficial ownership of our common stock as of the date of this prospectus by the following:





·
each shareholder known by us to own beneficially more than 5% of our common stock;




·
Sheng Zhai, our Chief Executive Officer




·
each of our directors; and




·
all directors and executive officers as a group.





There are 20,290,000 shares of our common stock outstanding on the date of this report.  Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below have sole voting power and investment power with respect to their shares,  subject to community property laws where applicable.  Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission.




46




In computing the number of shares beneficially owned by a person and the percent ownership of that person, we include shares of common stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days. We do not, however, include these “issuable” shares in the outstanding shares when we compute the percent ownership of any other person.





Name of

Beneficial Owner
Amount and Nature of

Beneficial Owner(2)
Percentage

of ClassSheng Zhai
500,000
2.5%John McFadden
20,000
0.1%Shaoqiu Xia
10,000
0.1%All officers and directors

as a group (4 persons)
530,000
2.6%Ieong Waifong(1)
5,000,000(2)
24.7%Fu Zhiguo(2)
1,300,000
6.4%


________________________________


(1)
The address for Ieong Waifong is No. 4, 30th Floor, Unit E, XinYi Garden, 9 XieLu, HeishaHuan, Macau.(2)
The shares held by Ieong Waifong are subject to an option granted by him to the Company.  The Company may exercise the option to purchase the shares for a price of $.001 per share at any time before 2020.(3)
The address for Fu Zhiguo is 15 West 39th Street, Suite 14A, New York, NY 10018.(4)
All shares are owned both of record and beneficially.





ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE




Certain Relationships and Related Transactions




From time to time during the years ended June 30, 2011 and 2010, the Company borrowed funds from Fu Qiang, who was its Chief Executive Officer during that period. The loans were taken in order to pay expenses incurred in the United States.  The first loan of $5,000 was made in August 2009, followed by additional loans that brought the balance due to $95,975.  $10,000 was repaid to Mr. Fu in May 2011.  The loans are interest-free and due on demand.
  None of the officers or directors of China Digital Animation has engaged in any transaction with China Digital Animation or its subsidiaries during the past two fiscal years or the current fiscal year that had a transaction value in excess of the lesser of $120,000 or one percent of the average of the Company’s total assets as of June 30, 2011 and June 30, 2010.





47




Director Independence




The following members of our Board of Directors are independent, as “independent” is defined in the rules of the NASDAQ National Market System:  John McFadden and Shaoqiu Xia.





ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





The Company engaged EFP Rotenberg, LLP to serve as its independent registered public accountant in December 2010.  Prior to that engagement, P.C. Liu, CPA P.C. had served as the independent registered public accountant for China Digital Animation.





Audit Fees





EFP Rotenberg, LLP billed $45,000 to the Company for professional services rendered for the audit of financial statements for the fiscal year ended June 30, 2011.


P.C. Liu, CPA P.C. billed $45,000 to the Company for professional services rendered for the audit of financial statements for the fiscal year ended June 30, 2010.





Audit-Related Fees





EFP Rotenberg, LLP billed $5,000 to the Company during fiscal 2011 for assurance and related services that are reasonably related to the performance of the fiscal 2011 audit or review of the quarterly financial statements.  P.C. Liu, CPA P.C. billed $0 to the Company during fiscal 2010 for assurance and related services that are reasonably related to the performance of the fiscal 2010 audit or review of the quarterly financial statements.





Tax Fees





EFP Rotenberg, LLP billed $0 to the Company during fiscal 2011 for professional services rendered for tax compliance, tax advice and tax planning.  P.C. Liu, CPA P.C. billed $0 to the Company during fiscal 2010 for professional services rendered for tax compliance, tax advice and tax planning.





All Other Fees





EFP Rotenberg billed $0 to the Company in fiscal 2011 for services not described above.  P.C. Liu, CPA P.C. billed $0 to the Company in fiscal 2010 for services not described above.




It is the policy of the Company that all services other than audit, review or attest services must be pre-approved by the Board of Directors.  No such services have been performed by EFP Rotenberg, LLP or P.C. Liu, CPA P.C.




48


Subcontracted Services





The hours expended on EFP Rotenberg LLP’s engagement to audit the Company’s financial statements for the year ended June 30, 2011 that were attributed to work performed by persons other than full-time permanent employees of EFP Rotenberg, LLP was not greater than 50% of the total hours expended.





ITEM 15   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a) Exhibit List





3-a
Certificate of Incorporation, as amended through 2003 - Filed as an exhibit to the Company’s Registration Statement on Form 10-SB (File No. 000-50441) and incorporated herein by reference.3-a(1)
Certificate of Amendment of Certificate of Incorporation, filed on January 30, 2009 - filed as an exhibit to the Current Report on Form 8-K dated January 30, 2009 and filed on February 4, 2009 and incorporated herein by reference.3-b
Bylaws - Filed as an exhibit to the Company’s Registration Statement on Form 10-SB (File No. 000-50441) and incorporated herein by reference.10-a
Consulting Services Agreement dated June 27, 2008 between RDX Holdings Limited and Heilongjiang Hairong Science and Technology Development Co., Ltd. (1)10-b
Operating Agreement dated June 27, 2008 among RDX Holdings Limited, Heilongjiang Hairong Science and Technology Development Co., Ltd., and the shareholders of Heilongjiang Hairong Science and Technology Development Co., Ltd.(1)10-c
Equity Pledge Agreement dated June 27, 2008 between RDX Holdings Limited and the shareholders of Heilongjiang Hairong Science and Technology Development Co., Ltd.(1)10-d
Option Agreement dated June 27, 2008 among RDX Holdings Limited, Heilongjiang Hairong Science and Technology Development Co., Ltd., and the shareholders of Heilongjiang Hairong Science and Technology Development Co., Ltd.(1)10-e
Proxy Agreement dated June 27, 2008 among RDX Holdings Limited, Heilongjiang Hairong Science and Technology Development Co., Ltd., and the shareholders of Heilongjiang Hairong Science and Technology Development Co., Ltd.(1)14.
Employee Code of Business Conduct and Ethics - filed as an exhibit to the Current Report on Form 8-K filed on May 4, 2010 and incorporated herein by reference.21
Subsidiaries –   RDX Holdings Limited ,  British Virgin Islands corporation31.1
Rule 13a-14(a) Certification - CEO31.2
Rule 13a-14(a) Certification - CFO32
Rule 13a-14(b) Certifications


_____________________________________


(1)
Filed as an Exhibit to the Current Report on Form 8-K dated November 12, 2008 and filed on November 12, 2008, and incorporated herein by reference.


49





SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) 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: October 13, 2011
By: /s/ Sheng ZhaiSheng Zhai, Chief Executive Officer





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.








/s/ Sheng Zhai

October 13, 2011Sheng ZhaiDirector, Chief Executive Officer/s/ Hu Yumei

October 13, 2011Hu YumeiChief Financial and Accounting OfficerJohn McFadden

October 13, 2011John McFadden, Director/s/ Shaoqiu Xia

October 13, 2011Shaoqiu Xia, Director









50