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EX-32 - RULE 13A-14(B) CERTIFICATION - China Digital Animation Development, Inc. | chda10q20090930ex32.htm |
EX-31.1 - RULE 13A-14(A) CERTIFICATION - CEO - China Digital Animation Development, Inc. | chda10q20090930ex31-1.htm |
EX-31.2 - RULE 13A-14(A) CERTIFICATION - CFO - China Digital Animation Development, Inc. | chda10q20090930ex31-2.htm |
U. S.
Securities and Exchange Commission
Washington,
D. C. 20549
FORM
10-Q
[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For
the quarterly period ended September 30, 2009
[
] TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _____ to _____
Commission
File No. 0-50441
CHINA DIGITAL
ANIMATION DEVELOPMENT INC.
(Name
of Registrant in its Charter)
|
||
New
York
|
84-1275578
|
|
(State
of Other Jurisdiction of
incorporation
or organization)
|
(I.R.S.)
Employer I.D. No.)
|
|
15 West 39th Street, Suite 14B,
New York, NY 10018
|
||
(Address
of Principal Executive Offices)
|
Issuer's
Telephone Number: (212) 391-2688
Indicate
by check mark whether the Registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files.) Yes
No _____
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes [ ] No [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
Large
accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company [X]
APPLICABLE
ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of
each of the Registrant's classes of common stock, as of the latest practicable
date:
November
13, 2009
Common
Voting Stock: 20,000,000
PAGE
|
||
|
|
|
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS:
|
||
CONSOLIDATED
BALANCE SHEETS
|
2-3
|
|
AS
OF SEPTEMBER 30, 2009 AND JUNE 30, 2009
|
||
CONSOLIDATED
STATEMENTS OF INCOME
|
4
|
|
FOR
THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2009 &
2008
|
||
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
|
5
|
|
FOR
THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2009
|
||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
6
& 7
|
|
FOR
THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
|
||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
8
- 19
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CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
September
30, 2009
|
June
30, 2009
|
||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,635,808 | $ | 2,282,786 | ||||
Accounts
Receivable, net
|
1,091,188 | 1,388,599 | ||||||
Employee
advances
|
2,223 | 2,234 | ||||||
Advanced
to suppliers
|
1,254,826 | 1,443,440 | ||||||
Interest
Receivable
|
137,110 | 54,786 | ||||||
Prepaid
Expenses
|
79,854 | 84,202 | ||||||
Total
Current Assets
|
5,201,009 | 5,256,047 | ||||||
Non-current
Assets
|
||||||||
Property,
Plant & Equipment, net
|
4,635,827 | 3,929,257 | ||||||
Land
use right and other intangible assets, net
|
1,086,917 | 1,106,870 | ||||||
Long
Term Investment
|
2,193,752 | 2,191,457 | ||||||
Total
Non-current Assets
|
7,916,496 | 7,227,584 | ||||||
Total
Assets
|
$ | 13,117,505 | $ | 12,483,631 | ||||
"The
accompanying notes are an integral part of these financial statements"
2
CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
(Unaudited)
|
(Audited)
|
|||||||
September
30, 2009
|
June
30, 2009
|
|||||||
Current
Liabilities:
|
||||||||
Accounts
Payable
|
$ | 70,539 | $ | 29,219 | ||||
Tax
Payable
|
199,681 | 214,471 | ||||||
Accrued
expenses and other payable
|
56,230 | 64,964 | ||||||
Total
Current Liabilities
|
326,449 | 308,654 | ||||||
Long-Term
Liabilities:
|
||||||||
Loan
Payable
|
31,000 | 5,000 | ||||||
Total
Long-Term Liabilities
|
31,000 | 5,000 | ||||||
Total
Liabilities
|
357,449 | 313,654 | ||||||
Stockholders'
Equity:
|
||||||||
Common
Stock, par value $0.001, 500,000,000 authorized20,000,000
shares issued and outstanding
|
20,000 | 20,000 | ||||||
Additional
Paid in Capital
|
6,223,717 | 6,223,717 | ||||||
Accumulated
other comprehensive income
|
1,775,045 | 1,761,978 | ||||||
Reserved
Fund
|
341,524 | 341,524 | ||||||
Retained
Earnings
|
4,399,769 | 3,822,758 | ||||||
Total
Stockholders' Equity
|
12,760,055 | 12,169,977 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 13,117,504 | $ | 12,483,631 |
"The
accompanying notes are an integral part of these financial statements"
3
CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three
Months Ended
|
||||||||
September
30,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 1,143,915 | $ | 1,133,934 | ||||
Cost
of Goods Sold
|
221,352 | 173,465 | ||||||
Gross
Profit
|
922,564 | 960,469 | ||||||
Operating
Expenses:
|
||||||||
Sales
Expenses
|
64,631 | 54,210 | ||||||
General
and Administrative Expenses
|
169,612 | 97,928 | ||||||
Total
Operating Expenses
|
234,243 | 152,139 | ||||||
Income
from Operations before other Income and (expenses)
|
688,321 | 808,330 | ||||||
Other
Income and (Expense):
|
||||||||
Interest
income
|
84,595 | 7,085 | ||||||
Loss
from Disposal of Fixed Assets
|
(26 | ) | ||||||
Total
Other Income and (Expense)
|
84,570 | 7,085 | ||||||
Income
Before Income Taxes
|
772,890 | 815,415 | ||||||
Provision
For Income Taxes
|
195,879 | 215,177 | ||||||
Income
from Continuing Operations
|
577,011 | 600,239 | ||||||
Discontinued
Operations
|
||||||||
Loss
from Operations of discountinued Component
|
- | (661 | ) | |||||
Less
:Taxes
|
- | 0 | ||||||
Loss
from discontinued operations
|
- | (661 | ) | |||||
Minority
Interest
|
- | (13,786 | ) | |||||
Net
Income
|
$ | 577,011 | $ | 613,364 | ||||
Basic
and diluted income per share
|
0.03 | 0.03 | ||||||
Weighted
average common shares outstanding
|
20,000,000 | 20,000,000 |
4
CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY
Accumulated | ||||||||||||||||||||||||||||||||||||
Common
Stock
|
Additional
|
Other
|
Total
|
|||||||||||||||||||||||||||||||||
par value $.0001 |
Paid
in
|
Comprehensive
|
Retained
|
Reserved
|
Comprehensive
|
Minority
|
Stockholders'
|
|||||||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Income
|
Earnings
|
Fund
|
Income
|
Interest
|
Equity
|
||||||||||||||||||||||||||||
Balance
- June 30, 2008
|
20,000,000 | $ | 20,000 | $ | 6,223,717 | $ | 1,645,487 | $ | 1,600,427 | $ | 112,241 | $ | 64,259 | $ | 9,666,131 | |||||||||||||||||||||
Comprehensive
income
|
||||||||||||||||||||||||||||||||||||
Net
income for the twelve months
|
2,451,614 | 2,451,614 | 2,451,614 | |||||||||||||||||||||||||||||||||
Reserved
Fund
|
(229,283 | ) | 229,283 | - | ||||||||||||||||||||||||||||||||
Other
comprehensive income, net of tax
|
||||||||||||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
116,491 | 116,491 | 116,491 | |||||||||||||||||||||||||||||||||
Decrease
in Minority Interest
|
(64,259 | ) | (64,259 | ) | ||||||||||||||||||||||||||||||||
Comprehensive
income
|
2,568,105 | |||||||||||||||||||||||||||||||||||
Balance
- June 30, 2009
|
20,000,000 | 20,000 | 6,223,717 | 1,761,978 | 3,822,758 | 341,524 | - | 12,169,977 | ||||||||||||||||||||||||||||
Comprehensive
income
|
||||||||||||||||||||||||||||||||||||
Net
income for the three months
|
577,011 | 577,011 | 577,011 | |||||||||||||||||||||||||||||||||
Other
comprehensive income, net of tax
|
||||||||||||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
13,067 | 13,067 | 13,067 | |||||||||||||||||||||||||||||||||
Comprehensive
income
|
590,078 | |||||||||||||||||||||||||||||||||||
Balance
- September 30, 2009
|
20,000,000 | $ | 20,000 | $ | 6,223,717 | $ | 1,775,045 | $ | 4,399,769 | $ | 341,524 | $ | - | $ | 12,760,055 |
"The
accompanying notes are an integral part of these financial statements"
5
CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three
Months Ended
|
||||||||
September
30,
|
||||||||
Cash
Flows From Operating Activities:
|
2009
|
2008
|
||||||
Net
Income
|
$ | 577,011 | $ | 613,364 | ||||
Adjustments
To Reconcile Net Income To Net Cash
|
||||||||
Provided
By Operating Activities:
|
||||||||
Depreciation
and Amortization Expense
|
93,614 | 85,076 | ||||||
Gains
from Disposal of Fixed Assets
|
(26 | ) | ||||||
(Increase)
or Decrease in Current Assets:
|
||||||||
Accounts
Receivable
|
297,410 | (74,568 | ) | |||||
Inventories
|
- | (429,470 | ) | |||||
Prepaid
Expenses
|
4,318 | 8,483 | ||||||
Advanced
to Suppliers
|
188,614 | 278,244 | ||||||
Interest
Receivable
|
(82,323 | ) | - | |||||
Employee
Advanced
|
11 | 103,825 | ||||||
Increase
or (Decrease) in Current Liabilities:
|
||||||||
Accounts
Payable
|
41,319 | 3,086 | ||||||
Advanced
from Customers
|
- | 80,299 | ||||||
Taxes
Payable
|
(14,790 | ) | 106,023 | |||||
Minority
Interest
|
- | 13,786 | ||||||
Accrued
Expenses and Other Payables
|
(8,734 | ) | (32,993 | ) | ||||
Net
Cash Provided by Operating Activities
|
1,096,425 | 755,154 | ||||||
Cash
Flows From Investing Activities:
|
||||||||
Purchases
of Property and Equipment
|
(775,032 | ) | (278,444 | ) | ||||
Net
Cash Used in Investing Activities
|
(775,032 | ) | (278,444 | ) |
"Continued on
next page"
"The
accompanying notes are an integral part of these financial statements"
6
CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three
Months Ended
|
||||||||
September
30,
|
||||||||
Cash
Flows From Financing Activities:
|
2009
|
2008
|
||||||
Proceeds
from Borrowing
|
26,000 | - | ||||||
Net
Cash Used in Financing Activities
|
26,000 | - | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
5,630 | 108 | ||||||
Increase
(Decrease) in Cash and Cash Equivalents
|
353,022 | 476,818 | ||||||
Cash
and Cash Equivalents -Beginning Balance
|
2,282,786 | 4,740,675 | ||||||
Cash
and Cash Equivalents - Ending Balance
|
$ | 2,635,808 | $ | 5,217,493 | ||||
Supplemental
Disclosures of Cash Flow Information:
|
||||||||
Cash
Paid During The Years for:
|
||||||||
Interest
Paid
|
- | - | ||||||
Income
Taxes Paid
|
$ | 215,748 | $ | 206,215 |
"The
accompanying notes are an integral part of these financial
statements"
7
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES TO
CONDENSED FINANCIAL STATEMENTS
FOR THE
PERIOD ENDED SEPTEMBER 30, 2009
UNAUDITED
1.
|
ORGANIZATION AND BASIS OF
PRESENTATION
|
On
January 30, 2009, Maui General Store, Inc. (the “Company”) changed its name to
“China Digital Animation Development, Inc.” to reflect the reverse merger of
Heilongjiang Hairong Science and Technology Development Co., Ltd. (“Hairong”)
into the Company.
On
November 12, 2008 the Company acquired the outstanding capital stock of RDX
Holdings Limited ("RDX"), a corporation organized under the laws of the British
Virgin Islands. The acquisition was effected by a share exchange between Fu
Qiang and Su Jianping, the shareholders of RDX, and the Company (the "Share
Exchange"). In exchange for the capital stock of RDX, the Company issued
14,400,000 shares of its common stock to the Messrs. Fu and Su, the issued
shares represented 72% of the outstanding shares of the Company.
RDX is
engaged in the business of managing the assets and operations of Hairong, a
joint stock company organized under the laws of The People's Republic of China.
Hairong is primarily engaged in animation design and development and in
the production and presentation of cultural events. During the
quarter ended September 30, 2008, Hairong was also engaged in the IT
construction business. Hairong operates its business primarily in the PRC with
its headquarters in Harbin city, Heilongjiang province.
On
October 1, 2007, Hairong purchased 70% of the shareholders’ equity of an
advisory consulting firm, Fortune Global Investment Advisory Co., Ltd (the
“FGIA”). On January 1, 2009 the Company purchased the remaining 30% of the
shareholders’ equity of FGIA without any consideration or currency equivalents
under a transfer agreement. On May 13, 2009, Hairong sold 100% of
FGIA for the cash amount of $219,036. Hairong is responsible for all the debt
and liabilities incurred up to the transferring date, May 13, 2009.
On June
27, 2008, RDX Holdings entered into five agreements with Hairong and with the
equity owners in Hairong. Collectively, the agreements provide RDX exclusive
control over the business of Hairong, the right to all revenues obtained by
Hairong, and responsibility for all of the expenses incurred by Hairong. The
relationship is one that is generally identified as "entrusted
management."
8
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited
Interim Financial Information
The
consolidated interim financial statements included herein have been prepared by
the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are adequate
to make the information presented not misleading.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company, its
wholly and majority owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
Reclassification
Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications had no effect on reported total assets,
liabilities, stockholders’ equity or net income.
Use
of estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of
inventories. Actual results could differ from those
estimates.
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.
9
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Bad
debt reserves
The
carrying amount of accounts receivable is reduced by a valuation allowance. The
Company's policy is that for accounts receivable amounts that are aged between 6
months and 12 months, the Company records a 3% bad debt reserve. If
the receivable is aged over 12 months, the Company reserves 5% of the account as
a bad debt allowance. In addition, the Company reviews balances in excess of
payment terms. Based on this review, which includes customer credit
worthiness and history, general economic conditions and changes in customer
payment patterns, the Company estimates the portion, if any, of the balance that
will not be collected and records that amount as an additional reserve.
Management reviews its valuation allowance on a semi-annual basis.
Concentration
of credit risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents and accounts and other
receivables. As of September 30, 2009, major banks located in the PRC held
substantially all the Company’s cash and cash equivalents. Hairong’s management
believes they are all of high credit quality. With respect to accounts
receivable, the management extends credit based on an evaluation of the
customer’s financial condition and customer payment practices to minimize
collection risk on accounts receivable.
Inventories
Inventories
are stated at lower of cost, as determined on a weighted average basis, or
market value. As the company changed its business to animation, it will not hold
any inventories anymore.
Construction
in progress
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
The useful life is 20 years.
Property
and equipment
Property
and equipment are stated at cost, net of accumulated
depreciation. Maintenance, repairs and betterments, including
replacement of minor items, are charged to expense; major additions to physical
properties are capitalized. Depreciation and amortization are provided using the
straight-line method over the following estimated useful lives:
Buildings
and improvements
|
40
years
|
|
Machinery,
equipment and automobiles
|
5-10
years
|
10
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangible
assets
Intangible
assets consist of “rights to use land” and “animation software.” According to
the law of China, the government owns all the land in China. Companies or
individuals are authorized to possess and use the land only through land use
rights granted by
the Chinese government. Land use rights are being amortized using the
straight-line method over the lease term of 50 years. The method to amortize
intangible assets is a 50-year straight-line method. The Company also evaluates
intangible assets for impairment, at least on an annual basis and whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable from its estimated future cash flows. Recoverability of
intangible assets, other long-lived assets and goodwill is measured by comparing
their net book value to the related projected undiscounted cash flows from these
assets, considering a number of factors including past operating results,
budgets, economic projections, market trends and product development cycles. If
the net book value of the asset exceeds the related undiscounted cash flows, the
asset is considered impaired, and a second test is performed to measure the
amount of impairment loss.
Income
taxes
Hairong
accounted for income tax under the provisions of ASC 740 "Accounting for Income
Taxes", which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, whenever necessary,
against net deferred tax assets when it is more likely than not that some
portion or the entire deferred tax asset will not be realized. There are no
deferred tax amounts at September 30, 2009.
Revenue
recognition
The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized when the services
are provided and the contracts are performed.
Fair
value of financial instruments
The
Company’s financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, taxes payable, notes payable and other loans payable. Management has
estimated that the carrying amounts approximate their fair value due to the
short-term nature.
11
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign
currency translation
Hairong’s
functional currency is the Renminbi (“RMB”). Foreign currency transactions are
translated at the applicable rates of exchange in effect at the transaction
dates. Monetary assets and liabilities denominated in foreign currencies at the
balance sheet date are translated at the applicable rates of exchange in effect
at that date. Revenues and expenses are translated at the average exchange rates
in effect during the reporting period. Translation adjustments arising from the
use of different exchange rates from period to period are included as a
component of stockholders' equity as "Accumulated Other Comprehensive
Income". Gains and losses resulting from foreign currency
translations are included in Accumulated Other Comprehensive
Income.
Statement
of cash flows
In
accordance with Accounting Standards Codification ASC 230, “Statement of Cash
Flows,” cash flows from the Company’s operations are calculated based upon the
local currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
Earnings
(Loss) per share
Basic
earnings (loss) per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed similar to basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive.
There are no common stock equivalents available in the computation of earnings
(loss) per share at June 30, 2009.
Reserve
Fund
Before
June 20, 2006, Hairong was required to transfer 15% of its profit after
taxation, as determined in accordance with Chinese accounting standards and
regulations, to the surplus reserve fund. Subject to certain restrictions set
out in the Chinese Companies Law, the surplus reserve fund may be distributed to
stockholders in the form of share bonus issues and/or cash dividends. After June
30, 2006, such reserve is no longer mandatory under the Chinese
Law.
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.
12
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
New
accounting pronouncements
In June
2009, the FASB issued ASC 810, “Amendments to FASB Interpretation No. 46(R),”
which changes the approach to determining the primary beneficiary of a variable
interest entity (“VIE”) and requires companies to more frequently assess whether
they must consolidate VIEs. ASC 810 is effective for annual periods beginning
after November 15, 2009. The Company does not expect the adoption of ASC 810
will have a material effect on the Company’s financial condition, results of
operations or cash flows.
In May
2009, the FASB issued ASC 855, “Subsequent Events,” which establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. ASC 855 is effective for interim reporting periods ending after
June 15, 2009. The adoption of ASC 855 did not have a material effect on the
Company’s financial condition, result of operations or cash flows.
In April
2009, the FASB issued ASC 270, “Interim Disclosures about Fair Value of
Financial Instruments,” which requires quarterly disclosures of the fair value
of all financial instruments that are not reflected at fair value in the
financial statements, as well as additional disclosures about the method(s) and
significant assumptions used to estimate the fair value. Prior to the issuance
of this FSP, such disclosures, including quantitative and qualitative
information about fair value estimates, were only required on an annual basis.
ASC 270 is effective for interim reporting periods ending after June 15, 2009.
The adoption of ASC 270 did not have a material effect on the Company’s
disclosures.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” The current GAAP hierarchy, as set forth in the American
Institute of Certified Public Accountants (AICPA) Statement on Auditing
Standards No. 69, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles, has been criticized because (1) it is directed
to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB
Statements of Financial Accounting Concepts. The FASB believes that the GAAP
hierarchy should be directed to entities because it is the entity (not its
auditor) that is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP.
Accordingly, the FASB concluded that the GAAP hierarchy should reside in the
accounting literature established by the FASB and is issuing this Statement to
achieve that result. This Statement is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. The adoption of FASB 162 is not expected to have a
material impact on the Company’s financial position.
13
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
New
accounting pronouncements
In April
2008, the FASB issued ASC 350-3, “Determination of the Useful Life of Intangible
Assets,” which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under ASC 350-3, “Goodwill and Other Intangible
Assets.” The intent of this FSP is to improve the consistency between the useful
life of a recognized intangible asset under ASC 350-3 and the period of expected
cash flows used to measure the fair value of the asset under ASC 805. ASC 350-3
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The adoption of ASC 350-3 did not have
an effect on the Company’s financial condition, results of operations or cash
flows.
3. ACCOUNTS RECEIVABLE
Accounts
receivable are uncollateralized, non-interest bearing customer obligations
typically due under terms requiring payment from the invoice
date. Payments of accounts receivable are allocated to the specific
invoices identified on the customer’s remittance advice or, if unspecified, are
applied to the oldest unpaid invoices. As of September 30, and June 30, 2009,
the net accounts receivable was $1,091,188 and $1,388,599,
respectively.
4. ADVANCED TO
SUPPLIERS
Hairong
makes advance payments to certain suppliers which provide services to the
company for animation design and development. The advances to suppliers was
$1,254,826 and $1,443,440 as of September 30, and June 30, 2009,
respectively.
14
5
. PROPERTY, PLANT & EQUIPMENT, NET
Property,
Plant & Equipment consisted of the following:
September
30, 2009
|
June
30, 2009
|
|||||||
Building
and Improvement
|
$ | 1,787,853 | $ | 1,785,983 | ||||
Machinery
& Equipment
|
- | 831,180 | ||||||
Office
Furniture & Equipment
|
1,387,025 | 612,105 | ||||||
Vehicles
|
352,468 | 352,099 | ||||||
Construction
in progress
|
1,461,504 | 1,459,975 | ||||||
Total
Property
|
4,988,849 | 4,210,162 | ||||||
Accumulated
depreciation
|
(353,022 | ) | (280,905 | ) | ||||
Total
Property, net
|
$ | 4,635,827 | $ | 3,929,257 |
Depreciation
expense for the three months ended September 30, 2009 was $72,513.
6. LAND
USE RIGHT AND OTHER INTANGIBLES
The net
book value of intangible assets as of September 30, 2009 and June 30, 2009
comprised of the following:
September
30, 2009
|
June
30, 2008
|
|||||||
Cost
of land use right and other intangibles
|
$ | 1,383,561 | $ | 1,382,114 | ||||
Less:
accumulated amortization
|
(296,644 | ) | (275,244 | ) | ||||
Land
use right and other intangibles, net
|
$ | 1,086,917 | $ | 1,106,870 |
As of
September 30, 2009, total amortization expense related to intangible assets was
$21,101.
15
7.
LONG TERM INVESTMENT
On April
24, 2009, the Company deposited $ 2,193,752 with an investment management
company and signed an agreement for a rate of 15% annual interest on this
deposit. The interest is payable semiannually, and the Company accrued interest
in the amount of $ 82,323 for the three months ended September 30,
2009.
8. INCOME
TAXES
Effective
on January 1, 2007 a new Chinese Tax Law was enacted. Hairong has been subject
to income tax at an effective rate of 25% on income reported in the statutory
financial statements after appropriate tax adjustments.
The
Company’s provisions for income taxes for the three months ended September 30,
2009 and fiscal year ended June 30, 2008 as follows:
PRC
only:
|
September
30, 2009
|
June
30, 2009
|
||||||
Current
|
$ | 195,879 | $ | 823,142 | ||||
Deferred
|
- | - | ||||||
Total
|
$ | 195,879 | $ | 823,142 |
9
. STOCKHOLDERS’ EQUITY
As of
September 30, 2009, 500,000,000 shares have been authorized and 20,000,000
shares are outstanding.
The
Company implemented a 1-for-25 reverse split on January 30, 2009. Retroactive
effect is being given to the reverse split in these financial
statement. Income statements have retroactively used the new
outstanding shares to calculate the EPS. Stated par value in the stockholders’
equity section has been reduced accordingly.
16
10.
SEGMENT INFORMATION
Segment
revenue for the three months ended September 30, 2009 was as
follows:
Revenue
for the three months
|
30-Sep
|
30-Sep
|
||||||
2009
|
2008
|
|||||||
Revenue:
|
||||||||
IT
Construction
|
$ | - | $ | 611,310 | ||||
Membership
Fees
|
127,266 | 356,164 | ||||||
Animation
Design and Development
|
1,016,649 | 661,032 | ||||||
Others
|
- | 116,739 | ||||||
Consolidated
|
$ | 1,143,915 | $ | 1,745,245 |
Segment
operating income for the three months ended September 30, 2009 was as
follows:
30-Sep
|
30-Sep
|
|||||||
Operating
Income for the three months
|
2009 | 2008 | ||||||
Operating
Income:
|
||||||||
IT
Construction
|
$ | - | $ | (661.00 | ) | |||
Membership
Fees
|
97,271 | 341,974 | ||||||
Animation
Design and Development
|
591,050 | 501,635 | ||||||
Consulting
Service
|
- | (35,279 | ) | |||||
Others
|
- | - | ||||||
Consolidated
|
$ | 688,321 | $ | 807,669 |
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.
17
11.
CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC's economy.
The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
Concentration of credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents. As of September 30, 2009,
substantially all of the Company’s cash and cash equivalents were held by major
banks located in the PRC of which the Company’s management believes are of high
credit quality. With respect to accounts receivable, the Company extends credit
based on an evaluation of the customer’s financial condition and customer
payment practices to minimize collection risk on account
receivables.
The major customers which
represented more than 5% of Accounts Receivable
Customer
Name
|
Amount(USD)
|
Percentage
|
||||||
Jilin
New Century Ltd
|
71,078 | 6.42 | % | |||||
China
Petrol Daqing Branch
|
108,658 | 9.82 | % | |||||
Harbin
Huayu Medicine Group
|
65,008 | 5.87 | % | |||||
Heilongjiang
Drought situation Control
|
131,625 | 11.89 | % | |||||
Beijing
Wanfang Xingxing Digital Tech
|
475,313 | 42.95 | % | |||||
Harbin
Renhe Spring
|
87,531 | 7.91 | % | |||||
Harbin
Shengwen Amination Ltd
|
113,344 | 10.24 | % | |||||
1,052,556 | 95.10 | % |
18
11. CURRENT VULNERABILITY DUE TO
CERTAIN CONCENTRATIONS (continued)
The
major suppliers which represented more than 5% of Prepayment
Vendor
Name
|
Amount
|
Percentage
|
||||||
Harbin
City Design Institution
|
321,750 | 25.64 | % | |||||
Harbin
Danwei Chuangyi Ltd
|
307,125 | 24.48 | % | |||||
Zhangye
|
109,688 | 8.74 | % | |||||
Harbin
Gongdahuitong Technology Co., Ltd
|
516,263 | 41.14 | % | |||||
1,254,826 | 41.14 | % |
The
major clients that represented more than 5% of the total sales
Harbin
Shengwen Animation Ltd
|
343,512 | 30.03 | % | |||||
Beijing
Wanfang Xingxing Tech
|
324,509 | 36.55 | % | |||||
Benxi
Yige Animation Design Co., Ltd
|
255,076 | 22.30 | % | |||||
923,097.16 | 88.87 | % |
19
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
OPERATIONS
|
Forward-Looking
Statements: No Assurances Intended
In
addition to historical information, this Quarterly Report contains
forward-looking statements, which are generally identifiable by use of the words
“believes,” “expects,” “intends,” “anticipates,” “plans to,” “estimates,”
“projects,” or similar expressions. These forward-looking statements represent
Management’s belief as to the future of China Digital Animation Development,
Inc. Whether those beliefs become reality will depend on many factors
that are not under Management’s control. Many risks and uncertainties
exist that could cause actual results to differ materially from those reflected
in these forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in Item 1A - “Risk Factors” in
the Company’s Annual Report on Form 10-K for the year ended June 30,
2009. Readers are cautioned not to place undue reliance on these
forward-looking statements. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking
statements.
Outline
of Our Business
China
Digital Animation Development Inc. (“China Digital”), through its operating
company, Heilongjiang Hairong Science and Technology Development Co Ltd., a
joint stock company organized under the laws of The People’s Republic of China
(“Hairong”), engages in the business of digital animation production, financial
information services, and cultural productions in China.
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. During that period we developed a reputation in the
Chinese business community for our ability to provide efficient solutions to
complex integration problems.
Since
2007, however, Hairong has evolved from the network engineering business into
other businesses that utilize our managerial skills, in particular the animation
development business. The primary reason for the entry into this industry is
because animation development is now more profitable in China than network
engineering. Due to the intense competition in the IT industry as a result of
influx of college graduates with training in network and software design in
China, competition in the network engineering business forces us to reduce
margins. In contrast, the animation industry is facing great
opportunities in China, with the increasing customer demand and especially
favorable treatment by the government of China.
20
The
government of China is actively supporting the development of the animation
industry in China. Among the stimuli provided for development of the
industry:
|
·
|
Heilongjiang
Province has developed an Animation Development Area, in which
participants in the industry are provided subsidized
property. We are currently the beneficiaries of 2,000 square
meters in the Animation Development Area, which we occupy rent-free until
February 2011.
|
|
·
|
The
local government provides subsidies for animation productions broadcast in
China, from 300 RMB per minute for broadcasts on provincial television
stations up to 50 million RMB for productions in prime time on China
Central Television or overseas mainstream
media.
|
|
·
|
Animation
companies receive reductions in value-added tax, income tax, sales tax,
and import duties.
|
For this
reason, when our fiscal year ended on June 30, 2009, we terminated all of our
network engineering activities, and sold the related property and
equipment. The results of this business during the 2009 fiscal year
are now classified on our statement of operations as “discontinued
operations.”
Hairong
now offers services in three distinct market segments:
|
§
|
Animation. Our
team of 30 animation technicians offers digital animation services to the
movie, television and Internet industries, specializing in high end
special effects, including 3-D animation. We also offer
non-media businesses animated products for advertising, branding and
education purposes.
|
The
animation industry is growing rapidly in China. Because we have
developed a state-of-the-art facility with personnel recognized in the industry,
we expect to participate in that growth in a leadership position. For
that reason, we expect that animation development will be the primary source of
our revenues for the foreseeable future.
|
§
|
Financial Information
Delivery. With our Trans World Financial Website as the
foundation, we offer investors and issuers a wide variety of financial
data and information useful to individuals concerned with the
international capital markets.
|
|
§
|
Cultural
Productions. Commencing with the Great Wall Ice Tour, a
travelling multimedia entertainment facility constructed of snow and ice,
we intend to mine the rich cultural heritage of China to produce and
distribute a wide variety of cultural
entertainments.
|
Results
of Operations – Three Month Periods Ended September 30, 2009
During
the three months ended September 30, 2009, we realized revenues from operation
of two business segments: from animation design and development as
well as from membership fees charged to users of our Financial Information
Services. In that period, animation design and development accounted for
$1,016,649 (88.9%) of our revenues and generated $591,050 in operating income.
Membership fees accounted for the remaining $127,266 of our revenue (11.1%) and
generated $ 97,271 in operating income. In comparison, during the
three months ended September 30, 2008 our revenues totaled $1,133,934, excluding
$611,310 in revenue that we realized from our IT business, which is accounted
for as a discontinued operation. Animation development, which we were
only initiating in that period, accounted for 58% of our revenue from continuing
operations in that period.
21
Because
our current operations are focused on service industries, we record a low cost
of goods sold, compared to the cost of goods sold recorded by our
now-discontinued network engineering business. Our gross margin
during the three months ended September 30, 2009 was 80.6%, an increase over the
73% margin we realized in fiscal year 2009. Our gross margin will
vary from one period to another, depending on our success in pricing the
animation contracts we perform. In general, however, we expect our
gross margin ratio to remain high.
On the
other hand, the overhead required to maintain an animation development business
is greater than that required by the network engineering business. We
currently have a staff of 129 employees dedicated to the animation development
business, and their salaries are accounted for as general and administrative
expense. For that reason, our operating expenses during the three
months ended September 30, 2009 increased by 54%, from $152,139 in the first
quarter of fiscal year 2009 to $234,243 in the first quarter of fiscal year
2010.
In April
2009 we determined that our cash assets exceeded our immediate
needs. Therefore we invested $2.1 million of our cash with an
investment management company that contracted to provide us a 15% annual
return. As a result of this investment, we accrued interest income of
$84,595 in the quarter ended September 30, 2009. In the quarter ended
September 30, 2008, when our cash was deposited in bank accounts only, our
interest income was only $7,085.
Our
revenue less expenses for the three months ended September 30, 2009 yielded a
net income before taxes of $772,890, a decrease from the $815,415
realized during the three months ended September 30, 2008. The
decrease was primarily attributable to the increase on our general and
administrative expenses. After accruing income taxes at
the national rate of 25%, we recorded net income of $577,011 ($.03 per share), a
6% decline from the first quarter of our last fiscal year.
Liquidity
and Capital Resources
To date,
our operations have been funded by capital contributions from Hairong’s
management and employees. Approximately 54% of the capital
contribution has been made by members of management and their business
associates. The remaining 46% was contributed by the employees,
acting through a trustee. The Company expects that in the future it
will issue equity to the employees to compensate them for their financial
contributions to the growth of Hairong, and to incentivize them for future
loyalty to Hairong.
At
September 30, 2009, our working capital was $4,874,560, including $2,635,808 in
cash. Our operations during the first quarter of 2009 produced
$1,096,425 in cash. Our operations were also cash-positive in each of
the past two fiscal years -
providing $819,226 in cash during the 2009 fiscal year and $2,030,233 in
cash during the 2008 fiscal year. For this reason, we believe that
our cash resources are adequate to fund our operations for the foreseeable
future.
22
We expect
to fund several significant capital improvements during the next twelve
months:
|
·
|
An
acquisition of the assets of a film company in
China
|
|
·
|
a
significant upgrade to our Website’s infrastructure, in order to
facilitate a rapid expansion of the user
base;
|
|
·
|
acquisition
of specialized equipment for our Ice
Tour;
|
|
·
|
additional
animation equipment; and
|
|
·
|
a
dedicated education facility for the training center associated with our
animation department.
|
At
present, we anticipate that we will finance these projects from our capital
resources. However, if we are able to obtain financing on favorable
terms, we may use external financing for one or more of the
projects. Currently we have fixed assets with a book value of
$5,722,744, on which there is no lien. This provides us the ability
to obtain secured debt financing, if we decided to preserve our working capital.
Based on this experience, we anticipate that our capital resources will be
adequate to fund our operations and our anticipated growth for the foreseeable
future.
Off-Balance Sheet
Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition or results of
operations.
ITEM
3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4. CONTROLS
AND PROCEDURES
Evaluation of Disclosure Controls
and Procedures. Our Chief Executive Officer and Chief Financial
Officer carried out an evaluation of the effectiveness of the Company’s
disclosure controls and procedures as of September 30, 2009. Pursuant to
Rule13a-15(e) promulgated by the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934, “disclosure controls and procedures” means
controls and other procedures that are designed to insure that information
required to be disclosed by the Company in the reports that it files with the
Securities and Exchange Commission is recorded, processed, summarized and
reported within the time limits specified in the Commission’s rules.
“Disclosure controls and procedures” include, without limitation, controls
and procedures designed to insure that information the Company is required to
disclose in the reports it files with the Commission is accumulated and
communicated to our Chief Executive Officer and Chief Financial Officer as
appropriate to allow timely decisions regarding required disclosure. Based
on their evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the Company’s system of disclosure controls and procedures was
effective as of September 30, 2009 for the purposes described in this
paragraph.
Changes in Internal Controls.
There was no change in internal controls over financial reporting (as
defined in Rule 13a-15(f) promulgated under the Securities Exchange Act or 1934)
identified in connection with the evaluation described in the preceding
paragraph that occurred during the Company’s first fiscal quarter that has
materially affected or is reasonably likely to materially affect the Company’s
internal control over financial reporting.
23
PART II -
OTHER INFORMATION
Item
1A Risk
Factors
There
have been no material changes from the risk factors included in the Annual
Report on Form 10-K for the year ended June 30, 2009.
Item
6. Exhibits
31.1
|
Rule
13a-14(a) Certification – CEO
|
31.2
|
Rule
13a-14(a) Certification – CFO
|
32
|
Rule
13a-14(b) Certification
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
CHINA
DIGITAL ANIMATION DEVELOPMENT INC.
|
|
|
Date:
November 16, 2009
|
By:
/s/ Fu
Qiang
|
Fu
Qiang, Chief Executive Officer
|
|
|
By:
/s/ Hu
Yumei
|
Hu
Yumei, Chief Executive Officer
|
24