China Digital Media (CMDC) 10-Q 2009 Q3 Quarterly report

United States

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 _______

CHINA DIGITAL MEDIA CORPORATION

(Exact name of small business issuer as specified in its charter)

HAIRMAX INTERNATIONAL CORP.

(Former name of registrant, if applicable)

Nevada	13-3422912
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

2505-06, 25/F, Stelux House, 698 Prince Edward Road E. Kowloon, Hong Kong

(Address of principal executive offices)

(011) 852-2390-8600

(Issuer's telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer, “large 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]

(Do not check if a smaller reporting company)                                                                                                                                

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

Number of shares of common stock outstanding as of  November 2, 2009: 42,706,363

Number of shares of preferred stock outstanding as of November 2, 2009: 1,875,000

1

CHINA DIGITAL MEDIA CORPORATION

INDEX TO FORM 10-Q

		Page No.
PART I
Item 1. Financial Statements
	Condensed Consolidated Balance Sheet - September 30, 2009 (unaudited)	3
	Condensed Consolidated Statements of Operations And Comprehensive Income - Nine months Ended September 30, 2009 and 2008 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows - Nine months Ended September 30, 2009 and 2008 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations		8
Item 3. Quantitative and Qualitative Disclosures about Market Risk		10
Item 4. Controls and Procedures		10
PART II
	Item 1. Legal Proceedings	11
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	11
	Item 3. Defaults Upon Senior Securities	11
	Item 4. Submission of Matters to a Vote of Security Holders	11
	Item 5. Other Information	11
	Item 6. Exhibits	11
	Signatures	12

2

ITEM 1. FINANCIAL STATEMENTS

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
	September 30, 2009			December 31, 2008
	(Unaudited)			(Audited)
CURRENT ASSETS
Cash and cash equivalents	$	733,710		$	436,062
Security deposit		284,888			-
Accounts receivable, net of allowances		2,416,708			1,078,228
Inventories, net		759,311			1,247,781
Other receivables and prepaid expenses		509,899			194,386
Due from a related company		280,018			-
Value added taxes recoverable		461,682			52,820
Total Current Assets		5,446,216			3,009,277
ACCOUNTS RECEIVABLE, long term portion, net of allowances		410,586			-
INTANGIBLE ASSETS, NET of impairment of $3,996,595		324,330			324,329
PROPERTY AND EQUIPMENT, NET		15,261,545			14,202,241
TOTAL ASSETS	$	21,442,677		$	17,535,847
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Convertible debentures, net of discount	$	2,465,000		$	950,000
Bills payable		949,626			-
Accounts payable		5,692,335			5,178,216
Other payables and accrued liabilities		1,439,272			923,980
Due to directors		285,829			285,642
Due to a stockholder		9,270			396,331
Due to related companies		497,764			454,555
Business and other tax payable		21,472			23,099
Income tax payable		1,752,536			2,603,012
Total Current Liabilities		13,113,104			10,814,835
LONG TERM LIABILITIES
Convertible debentures, net of discount		500,000			2,015,000
Accounts payable		1,647,916			333,632
Total Long Term Liabilities		2,147,916			2,348,632
COMMITMENTS AND CONTINGENCIES		-			-
MINORITY INTERESTS		-			-
STOCKHOLDERS' EQUITY
Series A convertible preferred stock ($0.001 par value, 40,000,000 shares
authorized,1,875,000 shares issued and outstanding as of
September 30, 2009 and December 31, 2008)		1,875			1,875
Common stock ($0.001 par value, 500,000,000 shares authorized,
42,706,363 shares issued and outstanding as of September 30, 2009
and December 31, 2008)		42,706			42,706
Additional paid-in capital		14,984,021			14,984,021
Retained earnings
Unappropriated		(12,327,010	)		(14,346,279	)
Appropriated		1,521,997			1,521,997
Accumulated other comprehensive income		1,958,068			2,168,060
Total Stockholders' Equity		6,181,657			4,372,380
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	21,442,677		$	17,535,847

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

3

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 and 2008

(UNAUDITED)

	For the three months ended			For the nine months ended
	September 30			September 30
	2009		2008	2009	2008
NET SALES
Revenue from digitalization of television signals	$           2,560,278	$	1,698,059	$          6,367,291	$         4,960,035
Revenue from television advertising	94,984		143,430	239,287	288,354
Revenue from software development	33,621		78	33,621	18,735
	2,688,883		1,841,567	6,640,199	5,267,124
COST OF SALES
Cost of Sales - digitalization of television signals	(531,531)		(198,422)	(1,025,858)	(574,946)
Depreciation - digitalization of television signals	(1,156,772)		(1,061,699)	(3,433,479)	(2,864,892)
Cost of Sales - television advertising	(125,186)		(83,685)	(203,852)	(185,694)
	(1,813,489)		(1,343,806)	(4,663,189)	(3,625,532)
GROSS PROFIT	875,394		497,761	1,977,010	1,641,592
OPERATING EXPENSES
Selling, general and administrative expenses	(777,031)		(708,698)	(1,962,391)	(1,907,198)
Provision for doubtful debts	-		(6,351,225)	-	(6,351,225)
Amortization of convertible debt discount	-		-	-	(752,369)
Depreciation and amortization	(19,394)		(18,619)	(62,309)	(61,486)
Total Operating Expenses	(796,425)		(7,078,542)	(2,024,700)	(9,072,278)
GAIN (LOSS) FROM OPERATION	78,969		(6,580,781)	(47,690)	(7,430,686)
OTHER INCOME (EXPENSES)
Interest income	477		297	1,401	2,242
Other income	985,582		129,814	1,268,100	210,319
Interest expenses	(89,649)		(132,030)	(254,344)	(241,741)
Interest paid to related companies and directors	(5,676)		(6,537)	(17,438)	(23,105)
Other expenses	(500)		(1,191)	(2,225)	(43,781)
Total Other Income (Expenses) , net	890,234		(9,647)	995,494	(96,066)
NET GAIN (LOSS) BEFORE TAXES	969,203		(6,590,428)	947,804	(7,526,752)
Income tax income (expense)	1,118,824		(19,737)	1,071,466	392,570
NET GAIN (LOSS)	2,088,027		(6,610,165)	2,019,270	(7,134,182)
OTHER COMPREHENSIVE INCOME
Foreign currency translation (loss) gain	(224,626)		(112,800)	(209,992)	816,098
COMPREHENSIVE GAIN (LOSS)	1,863,401	$	(6,722,965)	$         1,809,278	$       (6,318,084)

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

4

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 and 2008

(UNAUDITED)

 

	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Total net gain (loss)		2,019,269			(7,134,182	)
Adjusted to reconcile net loss to cash provided by operating activities:
Depreciation-cost of sales		3,433,479			2,864,892
Depreciation and amortization		62,309			61,486
Provision for doubtful debts		(964,236	)		6,351,225
Amortization of convertible debt discount		-			752,369
Amortization on stock compensation		-			21,200
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable		(784,830	)		(443,724	)
Other receivables and prepaid expenses		(724,375	)		254,089
Due from a related company		(280,018	)		-
Inventories		488,470			(579,963	)
Deferred tax asset		-			123,982
Other assets		-			124,471
Increase (decrease) in:
Accounts payable		1,828,403			193,937
Other payables and accrued liabilities		515,292			517,201
Business tax payable		(1,627	)		(135,972	)
Value added taxes payable		-			45,530
Income tax payable		(850,476	)		(389,999	)
Net cash provided by operating activities		4,741,660			2,626,542
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(4,562,317	)		(2,706,013	)
Net cash used in investing activities		(4,562,317	)		(2,706,013	)
CASH FLOWS FROM FINANCING ACTIVITIES
Due to related companies		43,209			20,306
Proceeds from bills payable		949,626			-
Due to a stockholder		(387,061	)		10,710
Due to directors		187			44,394
Net cash provided by financing activities		605,961			75,410
EFFECT OF EXCHANGE RATE ON CASH		(202,768	)		(158,754	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		582,536			(162,815	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		436,062			334,410
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,018,598		$	171,595
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	247,650		$	-
Cash paid for income tax	$	-		$	-

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

5

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2009 (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

(A) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments consisting only of normal recurring accruals considered necessary to present fairly the Company's consolidated financial position at September 30, 2009, the consolidated results of operations for the nine months ended September 30, 2009 and 2008, and consolidated statements of cash flows for the nine months ended September 30, 2009 and 2008. The consolidated results for the nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2009. These consolidated financial statement should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2008 appearing in the Company's annual report on Form 10-K as filed with the Securities and Exchange Commission.

(B)  Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements for the nine months ended September 30, 2009 include the unaudited financial statements of China Digital Media Corporation (“CDMC”) and its wholly owned or controlled subsidiaries, China Digimedia Holding Limited (“CDHL”), Arcotect (Guangzhou) Limited (“AGL”), Guangdong M-Rider Media Company (“M-Rider”), its 100% variable interest entity (“VIE”) in Guangdong HuaGuang DigiMedia Culture Development Limited (“HuaGuang”), and Arable Media Limited (“Arable”) and Arable (Guangzhou) Limited (“Arable GZ”) (collectively, “the Company”).

The accompanying unaudited condensed consolidated financial statements for the nine months ended September 30, 2008 include the financial statements of CDMC and its wholly owned subsidiaries, CDHL, AGL, M-Rider, Arable, Arable GZ, and its 100% VIE in HuaGuang.

All significant inter-company balances and transactions have been eliminated in consolidation.

(C)  Revenue Recognition

Digitalization of Television Signals

The Company entered into an agreement with Nanhai Network Company to assist its subscribers on the conversion of television signals from analog into digital by providing set-top-box (“STB”) and smart cards to the subscribers in Nanhai City on a lease basis. The Company is entitled to a portion of fees payable by the existing subscribers under a subscription agreement entered into between the subscribers and the Nanhai Network Company. Revenue is recognized on a straight line basis in accordance with the terms of the subscription agreement. The Company also sells STB and smart cards to new subscribers. Revenue arising from these services is recognized when the subscriber is invoiced for the STB and smart cards upon the completion of installation works.

In addition, the Company is entitled to be reimbursed for its operating expenses from Network Company in accordance to the subscription agreement. Revenue arising from costs reimbursement is recognized when the amounts are duly agreed upon between the Company and Network Company.

Television Advertising Sales

The Company acts as an advertising agent for certain television channels by selling advertising air time spaces and television program backdrops to customers. The Company's advertising services revenue is derived from billings that are earned when the advertisements are placed and revenue is recognized as the media placements appear.

Software Development

The Company provides various information technology professional services to its customers based on a negotiated fixed-price time and materials contract. The Company recognizes services-based revenue from all of its contracts when the services have been performed, the customers have approved the completion of the services and invoices have been issued and collectibility is reasonably assured.

(D)  Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is provided on a straight-line basis, less estimated residual value over the assets’ estimated useful lives. The estimated useful lives are as follows: (a) STB and smart cards - 5 years; (b) Motor vehicles - 10 years; and (c) Furniture, fixtures and equipment - 5 and 8 years.

Depreciation of STB

As required by SAB11:B, depreciation and amortization for property and equipment directly attributed to the generation of revenue are classified under “Cost of Sales”. Accordingly, depreciation of STB and smart cards of the Company is included in “Cost of Sales”.

(E) Valuation of Financial Instruments

Statement of Financial Accounting Standards No. 107, "Disclosure About Fair Value of Financial Instruments," requires certain disclosures regarding the fair value of financial instruments. Fair value of financial instruments is made at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values.

The carrying value of cash and cash equivalents, accounts receivables (trade and others), accounts payables (trade and related parties) and accrued liabilities approximate their fair value because of the short-term nature of these instruments. The Company places its cash and cash equivalents with what it believes to be high credit quality financial institutions. The Company controls credit risk related to accounts receivable through credit approvals, credit limit and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

The Company’s major operation is in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the United States dollars (“US$”) and the Chinese Renminbi (“RMB”). Nevertheless, the Company does not believe that its foreign currency exchange rate fluctuation risk is significant, especially if the PRC government allows only gradual currency fluctuation so as to maintain the relative stability of RMB.

The Company accounts for non-hedging contracts that are indexed to, and potentially settled in, its own common stock in accordance with the provisions of Emerging Issues Task Force 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). These non-hedging contracts accounted for in accordance with EITF 00-19 include freestanding warrants to purchase the Company’s common stock as well as embedded conversation features that have been bifurcated from the host contract in accordance with the requirements of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). Under certain circumstances that could require the Company to settle these equity items in cash or stock, and without regard to probability, EITF 00-19 could require the classification of all or part of the item as a liability and the adjustment of that reclassified amount to fair value at each reporting period, with such adjustments reflected in the line item of change in valuation of derivative as other income (expenses) in the statements of operations.

The Company has issued 4% secured convertible debentures in a face amount of US$3,100,000 which are due and payable in full in 18 months from their issuance. As fixed prices are set for the conversion prices of such convertible debentures and the attached warrants, the Company is in a position to be sure it had adequate authorized shares for the future conversion of convertible debentures and warrants. Therefore, no embedded derivatives and warrants are required to be recorded at fair value and marked-to-market at each reporting period.

(F)  Recent Accounting Pronouncements

In October 2008, the Financial Accounting Standards Board ("FASB") issued FSP SFAS No. 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active" (FSP SFAS 157-3), which clarifies the application of SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), in an inactive market and provides an example to demonstrate how the fair value of a financial asset is determined when the market for that financial asset is inactive.  FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued.  The adoption of this standard did not have any impact on the Company's results of operations, cash flows or financial positions for the year ended December 31, 2008.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162").  SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation and presentation of financial statements in accordance with generally accepted accounting principles.  This statement became effective in November 2008.  Adoption of SFAS 162 did not have a material impact on the Consolidated Financial Statements.

In February 2008, the FASB issued FSP SFAS No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP SFAS 157-2").  FSP SFAS 157-2 delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities that are not remeasured at fair value on a recurring basis (at least annually) until January 2009.  The implementation of FSP SFAS 157-2 did not have a material impact on the Consolidated Financial Statements.

6

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2009 (UNAUDITED)

NOTE 2 - SEGMENT INFORMATION

The Company operates in four reportable segments; digitalization of television signals, television advertising sales, software development, and investment in television series. The accounting policies of the segments are the same as described in the summary of significant accounting policies. The Company evaluates segment performance based on income from operations. All inter-company transactions between segments have been eliminated on consolidation. As a result, the components of operating income for one segment may not be comparable to another segment. The following is an unaudited summary of our segment information for the nine months ended September 30, 2009 and 2008:

	Digitalization									Investments
	of Television			Television			Software			in Television
	Signals			Advertising			Development			Series			Total
2009
Revenues	$	6,367,291		$	239,287		$	33,621		$	-		$	6,640,199
Gross profit		1,907,954			35,435			33,621			-			1,977,010
Net income (loss)		2,773,396			(54,862	)		(142,625	)		(10,285	)		2,565,624
Total assets		18,800,158			984,207			1,553,554			104,758			21,442,677
Capital expenditure		4,515,325			8,430			38,108			454			4,562,317
Depreciation and amortization	$	3,472,757		$	-		$	22,748		$	283		$	3,495,788
2008
Revenues	$	4,960,035		$	288,354		$	18,735		$	-		$	5,267,124
Gross profit		1,520,196			102,661			18,735			-			1,641,592
Net (loss) Income		(5,762,569	)		28,554			64,511			(14,922	)		(5,684,426	)
Total assets		18,811,375			583,467			4,271,394			107,189			23,773,425
Capital expenditure		2,416,927			12,429			154,316			122,341			2,706,013
Depreciation and amortization	$	2,903,993		$	-		$	15,313		$	7,072		$	2,926,378

A reconciliation is provided for unallocated amounts relating to corporate operations which is not included in the segment information.

	2009		2008
Total net income (loss) for reportable segments	$	2,565,624	$	(5,684,426	)
Unallocated amounts relating to corporate operations
Interest expenses		239,889		240,473
Amortization of convertible debt discount		-		752,369
Interest paid to related companies and directors		17,438		23,105
Administration expenses		233,246		365,685
Professional fees		53,555		51,382
Others		2,225		16,743
Total net income (loss)	$	2,019,270	$	(7,134,182	)

NOTE 3 - EARNINGS PER SHARE

As of September 30, 2009, the Company has outstanding:

-   42,706,363 shares of common stock;

-   1,875,000 shares of preferred stock;

-   6,888,882 shares of common stock to be issued upon conversion of convertible debenture;

-   warrants to purchase 6,888,882 shares of common stock at an exercise price of $0.80 per share, expire in November 2012;

-   warrants to purchase 6,888,882 shares of common stock at an exercise price of $1.20 per share, expire in November 2012; and

-   warrants to purchase 3,444,441 shares of common stock at an exercise price of $2.25 per share, expire in November 2012.

In accordance with paragraph 40 and 41 of SFAS 128 and EITF 03-6, basic and diluted earnings per share on a two classes method for the nine months ended September 30, 2009 and 2008 are calculated as follows:

	2009		2008
Net Gain (Loss)	$	2,019,270	$	(7,134,182	)
Basic - 2 classes method
Gain (Loss) available to common stockholders	$	2,019,270	$	(7,134,182	)
Weighted-average common stock outstanding		42,706,363		42,556,463
Basic earnings per share - Common Stock		0.05		(0.17	)
Diluted
Gain (loss) available to common stockholders	$	2,019,270	$	(7,134,182	)
Diluted weighted-average common stock outstanding		42,706,363		42,556,463
Diluted earnings per share		0.05		(0.17	)

Warrants to purchase 6,888,882 shares of common stock at $0.80 per share, 6,888,882 shares of common stock at $1.20 per share and 3,444,441 shares of common stock at $2.25 per share were outstanding as of September 30, 2009 but were not included in the computation of diluted earnings per share because the warrants’ exercise price was greater than the market price of the common shares.

NOTE 4 - COMMITMENTS AND CONTINGENCIES

Contingencies

The Company accounts for loss contingencies in accordance with SFAS 5 “Accounting for Loss Contingencies”, and other related guidance.  Set forth below is a description of certain loss contingencies as of December 31, 2005 and management’s opinion as to the likelihood of loss in respect of each loss contingency.

On May 24, 2005, a Complaint was filed against us, among others, in the United States District Court for the Southern District of New York, in a matter captioned as “Ziegler, Ziegler & Associates LLP and Scott Ziegler, Plaintiffs, v. China Digital Media Corporation and John Does 1-10, Defendants.” In the Complaint, the Plaintiffs allege, among other things, that we and John Does 1-10 used Plaintiff Scott Zeigler’s e-mail address and Plaintiff Ziegler, Ziegler & Associates, LLP’s internet domain name to distribute promotional information about us over the internet. The Plaintiffs seek a several types of relief, including damages in an amount not less than $1,250,000. Pre-trial discovery has commenced in the matter.  The file number of the civil action is 05 CV 4960.

On August 11, 2009, a charge was filed by Shenzhen Coship Electronics Ltd. (“Coship”), a STB supplier of the Company, against AGL for recovering the outstanding balance of $133,235 for the STB purchased from Coship and $179,355 penalty in accordance with the purchase agreement at the court of Shenzhen, China.   Both parties are forming an out of court settlement agreement for AGL to repay $133,235 to Coship whereas Coship will waive the penalty charge of $179,355.  Accordingly, no provision for the penalty was made in the financial statements as of September 30, 2009.

NOTE 5 - COMMON STOCK

During the quarter ended September 30, 2009, the Company did not issue any shares.

NOTE 6 - CONVERTIBLE DEBENTURE

The following is a summary of debenture as at September 30, 2009 and December 31, 2008.

		Sep 30,	Dec 31,
		2009	2008
		(Unaudited)	(Audited)
$2,150,000 Convertible Debentures, net of $135,000 conversions and unamortized discount of $0 as of September 30, 2009 and December 31, 2008 at 13% interest per annum for the first quarter and at 10% interest per annum due each quarter end in 2009, 2010 and expired at June 30, 2010.
	$	2,015,000	$  2,015,000
$500,000 Convertible Debentures, net of unamortized discount of $0 as of September 30, 2009 and December 31, 2008 at 4% interest per annum for the period of January 1 to May 17, 2008 due April 30, 2009, and 10% interest per annum for the period of May 18 to December 31, 2008 due October 31, 2009, and at 13% interest per annum for the year 2009 due at the end of 2009, and at 14% interest per annum for the year 2010 due at the end of 2010 upon expiry.
		500,000	500,000
$200,000 Convertible Debentures, net of unamortized discount of $0 as of September 30, 2009 and December 31, 2008 at 4% interest per annum due May 2008, in default
		200,000	200,000
$150,000 Convertible Debentures, net of unamortized discount of $0 as of September 30, 2009 and December 31, 2008 at 4% interest per annum due May 2008, in default
		150,000	150,000
$100,000 Convertible Debentures, net of unamortized discount of $0 as of September 30, 2009 and December 31, 2008 at 4% interest per annum due June 2008, in default
		100,000	100,000
	$	2,965,000	$    2,965,000

For the fiscal quarter ended September 30, 2009, the Company has convertible debentures with total value of $2.965 million outstanding. The aforesaid convertible debentures were issued pursuant to the private equity financing where the Company sold a total 31 units of securities. Each unit consists of (i) an eighteen-month 4% interest bearing convertible debenture in the principal amount of $100,000, convertible at $0.45 per share, (ii) a six-year Class A warrant to purchase 222,222 shares of the Company’s common stock, par value $0.001 per share at an exercise price of $0.80 per share, a (iii) six-year Class B warrant to purchase 222,222 shares of the Company’s common stock at an exercise price of $1.20 per share, and (iv) a six-year Class C warrant to purchase 111,111 shares of the Company’s common stock at an exercise price of $2.25 per share. The securities issuable upon conversion of the debenture and exercise of the warrants are eligible for certain registration rights.

The Company entered into an agreement with one of the debenture holders in December 2008 for extending the $2,015,000 debenture to June 30, 2010.  The debenture interest rate was increased to 10% for the period from May 18, 2008 to December 31, 2008, and 13% for the period from January 1, 2009 to December 31, 2009, and 14% for the period from January 1, 2010 to June 30, 2010.  The conversion price was reduced to $0.25 per share.

The Company entered into another agreement with the same debenture holder in May 2009 for a reduction of debenture interest rate to 10% over the extended period from April 1, 2009 to June 30, 2010 with an early repayment of principal of 5% on December, 31, 2009.

The Company entered into an agreement with one of the debenture holders in March 2009 for extending the $500,000 debenture to December 31, 2010.  The debenture interest rate was increased to 10% for the period from May 18, 2008 to December 31, 2008, and 13% for the period from January 1, 2009 to December 31, 2009, and 14% for the period from January 1, 2010 to December 31, 2010.  The conversion price was reduced to $0.25 per share.

NOTE 7 – BANK FACILITY

As of September 30, 2009, the Company withdrew bills of exchange to a STB supplier totalled $950,626 from the Zhangjiang Commercial Bank (the “Bank”).  The Bank had granted a total facility of $3,071,253 to the Company in August 2009 to finance the purchase of STB for completing the migration in Nanhai.  Such facility is fully pledged against the account receivable from Network Company on subscription fee income.  The Company bears the interest expense in discounting the bills to the bank from the STB supplier at 2.88% per annum.

NOTE 8 - RELATED PARTY TRANSACTIONS

As of September 30, 2009, the Company owed to two directors $285,829 for short-term advances.  Interest is charged at 6% per annum on the amount owed.

As of September 30, 2009, the Company owed to related companies $497,764 for short-term unsecured advances made. Interest is charged at 6% per annum on the amount owed.

As of September 30, 2009, the Company owed to a stockholder $9,270 for short-term advances made.  Interest is charged at 6% per annum on the amount owed.

As of  September 30, 2009, the Company owed from a related company $280,018  for unamortized prepaid software development and webpage design fee.  During the period, the Company prepaid $336,134 in total for such fee to the related company for a one year contract..

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

We are hereby providing cautionary statements identifying important factors that could cause our actual results to differ materially from those projected in forward looking statements made in this quarterly report on Form 10-Q. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as "likely will result", "are expected to", "will continue", "is anticipated", "estimated", "intends", "plans" and "projection") are not historical facts and may be forward-looking statements and involve estimates and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements.

We caution that the factors described herein, as well as the factors described generally in our Form 10-K for the year ended December 31, 2008, and specifically the factors described in such Form 10-K in the section entitled “Item 1. Business - Risk Factors”-, could cause actual results to differ materially from those expressed in any forward-looking statements and that the investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events or circumstances. Consequently, no forward-looking statement can be guaranteed.

New factors emerge from time to time, and it is not possible for us to predict all such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Overview

China Digital Media Corporation (”CDMC”) was previously known as HairMax International, Inc. (“Hairmax”), a Nevada corporation incorporated in 1987. Arcotect Digital Technology Limited, a corporation organized under the laws of Hong Kong, consummated a reverse merger with Hairmax in March, 2005, and Hairmax subsequently changed its name to China Digital Media Corporation. With the termination of the original businesses of Hairmax, all of China Digital Media Corporation’s businesses are now located in the People’s Republic of China (the “PRC” or “China”). Arcotect Digital Technology Limited has changed its name to China Digimedia Holdings Limited (“CDHL”), and is a wholly-owned subsidiary of CDMC.

We are engaged in the business of providing services to the television broadcasting and media industry in China through operations, partnerships and investments. The two main businesses of CDMC are:

-   Through a subsidiary, Arcotect (Guangzhou) Limited (“AGL”), converting analog cable television subscribers to digital television and providing various value added and broadband services to the digital subscribers; and

-   Television advertising sales.

The Company’s business plan is to strengthen its branding and to enlarge its presence and involvement in the media industry. The Company will continue to focus its resources toward replicating its successful migration model to other cities of China, while seeking opportunities to alliance with strong strategic partners.

Cable TV operations and digital broadcast technology development

AGL, a wholly owned foreign subsidiary of CDMC incorporated in China, is the sole contractor and operator of digital television (“DTV”) services in Nanhai, Guangdong Province, a city with over 430,000 residential and commercial cable television subscribers.

On February 6, 2004, we signed a 20-year Co-operative Agreement for Total Migration into DTV System for the Nanhai District and subsequently signed a supplementary agreement on July 8, 2005 (collectively, the “Co-operative Agreements”) with Nanhai Network Company, a city-owned cable network operator in Guangdong Province. Pursuant to the Co-operative Agreements, the Company was responsible for migrating all cable television subscribers in Nanhai from an analog to a digital system (“Migration”) by the end of 2008. Owing to certain technical issues of the local network upgrade of the Nanhai Network Company, the Migration completion date has been re-scheduled to the end of 2009. The Company entered into three supplementary agreements with the Nanhai Network Company in May and December 2007, and in February 2009 pursuant to the Co-operative Agreements, for re-scheduling the Migration completion date to the end of 2008 and then end of 2009.    As of September 30, 2009, the Company has migrated about 338,000 subscribers into the digital system and the migration program is on schedule.

According to the Co-operative Agreements, AGL is entitled to share the subscription fees paid by all cable television subscribers as well as by DTV subscribers for basic and additional services, including pay-TV services, VAS, and to receive the subscription fee for any additional STBs.

Under the Co-operative Agreement, the Company is a sole contractor and operator of digital TV in Nanhai. The Company is responsible for supplying all subscribers with a digital set-top-box on a lease basis to subscribers. Subscribers must pay for an additional set-top-box by purchasing it from the Company. The Company is also responsible for providing operational support services including migration planning, marketing and sales, software development, customer service, repair and maintenance and logistics administration. The Company’s proprietary operating system automates many of the processes, such as database management, billing, work orders and inventory control, and assists in the operation of a 24/7 call center for technical support and customer care. The city-owned cable company retains management of the broadcasting system and the fiber-optic network and is responsible for compliance with national broadcasting policies.

The broadcast system that decrypts the signal with the Company’s set-top-box and appropriate smart cards can carry up to 800 digital channels of pay-TV programs and value added multimedia services. Currently, the services consist of 152 channels, including a 46-channel basic package , 106 pay channels and 3 high definition TV channels bundled into various value added packages, such as Life & Leisure, World Sports, News, Drama and Family.

The Company has deployed an IP (Internet Protocol) based set-top-box which was developed by its subsidiary, Arable Media Limited, a software developer specialized in middleware products and applications for digital TV set-top box and broadcasting technologies. The Company believes the advanced set-top-box will enable the Company to provide additional value added services which can be deployed in the future; such as targeted advertising, interactive TV programs, online shopping and console games, as well as interactive education services.

TV advertising sales

M-Rider, a company incorporated in China and 100% owned by the Company under a trust arrangement, is an advertising sales company engaged in the distribution of television commercials. The Company is responsible for reselling commercial airtime to international and local advertising customers, either directly or through agents and receiving agency fees and services fee. The Company has many years of experience in providing consultancy and media planning services to clients, and assisting them to deliver their messages precisely and professionally to their targeted audiences efficiently. In addition, the Company believes that it can manage advertising resources more effectively to enhance value of the advertising space.

In February, 2008, M-Rider signed a five year sole agent service agreement (the “Sole Agent Agreement”) to provide consultation services and manage advertising time slots exclusively with China Yellow River TV Station (“CYR Station”), a television station located in Shanxi Province in China which has a population of over 30 million, starting from January 1, 2008. In addition, M-Rider has a priority to renew the Agreement for an additional five years upon expiration of the Sole Agent Agreement on December 31, 2011.

According to the Sole Agent Agreement, M-Rider shall act as the sole agent and provide consultation services for media planning advisory, sales analysis and strategic planning to CYR Station. In return, M-Rider will get a media services fee based on the revenue generated and a performance bonus at the end of each fiscal year.

The Company relied on two suppliers for approximately 92% of its purchases in the first three quarters of 2009 for the Nanhai digitalization of TV system in the Nanhai project. As of September 30, 2009, accounts payable to these suppliers amounted to $6,434,811 and $573,544 for the Nanhai project.

At present, some of our targeted businesses are subject to certain governmental restrictions in the PRC. In order to enable us to invest in certain media sectors such as TV advertising and content productions before government regulations and policies in this field are opened to foreign investors, one of our directors holds the equity interest of HuaGuang while HuaGuang holds the equity interest of M-Rider on behalf of the Company. We are therefore not the direct owner of the programming and advertising operations. We anticipate that this arrangement will be continued until further relaxation of the broadcasting policy in China.

8

RESULTS OF OPERATIONS

Statements of Operations Items:

Sales

Total net sales for the three months ended September 30, 2009 increased by $847,316 or 46% to $2,688,883 from $1,841,567 for the same period ended September 30, 2008. Total net sales for the nine months ended September 30, 2009 increased by $1,373,075 or 26% to $6,640,199 from $5,267,124 for the same period ended September 30, 2008. The increase in total net sales was due to the increase in cable TV subscription income owing to the upward adjustment of basic cable TV subscription fee in Nanhai starting June 2008.  The number of basic and additional registered subscribers increased from 468,241 as of September 30, 2008 to 498,079 as of September 30, 2009.

Gross Profit

Gross Profit for the three months ended September 30, 2009 increased by $377,633or 76% and for the nine months ended September 30, 2009 increased by $335,418 or 20% as compared with the same periods last year because of the increase in sales of additional STB and the increase in subscription fee income as a result of increased DTV subscribers in the third quarter.

Expenses

Selling, general, administrative and depreciation and amortization (not related directly to generation of revenue) expenses for the three months ended September 30, 2009 decreased by $6,282,117or 89% to $795,425 and for the nine months ended September 30, 2009 decreased by $7,047,578 or 78% to $2,024,700 in comparison with the same period ended September 30, 2008.  The decrease in these expenses was due to the amortization of convertible debenture and the provision for doubtful debt on long term account receivable booked last year was not incurred this year.

Net Gain

Net gain after tax was $2,088,027 for the three months period ended September 30, 2009, and $2,019,270 for the nine months period ended September 30, 2009, compared to a net loss of $6,610,165 and $7,134,182 respectively for the same periods ended September 30, 2008. The increase in net gain was because of the increase in DTV subscription fee as a result of the increase in number of DTV subscribers in Nanhai, the decrease in provision of doubtful debts, the reversal of bad debts provision of $964,236, and the reversal of corporate income tax provision of $1,140,751 during the quarter.  The management has considered that owing to the recovering global financial environment, the possibility of long term account receivable being uncollectible is lower than that of the beginning of this year.  Therefore, part of the long term receivable reserved last year should be re-instated to reflect the fair value of the asset of the Company.  Also, the AGL was granted the status of  the Certified Software Enterprise in China at the end of 2008 where AGL is entitled to a two-year exemption and three year reduction for corporate income tax.  Therefore, a portion of the corporate income tax is reversed accordingly.

Balance Sheet Items:

Current Assets

Current assets of the Company increased by $2.4 million to $5.4 million during the nine months of 2009 mainly due to the increase in bank balance for security deposit for the bills issued, increase in amount due from a related company as a result of prepaid software development fee, increase in account receivable balance as the collection of the subscription fee income from the Network Company in September was delayed, reversal of provision of doubtful debt, and the increase in value added tax recoverable as the tax credit had not been utilized until next year owing to the change of tax regulation in China . As the Company utilized most of its cash on DTV migration, it has maintained a low level of cash balance of $0.7 million.

Property and Equipment, Net

The net decrease in property and equipment of the Company of $1.1 million represented an increase in purchases of STBs during the first nine months of 2009.

Current Liabilities

Current liabilities of the Company increased by $2.3 million to $13.1 million during the first nine months of 2009. The increase was mainly attributable to the classification of a portion of the Company’s outstanding debentures amounting to $2,015,000 from long term to current liabilities.

Liquidity and Capital Resources

On September 30, 2009, we had cash of $733,710 and a working capital deficit of $7,666,888. This compares with cash of $436,062 and a working capital deficit of $7,805,558 at December 31, 2008. The increase in cash was mainly due to the bank financing obtained during the quarter.

Operating activities had a net generation of cash in the amount of $4,741,660 during the nine months ended September 30, 2009 (2008: $2,626,542) reflecting an excess of revenues over expenditure.

Net cash used in investing activities for the nine months ended September 30, 2009 was $4,562,317 as compared with net cash used in investing activities of $2,706,013 for the nine months ended September 30, 2008. The increase in net cash used in investing activities was due to the increase in purchases of STBs in the first nine months of this year.

Net cash provided by financing activities for the nine months ended September 30, 2009 was $650,961 representing the increase in bank financing in the form of bills payable which is offset by the repayment to a major shareholder for a unsecured loan which was financed by another unsecured loan provided by an individual third party  (2008: provided by financing activities $75,410 ).

We continued to receive cash from Nanhai Network Company according to the project schedule and plan of television digitalization migration. The Company's investment in STBs and smart cards remained the substantial accounts payable at September 30, 2009. For further business expansion and acquisition, the Company is considering various financing methods for funding, although there is no assurance that the Company will be able to raise additional funding on favorable terms, if at all.

On a long-term basis, liquidity is dependent on continuation and expansion of operations, receipt of revenues, additional infusions of capital and debt financing. Our current capital and revenues are not sufficient to fund further acquisition and business expansion.  The Company is planning to raise capital through debt financing and equity raising from banks, potential investors and partners. However, if the Company is unable to raise additional capital, its growth potential is more likely to be affected.

The Company issued a total of $3.1 million in convertible debentures in November and December 2006, which provided net cash of $2,965,000, which matured in May and June 2008.  Due to the Company’s current financial situation with most of the Company’s cash being utilized to make the upfront investment for the Migration, the Company did not have enough cash to repay the debentures.  The Company negotiated with certain debenture holders to extend the debentures.  As of the date of this report, the Company has entered into agreement with two major debenture holders holding $2,515,000 in debentures that provided for the extension of their debentures to June 2010 and December 2010.

9

Off-Balance Sheet Transactions

The Company does not engage in material off-balance sheet transactions.

Foreign Currency Translation Risk

The Company’s major operation is in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the United States dollars (“US$”) and the Chinese Renminbi (“RMB”). Provided that the RMB exchange rate against the US$ maintains at a low degree of volatility, the Company does not believe that its foreign currency exchange rate fluctuation risk is significant.

The financial statements of the subsidiaries (whose functional currency is HK$ or RMB) are translated into US$ using the closing rate method. The balance sheet items are translated into US$ using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the year. All exchange differences on currency translations are recorded within equity. Translation loss for the nine months ended September 30, 2009 was $224,626.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information to be reported under this item is not required of smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules a13d-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive officer and chief financial officer have concluded that the Company’s current disclosure controls and procedures are adequate and effective to ensure that material information relating to the Company was made known to them by others, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

Changes in Internal Control

There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

10

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On May 24, 2005, a Complaint was filed against us, among others, in the United States District Court for the Southern District of New York, in a matter captioned as “Ziegler, Ziegler & Associates LLP and Scott Ziegler, Plaintiffs, v. China Digital Media Corporation and John Does 1-10, Defendants.” In the Complaint, the Plaintiffs allege, among other things, that we and John Does 1-10 used Plaintiff Scott Zeigler’s e-mail address and Plaintiff Ziegler, Ziegler & Associates, LLP’s internet domain name to distribute promotional information about us over the internet. The Plaintiffs seek a several types of relief, including damages in an amount not less than $1,250,000. We are currently awaiting a decision from the Court on our motion to dismiss the case. The file number of the civil action is 05 CV 4960.

The Company contests the allegations of the Plaintiffs and has retained counsel admitted to practice in the U.S. District Court for the Southern District of New York to vigorously defend the action. The Company did not hire a stock promoter or a spammer to distribute the alleged e-mails, and the alleged emails themselves recite that they were not paid for by the Company or an affiliate. We also do not believe that United States District Court for the Southern District of New York has jurisdiction over us to even hear this case. We believe we have no liability in this matter.

On August 11, 2009, a charge was filed by Shenzhen Coship Electronics Ltd. (“Coship”), a STB supplier of the Company, against AGL for recovering the outstanding balance of $133,235 for the STB purchased from Coship and $179,355 penalty in accordance with the purchase agreement to the court of Nanshan Shenzhen, China.   Both parties are forming an out of court settlement agreement at the final stage for AGL to repay $133,235 to Coship whereas Coship will waive the penalty charge of $179,355.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended September 30, 2009, the Company did not issue any securities.

Item 3. Defaults Upon Senior Securities

Owing to its tight financial situation, the Company did not redeem the debentures that matured in May and September 2008 but offered extension terms to all the debenture holders.  The Company paid the debenture interest due on May 17, 2008 and December 31, 2008 during the first quarter to the debenture holders who agreed to the extension of debenture.  As of date of this report, two out of five debenture holders have accepted the extension offer.  The remaining debentures are in default.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

EXHIBIT NO	DESCRIPTION OF EXHIBIT
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

11

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 MEDIA CORPORATION

(Registrant)

Date: November 13, 2009

/s/ Ng Chi Shing

Ng Chi Shing

Chief Executive Officer

Date: November 13, 2009

/s/ Ng Chi Shing

Ng Chi Shing

Chief Financial Officer