China Digital Animation Development (MAUG) 10-Q 2010 Q2 Quarterly report

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 December 31, 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:

February 22, 2010

Common Voting Stock: 20,000,000

CHINA DIGITAL ANIMATION DEVELOPMENT, INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTH ENDED DECEMBER 31, 2009 AND YEAR ENDED JUNE 30,  2009

		PAGE
FINANCIAL STATEMENTS:
	CONSOLIDATED BALANCE SHEETS	2-3
	CONSOLIDATED STATEMENTS OF INCOME	4
	CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY	5
	CONSOLIDATED STATEMENTS OF CASH FLOWS	6 & 7
NOTES TO FINANCIAL STATEMENTS		8 - 19

1

CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

FOR THE PERIOD ENDED DECEMBER 31, 2009 AND YEAR ENDED JUNE 30, 2009

	2009
	DECEMBER 31		JUNE 30
	(Unaudited)		(Audited)
ASSETS
Current Assets:
Cash and Cash Equivalents	$	1,069,023	$	2,282,786
Accounts Receivable, net		1,113,182		1,388,599
Employee Advances		4,287		2,234
Advanced to Suppliers		-		1,443,440
Interest Receivable		55,013		54,786
Prepaid Expenses		1,426,838		84,202
Total Current Assets		3,668,343		5,256,047
Non-current Assets
Property, Plant & Equipment, net		4,566,790		3,929,257
Land Use Right and Other Intangible Assets, net		2,960,290		1,106,870
Long Term Investment		2,200,500		2,191,457
Total Non-current Assets		9,727,580		7,227,584
Total Assets	$	13,395,923	$	12,483,631

 

" Continued on next page"

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

2

CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

FOR THE PERIOD ENDED DECEMBER 31, 2009 AND YEAR ENDED JUNE 30, 2009

	DECEMBER 31		JUNE 30
	2009		2009
	(Unaudited)		(Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable	$	71,255	$	29,219
Advance from Customers		-		-
Payroll  Payable		1,817		-
Tax Payable		138,737		214,471
Accrued Expenses and Other Payable		67,509		64,964
Total Current Liabilities		279,318		308,654
Long-Term Liabilities:
Loan Payable		66,000		5,000
Total Long-Term Liabilities		66,000		5,000
Total Liabilities		345,318		313,654
Stockholders' Equity:
Common Stock, par value $0.001, 500,000,000 authorized
20,000,000 shares issued and outstanding		20,000		20,000
Additional Paid in Capital		6,223,717		6,223,717
Accumulated Other Comprehensive Income		1,814,442		1,761,978
Reserved Fund		705,738		341,524
Retained Earnings		4,286,708		3,822,758
Total Stockholders' Equity		13,050,605		12,169,977
Total Liabilities and Stockholders' Equity	$	13,395,923	$	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

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008

(Unaudited)

	Three Months Ended					Six Months Ended
	December 31,					December 31,
	2009		2008			2009			2008
Revenues	$	1,234,375	$	1,371,034		$	2,378,290		$	2,504,968
Cost of Goods Sold		697,413		139,670			918,764			313,135
Gross Profit		536,962		1,231,364			1,459,526			2,191,833
Operating Expenses:
Sales Expenses		69,742		100,503			134,373			154,713
General and Administrative Expenses		196,367		187,729			365,979			285,657
Total Operating Expenses		266,109		288,232			500,352			440,370
Income from Operations before other Income and (expenses)		270,853		943,132			959,174			1,751,463
Other Income and (Expense):
Interest income		83,952		5,960			168,548			13,045
Gains from Disposal of Fixed Assets		-		-			(26	)
Gain from Investment		-		-			-			-
Other expense		-		(50	)					(50	)
Total Other Income and (Expense)		83,952		5,910			168,522			12,995
Income Before Income Taxes		354,805		949,042			1,127,696			1,764,458
Provision for Income Taxes		103,653		242,728			299,532			457,905
Income After Provision for Income Taxes		251,152		706,314			828,164			1,306,553
Gain from Operations of Discontinued Component (Net of Taxes)		-		33,477			-			32,816
Net Income before Minority Interest		251,152		739,791			828,164			1,339,369
Minority Interest		-		3,482			-			17,268
Net Income	$	251,152	$	736,309		$	828,164		$	1,322,101
Basic and diluted income per share		0.01		0.04			0.04			0.07
Weighted average common shares outstanding		20,000,000		20,000,000			20,000,000			20,000,000

 

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

 

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 6 months										828,164					828,164					828,164
Reserved Fund										(364,214	)		364,214							-
Other comprehensive income, net of tax
Foreign currency translation adjustment								52,464							52,464					52,464
Decrease in Minority Interest																	-			-
Comprehensive income															880,628
Balance - December 31, 2009		20,000,000	$	20,000	$	6,223,717	$	1,814,442	$	4,286,708		$	705,738			$	-			13,050,605

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

5

CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008

(Unaudited)

	DECEMBER 31
	2009			2008
Cash Flows From Operating Activities:
Net Income	$	828,164		$	1,342,100
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation and Amortization Expense		242,582			177,039
(Increase) or Decrease in Current Assets:
Accounts Receivable		275,417			(554,203	)
Inventories		-			(426,103	)
Prepaid Expenses		(1,342,636	)		9,211
Advanced to Suppliers		1,443,440			291,613
Interest Receivable		(227	)		-
Employee Advanced		(2,053	)		143,100
Increase or (Decrease) in Current Liabilities:
Accounts Payable		42,036			4,312
Advanced from Customers		-			80,313
Taxes Payable		(75,735	)		364,799
Payroll  payable		1,817			(510	)
Accrued Expenses and Other Payables		2,545			(117,455	)
Net Cash Provided by Operating Activities		1,415,350			1,314,216
Cash Flows From Investing Activities:
Purchases of Property and Equipment		(820,723	)		(1,328,064	)
Proceeds from Sale of Fixed Assets		-			-
Purchases of Intangible Assets		(1,912,803	)		-
Investment-Long Term		(9,043	)		-
Net Cash Used in Investing Activities		(2,742,569	)		(1,328,064	)

"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

FOR THE SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008

(Unaudited)

	DECEMBER 31
Cash Flows From Financing Activities:	2009			2008
Proceeds from Borrowing		61,000			-
Net Cash Used in Financing Activities		61,000			-
Effect of exchange rate changes on cash and cash equivalents		52,456			16,959
Increase (Decrease) in Cash and Cash Equivalents		(1,213,763	)		3,111
Cash and Cash Equivalents -Beginning Balance		2,282,786			4,740,675
Cash and Cash Equivalents - Ending Balance	$	1,069,023		$	4,743,786
Supplemental Disclosures of Cash Flow Information:
Cash Paid During The Years for:
Interest Paid		-			-
Income Taxes Paid	$	175,263		$	285,834

"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

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.

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.

9

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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.

10

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Intangible assets

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 December 31, 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.

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents and accounts and other receivables. As of December 31, 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.

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 December 31, 2009.

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2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Reserve fund

Before June 20, 2006, Hairong was required to transfer 15% of its profit after taxation, as determined in accordance with Chinese accounting standards and regulations, to the surplus reserve fund. Subject to certain restrictions set out in the Chinese Companies Law, the surplus reserve fund may be distributed to stockholders in the form of share bonus issues and/or cash dividends. After June 30, 2006, such reserve is no longer mandatory under the Chinese Law.

Comprehensive income

Comprehensive income is defined to include changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements.

Comprehensive income includes net income and the foreign currency translation gain, net of tax.

New accounting pronouncements

In 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.

13

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

New accounting pronouncements

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.

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 December 31, 2009 and June 30, 2009, the net accounts receivable was $1,113,182 and $1,388,599, respectively.  The allowance for bad debts was $15,528 and $15,646 as December 31, 2009 and June 30, 2009, respectively.

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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 were $0 and $1,443,440 as of December 31, 2009, and June 30, 2009, respectively.

5.    PREPAID EXPENSE

As of December 31, 2009, the Company makes advance payments approximately $1,400,000 to contactors for cost associated with setting up the school.

6.    PROPERTY, PLANT & EQUIPMENT, NET

Property, Plant & Equipment consisted of the following:

	December 31, 2009			June 30, 2009
Building and Improvement	$	1,793,352		$	1,785,983
Machinery & Equipment		-			831,180
Office Furniture & Equipment		1,417,991			612,105
Vehicles		355,552			352,099
Construction in progress		1,465,999			1,459,975
Total Property		5,030,894			4,210,162
Accumulated depreciation		(464,104	)		(280,905	)
Total Property, net	$	4,566,790		$	3,929,257

Depreciation expense for the six months ended December 31, 2009 was $183,199.

7.    LAND USE RIGHT AND OTHER INTANGIBLES

The net book value of intangible assets as of December 31, 2009 and June 30, 2009 comprised of the following:

	December 30, 2009			June 30, 2008
Cost of land use right and other intangibles	$	3,294,917		$	1,382,114
Less: accumulated amortization		(334,627	)		(275,244	)
Land use right and other intangibles, net	$	2,960,290		$	1,106,870

As of December 31, 2009, total amortization expense related to intangible assets was $59,383.

15

8.    LONG TERM INVESTMENT

On April 24, 2009, the Company deposited $ 2,200,500 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 $ 27,501 as December 31, 2009.

9.    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 December 31, 2009 and fiscal year ended June 30, 2008 as follows:

PRC only:	December 31, 2009		June 30, 2009
Current	$	89,902	$	823,142
Deferred		-		-
Total	$	89,902	$	823,142

10. STOCKHOLDERS’ EQUITY

As of December 31, 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 statements.  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.

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11.  SEGMENT INFORMATION

Segment revenue for the six months ended December 31, 2009 was as follows:

	Six Months Ended
	December 31,
	2009		2008
Revenue:
Membership Fees	$	244,162	$	657,622
Animation Design and Development		1,894,469		1,608,032
Other		239,659		239,314
Total Revenue	$	2,378,290	$	2,504,968

Segment operating income for the six months ended December 31, 2009 was as follows:

	Six Months Ended
	December 31,
	2009		2008
Net Operating Income:
Membership Fees	$	188,966	$	580,057
Animation Design and Development		735,590		1,136,728
Snow and Ice Show		34,618		-
Other		-		34,678
Total Operating Income	$	959,174	$	1,751,463

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.

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12.  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.

The major customers which represented more than 5% of Accounts Receivable

Customer Name	Amount(USD)		Percentage
Heilongjiang Drought situation Control		132,030		11.70	%
Beijing Wanfang Xingxing Digital Tech		396,090		35.09	%
Harbin Shengwen Animation Ltd		69,683		6.17	%
Benxi Yige Animation Design Ltd		364,549		32.30	%
Jilin Guoji Industrial Trading Ltd		166,358		14.74	%
		1,128,710		100.00	%

The major suppliers which represented more than 5% of Accounts Payable

Vendor Name	Amount(USD)		Percentage
Harbin Hengshui Road & Bridge Construction Ltd		29,340.00		41.18	%

The major clients which represented more than 5% of the total sales

Customer Name	Sales Amount(USD)		Percentage
Jilin Guoji Industrial Trading Ltd		239,658.78		19.42	%
Benxi Yige Animation Design Ltd		782,484.45		63.39	%
Beijing Wanfang Xingxing Digital Tech		95,335.50		7.72	%
		1,117,478.73		90.53	%

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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.

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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 “gain from operations of discontinued component.”

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

During the six months ended December 31, 2009, animation design and development accounted for $1,894,469 of our revenues (79.6% of our total revenues) and generated $735,590 in operating income (76.6% of our operating income). Membership fees relating to our Trans World Financial Website accounted for the $244,162 in revenue and generated $188,966 in operating income, which was a significant reduction from the $657,622 in revenue and $580,057 in operating income that the Website produced in the six months ended December 31, 2008.  The remaining $239,659 in revenue was primarily attributable to the Great Wall Ice Tour, which yielded $34,618 in operating income, all in the second quarter.  In comparison, during the six months ended December 31, 2008, animation development, which we initiated in that period, accounted for 64% of our revenue from continuing operations and 65% of our income from continuing operations.  We expect that animation development will continue to provide the largest portion of our financial results, particularly as we are experiencing a decline in utilization of our financial information website.

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Because our current operations are focused on service industries, we record a low cost of goods sold, compared to the cost of goods sold recorded by our now-discontinued network engineering business.  During the three months ended December 31, 2009, however, we completed some relatively low-profit animation projects, with the result that our operating income from animation development in that quarter was only 16% of animation revenues.  This brought overall gross margin for the quarter down to 44%, compared to 90% in the three months ended December 31, 2008, when our animation development revenues yielded 67% in operating income.  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 general and administrative expenses during the six months ended December 31, 2009 increased by 28%, from $285,657 in the first six months of fiscal year 2009 to $365,979 in the first six months of fiscal year 2010.  G&A expenses grew in the second quarter by 5%.

In April 2009 we determined that our cash assets exceeded our immediate needs.  Therefore we invested $2.1 million of our cash with an investment management company that contracted to provide us a 15% annual return.  Primarily as a result of this investment, we accrued interest income of $168,548 in the six months ended December 31, 2009.  In the six months ended December 31, 2008, when our cash was deposited in bank accounts only, our interest income was only $13,045.

Our revenue less expenses for the six months ended December 31, 2009 yielded a net income before taxes of $1,127,696, a decrease from the $1,764,458 net pre-tax income realized during the six months ended December 31, 2008. The decrease was primarily attributable to the 63% reduction in revenue from our Trans World Financial Website and to the poor margins that our animation business generated in the second quarter of this year.   After accruing income taxes at the national rate of 25%, we recorded net income of $828,164 ($.04 per share), a 37% decline from the first six months of our last fiscal year.  The second quarter, moreover, produced a 66% decline in net income, from $736,309 to $251,152.  We do not expect the decline to continue, since we expect our animation business to produce better revenue in coming months.  We will, however, need to build up animation revenues to replace our financial website revenues, if we are to surpass prior revenue levels.

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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 December 31, 2009, our working capital was $3,389,025, including $1,069,023 in cash.  Working capital was reduced by $1,558,368 during the first six months of fiscal 2010, primarily use of funds to purchase new technology for our animation department and to construct a school for training animations designers.  Our operations during the six months of 2009 produced $1,415,350 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.

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 $7,527,080, 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.

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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 December 31, 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 December 31, 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 second fiscal quarter that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

 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: February 25, 2010	By: /s/ Fu Qiang
	Fu Qiang, Chief Executive Officer
	By: /s/ Hu Yumei
	Hu Yumei, Chief Executive Officer

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