ITEM 1. BUSINESS
The Entrusted Management Agreements
China Digital Animation Development, Inc. (the “Company,”) ( formerly: “Maui General Store, Inc.”) was a shell company for several years prior to 2008. In November 2008 the Company acquired ownership of RDX Holdings Limited, an entity organized under the laws of the British Virgin Islands in May 2006. Until June 2008 RDX Holdings had conducted no business activity. On June 27, 2008, RDX Holdings entered into five agreements with Heilongjiang Hairong Science and Technology Development Co., Ltd., a corporation organized in the People’s Republic of China (“Hairong”), and with the equity owners in Hairong. Collectively, the agreements provide RDX exclusive control over the business of Hairong, the right to all revenues obtained by Hairong, and responsibility for all of the expenses incurred by Hairong. The relationship is one that is generally identified as “entrusted management.”
The purpose of the “Entrusted Management Agreements” is to transfer to RDX Holdings full responsibility for the management of Hairong, as well as all of the financial benefits and liabilities that arise from the business of Hairong. Each of the agreements has a term of ten years. A summary of the five agreements follows:
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Consulting Services Agreement. In this agreement RDX Holdings undertakes to provide Hairong advice and assistance with respect to all aspects of its business. In exchange for the services, Hairong will pay RDX Holdings, on a quarterly basis, a fee equal to its revenue. Payment shall be effected by causing all revenue realized by Hairong to be paid into the bank account of RDX Holdings. The Agreement contains covenants regarding the operations of Hairong that are designed to assure that Hairong undertakes no significant business activity without the consent of RDX Holdings.
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Operating Agreement. In this agreement RDX Holdings agrees to guarantee all of the obligations, financial and otherwise, undertaken by Hairong. At the same time, Hairong pledges all of its assets to RDX Holdings as a counter-guarantee. To preserve the value of the counter-guarantee, Hairong agrees not to effect any transaction that would affect its assets without the approval of RDX Holdings. The shareholders of Hairong agree in this Agreement that RDX Holdings will be entitled to name all of the officers and directors of Hairong.
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Equity Pledge Agreement. In this agreement, the shareholders of Hairong have pledged their equity interests in Hairong as security for the obligations of Hairong under the Consulting Services Agreement. During the term of the pledge (which extends for two years past the term of the Consulting Services Agreement), the shareholders are barred from transferring any interest in the equity in Hairong.
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Option Agreement. In this agreement the shareholders of Hairong grant to RDX Holdings an option to purchase their equity interests in Hairong, if permitted by the laws of the People’s Republic of China. The purchase price will equal the registered capital of Hairong - i.e. 32,270,283 RMB (approximately $4,717,877).
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Proxy Agreement. In this agreement the shareholders of Hairong have given to RDX Holdings a proxy to vote their shares at any meeting of the shareholders of Hairong.
Heilongjiang Hairong Science and Technology Development Co., Ltd.
Hairong was organized in 1999. From 1999 until 2006 Hairong was engaged exclusively in the business of developing and installing business networks and related software. Since 2007, however, Hairong gradually transformed the nature of its business operations. Although 27% of Hairong’s revenue during the year ended June 30, 2009 came from its network installation business, Hairong terminated that business at the end of the fiscal year. Hairong now offers services in three distinct market segments:
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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.
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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.
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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.
The unifying principle among our disparate businesses is our management style. We gather personnel with high levels of training and intelligence, and challenge them with complex problems, be it the production of a cutting edge video, the real-time delivery of data from around the world, or the on-time delivery of a cultural production. Fundamentally, in each case, the challenge is to find the efficient solution that resolves the inefficiencies of a multi-component situation. Our skill at finding those solutions will determine the success of our business.
Animation Production
Our Digital Animation Department originated in 2003 when Dahai Lu established the “Nataku” studio. The core design and management team that he brought together in 2003 joined Hairong in 2008 as the foundation for our entry into the digital animation industry. Among the members of the team are:
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Dahai Lu. Prior to organizing the Nataku studio, Mr. Lu had been working in the animation industry since 1998. In 1999 he participated in the production of “Thru the Moebius Strip.” Currently he serves as General Manager of our Digital Animation Department.
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Zhang Cheng. Mr. Cheng was one of the original members of the Nataku studio. A specialist in animation production, he has participated in the design of Blizzard’s online game, the Heroes of JinYing online game, and the French animated “Tiantian.” Currently he supervises our “Tritans” production group.
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Yu Ming. A specialist in pre-production modeling, Mr. Yu previously participated in the Heroes of JinYing project and the “Farm Kids” project.
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Ying Min Zou. A specialist in post-production effects, Ms. Zou previously participated in the French “Tiantian” and the film “Kung Fu King.”
We supplement the skills of our design team by carefully developing “partner” relations with top quality animation design firms in China and abroad. Within the past year Beijing Wanfang Xinxing Digital Animation, Inc. subcontracted four projects to us, in each of which we provided post-production editing and effects. Currently we are producing the “Tritans” animation series in joint venture with Monstrous, a design studio located in Singapore. These relationships permit us to leverage our skills to participate in larger scale productions, despite our relatively modest size.
The focus of our animation activities is high-end special effects for film, television and Internet productions, including online gaming. To enter this field, we invested $3.1 million in equipment and software, including such advanced devices as a motion capture photoelectric device, a three dimensional scanner, a non-linear video editing system, and QUADRO FX core graphics workstations. We expect growth to come, in particular, from our capacities in 3-D animation, and we intend to expand our present staff of 3-D experts.
During the year ended June 30, 2009 we realized $3.5 million in revenue from our animation activities. Among the projects that we completed during that fiscal year were:
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Post-production effects on four episodes of “Black and White” and five episodes of “Fly a Kite,” both produced for Harbin Pinge Culture Communications, Inc.
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Production services on ten episodes of “Animal Planet” and five episodes of “West Life” for Harbin Renhe Spring Public Facilities.
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Post production animation of 26 episodes of “Les Miserables” under subcontract from Beijing Wanfang Xinxing Digital Animation, Inc.
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Post production animation of 32 episodes of “Red Square” under subcontract from Beijing Wanfang Xinxing Digital Animation, Inc.
Currently we are developing 39 episodes of a fantasy series named “Tritans” in joint production with the Monstrous Studio of Singapore. The shows, which will be distributed worldwide in three languages (Chinese, English, Malay) presents stories involving environment heroes taking on various missions to protect the earth. Hairong is responsible for developing the models, and producing the animated product. Monstrous is responsible for developing the story boards and the music.
The demand for skilled animation technicians in China is intense. To meet our needs, therefore, we opened a school for animation training at the beginning of 2009. The staff of our Animation Development Department currently train a student body of 40 in animation technology and the production of special effects. Students pay from 6,000 to 15,000 Renminbi ($877 to $2192) for a course of instruction lasting 30 to 60 days. Upon completion of the course, qualified students are invited to join our own studio.
The government of China is actively supporting the development of the animation industry in China. Among the stimuli provided for development of the industry:
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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.
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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.
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Animation companies receive reductions in value-added tax, income tax, sales tax, and import duties.
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 be 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 forseeable future.
Financial Information Services
Since 2006 we have offered the Trans World Finance Website (TWFW) to investors and issuers who need in-depth, real-time information about international capital markets. The principal target market for the TWFW site are Chinese businesses seeking overseas listings for their securities and Chinese investors seeking information about such companies. Subscribers who visit the site, which is presented in both Chinese and English, will find:
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Market Quotations. We stream quotations and data from the primary securities markets around the world. But we also provide easy access to information about Chinese enterprises whose securities are listed abroad, include analysis of market trends.
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Red Chip Information. We provide up-to-date business and management information about Chinese enterprises that are listed abroad.
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Membership Column. Our market professionals provide analysis of overseas market trends and advice for both investors and issuers.
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Global Financial Information. We offer global macroeconomic data, timely reports on worldwide financial events, and expert analysis.
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Shareholder School. Neophytes to the international stock markets are provided simple, but in-depth introductions to international investment.
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China Today. Our journalists comment on the development of China and the changing nature of life in China, with an eye towards trends of interest to the investment community.
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Fortune Forum. A platform for investors to exchange ideas and experiences regarding the investment world.
Access to the TWFW site is offered on a subscription basis, which frees us from dependence on the fickle market for online advertising. Investors who opt for a VIP membership are provided specialized investment advice by our market professionals.
Our plan for the coming year is to joint venture with a Chinese Web developer to enable 3G mobile devices to access our TWFW site. When that platform is achieved, we will focus on integrating SMS applications with our core applications, with the goal of becoming a leader in China’s 3G Web market.
The TWFW site faces competition from three primary sources: Shanxi Bositon, Finance World, and Sina Finance. Each of these provides stock prices and summary information regarding Chinese enterprises that list abroad. We believe, however, that the in-depth information and analysis that we provide gives us a competitive advantage.
Cultural Production
In April 2008 we initiated our efforts in the business of producing and distributing cultural events. The mission of our Cultural Development Department is to mine the rich cultural heritage of The People’s Republic of China to produce marketable cultural events or adjuncts to the promotional programs of our business clients. The breadth of our plans include:
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Major Exhibitions. By applying the management skills that we developed as network designers to the logistical problems of major cultural exhibitions, we intend to provide a more efficient path to an audience for those enterprises. Our Great Wall Ice Tour is exemplary of the kind of logistically complex and culturally rich projects that we intend to undertake.
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Film Production. Our location in Harbin, the capital of Heilongjiang, gives us access to a well-developed film and teleplay industry, in which our own Animation Department is a major participant. The availability of these extensive resources will enable us to undertake film production projects for national distribution. Our first production, on which we have already undertaken marketing and editing, is a production for television distribution titled “The Intangible Cultural Heritage of China.” We expect the show to go into distribution in the coming months.
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Large Commercial Performance. By combining the efforts of our management consultants with those of our cultural production staff, we offer businesses a dramatic means of attracting attention. Using our roster of actors and production professionals, we allow our clients to cap their promotion campaign with a public performance, be it a strictly cultural performance with business sponsorship or, at the other end of the spectrum, a celebration of the client’s business.
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Advertising Design. The same team of experienced designers that we deploy to structure our cultural performances are available for our business clientele. We offer promotional teleplay, 3-D animation, multimedia productions - whatever is needed to bring the client’s brand to the public’s attention.
The first major undertaking by our Cultural Development Department draws on the ancient tradition in Heilongjiang Province of elaborate ice sculpture. The Great Wall Ice Tour will be a monumental construction of snow and ice. It was designed as an introduction to the art of ice sculpture, as well as to the culture of northeastern China. Like a giant ice castle, the sculpture will boast a variety of entertainment options to attract a wide audience. There is the detailed carving itself, which shows the variety of local design. But in addition, there is an ice sliding board, ice labyrinth, and ice skating park to entertain the young. And there is an ice bar, to refresh the adults. To complete the visit, an ice cafeteria will offer a full menu of frozen delights, from ice porridge to frozen persimmons. Our staff is currently in negotiations to exhibit the Ice Tour in conjunction with the ice sculpture project at Beijing’s Xiedao Green Eco Park.
Employees
We currently have 193 employees. They are associated with our several departments as shown below. Since all of our departments are in their infancy, we expect all of our departments to grow in the coming year.
ITEM 1A.
ITEM 1A. RISK FACTORS
Investing in our common stock involves risk. You should carefully consider the risks described below together with all of the other information contained in this Report, including the financial statements and the related notes, before deciding whether to purchase any shares of our common stock. If any of the following risks occurs, our business, financial condition or operating results could materially suffer. In that event, the trading price of our common stock could decline and you may lose all or part of your investment.
We have recently undertaken a number of new business ventures, and cannot fully anticipate the problems they may encounter.
Within the past twenty-four months, Hairong’s business has been completely reformulated. We have terminated our traditional line of business - network engineering and software design. We are not focused on animation production, financial data services, and cultural project management. Each of these new ventures carries with it the risks of the untested. Until we have more extensive experience in each of these areas, the problems that may arise and frustrate our business plan are not readily apparent. If these unforeseen problems become significant, the results could have a serious negative impact on our profitability.
We expect to issue a substantial portion of the Company’s equity to our employees.
The growth of Hairong was funded by our management, but also by our employees, who contributed approximately 46% of the capital used to develop Hairong to its current condition. The terms of that contribution have never been made concrete; but there is an expectation that shares in the U.S. public company that now has beneficial ownership of Hairong will be issued to our employees in compensation. That issuance, when it occurs, will dilute the interest of our existing shareholders in China Digital Animation Development Inc.
We rely on contractual arrangements with Hairong for our China operations, which may not be as effective in providing control over Hairong as direct ownership.
Because PRC regulations restrict our ability to provide Internet content and certain other services in China through a directly-owned subsidiary, our business is defined by a contractual relationship with Hairong, an entity in which China Digital Animation Development Inc. has no equity ownership interest. We will rely on contractual arrangements to control and operate this business. These contractual arrangements may not be as effective in providing control over Hairong as direct ownership. For example, if Hairong failed to perform under its agreements with us, we would have to rely on legal remedies under Chinese law, which we cannot be sure would be available. In addition, we cannot be certain that the individual equity owners of Hairong would always act in the best interests of China Digital Animation Development.
Our business and growth will suffer if we are unable to hire and retain key personnel that are in high demand.
Our future success depends on our ability to attract and retain highly skilled engineers, technical, marketing and customer service personnel, especially qualified personnel for our operations in China. Qualified individuals are in high demand in China, and there are insufficient experienced personnel to fill the demand. Therefore we may not be able to successfully attract or retain the personnel we need to succeed.
We may be subject to penalty if the content posted on our investor Website violates relevant laws.
The advertising laws and regulations promulgated by the Government of China require advertisers, advertising operators and advertising distributors, including online advertising publishers such as us, to insure that the content of the advertisements they prepare or distribute are fair and accurate and are in full compliance with applicable law. Violation of these laws or regulations may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the PRC government may revoke a violator’s license for advertising business operations.
Under the PRC advertising laws and regulations, we are obligated to monitor the advertising content posted on our website. In addition, where a special government review is required for specific categories of advertisements before posting, we are obligated to confirm that such review has been performed and approval has been obtained. Our reputation could be hurt and our results of operations could be adversely affected if advertisements shown on our websites are provided to us by our advertising clients in violation of relevant PRC advertising laws and regulations, or if the supporting documentation and government approvals provided to us by our advertising clients in connection with such advertising content are not complete.
We have limited business insurance coverage.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.
Our bank deposits are not insured.
There is no insurance program in the PRC that protects bank deposits, in the way that bank deposits in the U.S. are given limited protection by the FDIC. If the bank in which we maintain our cash assets were to fail, it is likely that we would lose most or all of our deposits.
We may have difficulty establishing adequate management and financial controls in China.
The People’s Republic of China has only recently begun to adopt the management and financial reporting concepts and practices with which investors in the United States are familiar. We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company. If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards.
We are also subject to the rules and regulations of the United States, including the SEC. We expect to incur significant costs associated with our public company reporting requirements, costs associated with applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC. If we cannot assess our internal control over financial reporting as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.
Our operations are subject to PRC laws and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations thereof, may have a material and adverse effect on our business.
Our principal operating subsidiary, Hairong is required to comply with PRC laws and regulations. Unlike the common law system prevalent in the United States, decided legal cases have little value as precedent in China. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business and the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation.
Capital outflow policies in China may hamper our ability to pay dividends to shareholders in the United States.
The People’s Republic of China has adopted currency and capital transfer regulations. These regulations require that we comply with complex regulations for the movement of capital. Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange. We may be unable to obtain all of the required conversion approvals for our operations, and Chinese regulatory authorities may impose greater restrictions on the convertibility of the RMB in the future. Because most of our future revenues will be in RMB, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit our ability to fund our business activities outside China or to pay dividends to our shareholders.
Our business development would be hindered if we lost the services of our Chairman.
Fu Qiang is the Chief Executive Officer of China Digital Animation Development and of its operating subsidiary, Hairong. Mr. Fu is responsible for strategizing not only our business plan but also the means of financing it. If Mr. Fu were to leave Hairong or become unable to fulfill his responsibilities, our business would be imperiled. At the very least, there would be a delay in the development of Hairong until a suitable replacement for Mr. Fu could be retained.
China Digital Animation Development is not likely to hold annual shareholder meetings in the next few years.
Management does not expect to hold annual meetings of shareholders in the next few years, due to the expense involved. The current members of the Board of Directors were appointed to that position by the previous directors. If other directors are added to the Board in the future, it is likely that the current directors will appoint them. As a result, the shareholders of China Digital Animation Development will have no effective means of exercising control over the operations of the Company.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
Our executive offices are located at #69 Ganshui Road, Xiangfang District, City of Harbin, P.R. China. The facility, which we own, has 661 m2 of office space.
We have also been provided 2,000 m2 of office space in the Harbin Cultural Development Area. Our Animation Development Department occupies this space rent-free until 2010, through a program of the Heilongjiang Provincial Government.We expect that our current facilities will be adequate for our operations for the forseeable future, except that we are currently developing an education facility for the training center associated with our Animation Development Department.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Market Information
On January 30, 2009 we implemented a 1-for-25 reverse split of our common stock. All references in this Report to a number of shares issued or outstanding prior to January 30, 2009 have been adjusted to retroactively reflect the effect of the reverse split.
Our common stock is listed for quotation on the OTC Bulletin Board system under the symbol “CHDA.” The following table sets forth for the respective periods indicated the prices of the common stock, as reported by the OTC Bulletin Board. Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.
(b) Shareholders
On October 15, 2009 there were approximately 2,932 holders of record of our common stock.
(c) Dividends
Since the Company’s incorporation, no dividends have been paid on our Common Stock. We intend to retain any earnings for use in our business activities, so it is not expected that any dividends on our common stock will be declared and paid in the foreseeable future.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
The information set forth in the table below regarding equity compensation plans (which include individual compensation arrangements) was determined as of June 30, 2009.
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders
N.A.
Equity compensation plans not approved by security holders
N.A.
Total
N.A.
(e) Sale of Unregistered Securities
China Digital Animation did not effect any unregistered sales of equity securities during the quarter ended June 30, 2009.
(f) Repurchase of Equity Securities
China Digital Animation did not repurchase any of its equity securities that were registered under Section 12 of the Securities Act during the quarter ended June 30, 2009.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Results of Operations
The reformation of our operations from a focus on network integration to a focus on animation development had an immediate positive impact on our results of operations. Our revenue for the year ended June 30, 2009 were 34% greater than our revenue in the year ended June 30, 2008. Moreover, because animation development is primarily a service industry, the 34% increase in revenue was achieved with 2% lower cost of goods sold. Our gross margin, therefore, was 73% in the 2009 fiscal year, compared to 63% in fiscal 2008.
Network engineering still contributed 27% of our revenue in fiscal 2009. At the end of the year, we terminated all of our network engineering activities, and sold the related property and equipment. The primary reason for abandoning this line of business was the level of competition in the Chinese IT industry. Chinese educational institutions have produced a plethora of graduates with training in network and software design. The result is intense competition, which leads to reduced margins. Given the opportunity to refocus in the animation industry, which is growing rapidly in China, we determined that the future would be more profitable in that area. The greater portion of our revenue in future periods will come from animation development. As a result, we expect our gross margin ratio to remain high.
Hairong’s expansion into new business areas resulted in a significant increase in our operating expenses, which rose from $1,064,779 (24% of revenue) in fiscal 2008 to $1,529,106 (25% of revenue) in fiscal year 2009. The increase in expenses reflects the expenses that attend entry into new business ventures. In addition, during November 2008 we established ourselves as a U.S. public company and opened an office in New York City. The expenses of those initiatives also increased our operating costs. As we expand in these new areas, we expect our operating expenses to increase as well. However, the ratio of operating expenses to revenue should decrease as our new operations experience the efficiencies of size.
The transformation of our business operations also resulted in additional income for the year ended June 30, 2009. We realized a gain of $239,746 when we sold the building and equipment associated with our network engineering business - this is recorded on our Statements of Income as “Gains on Disposal of Fixed Assets.” This was partially offset, however, by the loss of $104,005 that we incurred on the sale of the inventory we carried for the network engineering business, which is included in “Other Expense” on our Statements of Income. On the other hand, during the year we also sold our management consulting subsidiary, Fortune Global Investment Advisory Co., Ltd. (“FGIA”). FGIA had been contributed to Hairong by Fu Qiang, our Chairman, and was carried on our books at zero basis. For that reason, we recorded the entire sales price - $219,036 - as a “Gain from Investment.”
Our revenue less expenses for year ended June 30, 2009 yielded a net income before taxes of $3,274,757, almost double the net pre-tax income of $1,768,392 during the year ended June 30, 2008. For 2008 and subsequent years, the Government of China reduced the corporate tax rate from 33% to 25%. In preparing our financial statements for the years ended June 30, 2009 and 2008, we applied the new tax rate retroactively to July 1, 2007. As a result, we recorded net income of $2,451,614 ($.12 per share) for the 2009 fiscal year, and net income of $1,246,777 ($06 per share) for the 2008 fiscal year.
Our business operates in Chinese Renminbi, but we report our results in our SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars results in translation adjustments, which are reported as a middle step between net income and comprehensive income. The net income is added to the retained earnings on our balance sheet; while the translation adjustment is added to a line item on our statement of stockholders equity labeled “accumulated other comprehensive income,” since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. During the year ended June 30, 2009, the unrealized gain on foreign currency translations added $116,491 to our accumulated other comprehensive income. In the prior fiscal year, when the changes in value between the Dollar and the Renminbi were more dramatic, we added $1,070,501 to our shareholders equity by reason of foreign currency translation adjustments.
Liquidity and Capital Resources
To date, our operations have been funded by capital contributions from Hairong’s management and employees. Approximately 54% of the capital contribution has been made by members of management and their business associates. The remaining 46% was contributed by the employees, acting through a trustee. The Company expects that in the future it will issue equity to the employees to compensate them for their financial contributions to the growth of Hairong, and to incentivize them for future loyalty to Hairong.
This program of internal financing has left us with a balance sheet that, at June 30, 2009, included no debt, either short-term or long-term, other than a $5,000 loan. It also left us with working capital of $4,947,393 at June 30, 2009, including $2,282,786 in cash. Since our operations have been 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 - we believe that our cash resources are adequate to fund our operations for the forseeable future.
We expect to fund several significant capital improvement during the next twelve months:
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a significant upgrade to our Website’s infrastructure, in order to facilitate a rapid expansion of the user base;
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acquisition of specialized equipment for our Ice Tour;
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additional animation equipment; and
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a dedicated education facility for the training center associated with our animation department.
We expect the overall cost of these capital improvements to be approximately 3 million RMB ($439,000). At present, we anticipate that we will finance these projects from our capital resources. However, if we are able to obtain financing on favorable terms, we may use external financing for one or more of the projects. Currently we have fixed assets with a book value of $5,036,127 on which there is no lien. This provides us the ability to obtain secured debt financing, if we decided to preserve our working capital. Based on this experience, we anticipate that our capital resources will be adequate to fund our operations for the foreseeable future.
Critical Accounting Policies and Estimates
In preparing our financial statements we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values. In our preparation of the financial statements for 2009, there was one estimate made which was (a) subject to a high degree of uncertainty and (b) material to our results. These was the determination, explained in Note 3 to the Consolidated Financial Statements, to record a bad debt reserve of $15,464 as of June 30, 2009. This determination was based on application of our standard evaluation of accounts receivable, which resulted in a high level of confidence regarding the collectability of our receivables.
Impact of Accounting Pronouncements
There were no recent accounting pronouncements that have had a material effect on the Company’s financial position or results of operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to the Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of June 30, 2009 and 2008.
Consolidated Statements of Income for the Fiscal Years Ended June 30, 2009 and 2008.
Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years Ended June 30, 2009 and 2008.
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2009 and 2008.
to Notes to Consolidated Financial Statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of China Digital Animation Development, Inc.
We have audited the accompanying consolidated balance sheets of China Digital Animation Development, Inc. and Subsidiaries as of June 30, 2009 and 2008 and the related consolidated statements of income, stockholders’ equity, and cash flows for the years ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Digital Animation Development, Inc. and Subsidiaries as of June 30, 2009 and 2008, and the results of its consolidated operations and its cash flows for years ended in conformity with accounting principles generally accepted in the United States of America.
/s/ P.C.LIU, CPA, P.C.
P.C.LIU, CPA, P.C.
Flushing, NY
September 1, 2009
CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED JUNE 30, 2009 AND, 2008
"Continued on next page"
"The accompanying notes are an integral part of these financial statements"
CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED JUNE 30, 2009 AND, 2008
"The accompanying notes are an integral part of these financial statements"
CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
"The accompanying notes are an integral part of these financial statements"
CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
"The accompanying notes are an integral part of these financial statements"
CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
"Continued on next page"
"The accompanying notes are an integral part of these financial statements"
CHINA DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
"The accompanying notes are an integral part of these financial statements"
CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 & JUNE 30, 2008
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 software design and the production and presentation of cultural events. In the last quarter of this financial year, Hairong was also engaged in the IT construction business and primarily engaged in animation design and development. 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."
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.
CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 & JUNE 30, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents and accounts and other receivables. As of June 30, 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.
CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 & JUNE 30, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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:
Intangible assets
Intangible assets consist of “rights to use land” and “animation software.” According to the law of China, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Land use rights are being amortized using the straight-line method over the lease term of 50 years. The method to amortize intangible assets is a 50-year straight-line method. The Company also evaluates intangible assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets, other long-lived assets and goodwill is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.
Income taxes
Hairong accounted for income tax under the provisions of SFAS No.109 "Accounting for Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, whenever necessary, against net deferred tax assets when it is more likely than not that some portion or the entire deferred tax asset will not be realized. There are no deferred tax amounts at June 30, 2009 or June 30, 2008.
CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 & JUNE 30, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104. Sales revenue is recognized when the services are provided and the contracts are performed.
Fair value of financial instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, advances to suppliers, other receivables, accounts payable, accrued expenses, taxes payable, notes payable and other loans payable. Management has estimated that the carrying amounts approximate their fair value due to the short-term nature.
Foreign currency translation
Hairong’s functional currency is the Renminbi (“RMB”). Foreign currency transactions are translated at the applicable rates of exchange in effect at the transaction dates. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. Revenues and expenses are translated at the average exchange rates in effect during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated Other Comprehensive Income". Gains and losses resulting from foreign currency translations are included in Accumulated Other Comprehensive Income.
Statement of cash flows
In accordance with Statement of Financial Accounting Standards No.95, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Earnings (Loss) per share
Basic earnings (loss) per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There are no common stock equivalents available in the computation of earnings (loss) per share at June 30, 2009.
CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 & JUNE 30, 2008
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 SFAS No. 167, “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. SFAS 167 is effective for annual periods beginning after November 15, 2009. The Company does not expect the adoption of SFAS No. 167 will have a material effect on the Company’s financial condition, results of operations or cash flows.
In May 2009, the FASB issued SFAS no. 165, “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. SFAS No. 165 is effective for interim reporting periods ending after June 15, 2009. The adoption of SFAS No. 165 did not have a material effect on the Company’s financial condition, result of operations or cash flows.
In April 2008, the FASB issued Staff Position (“FSP”) No. FAS 142-3, “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 SFAS No. 142, “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 SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS no. 141R. FSP No. 142-3 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of FSP No. 142-3 did not have an effect on the Company’s financial condition, results of operations or cash flows.
CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 & JUNE 30, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
New accounting pronouncements
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “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. FSP No. FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. The adoption of FSP No. FAS 107-1 and APE 28-1 did not have a material effect on the Company’s disclosures. See “- Note 3 - Long-term Debt” for disclosures required by this FSP.
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 December 2007, the Financial Accounting Standards Board (“FASB”) simultaneously issued SFAS No. 141R, “Business Combinations (2007 Amendment),” and SFAS 160, Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB 51.” Both standards update United States guidance on accounting for “non-controlling interests,” sometimes referred to as minority interests, which interests represent a portion of a subsidiary not attributable, directly or indirectly, to a parent. FASB and the International Accounting Standards Board (“IASB”) have been working together to promote international convergence of accounting standards. Prior to promulgation of these new standards there were specific areas in accounting for business acquisitions in which conversion was not achieved. The objective of both standards is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in “business combinations” and consolidated financial statements by establishing accounting and reporting standards. In business combinations it is accomplished by establishing principles and requirements concerning how an “acquirer” recognizes and measures identifiable assets acquired, liabilities assumed, and non-controlling interest in the acquiree, as well as goodwill acquired in the combination or gain from a bargain purchase; and determines information to be disclosed to enable users to evaluate the nature and effects of business combinations. In consolidated financial statements the standards require: identification of ownership interests held in subsidiaries by parties other than the parent be clearly identified, labeled and presented in consolidated financial position within equity (rather than “mezzanine” between liabilities and equity) separately from amounts attributed to the parent, with net income attributable to the parent and to the minority interest clearly identified and presented on the face of consolidated statements of income. The standards also provide guidance in situations where the parent’s ownership interest in a subsidiary changes while the parent retains its controlling financial interest. The standard also provides guidance on recording a gain or loss based on fair value in situations involving deconsolidation of a subsidiary. Entities must provide sufficient disclosures that distinguish between interests of the parent and that of the non-controlling interest.
CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 & JUNE 30, 2008
Both standards are effective for fiscal years and interims beginning on or after December 15, 2008. Earlier adoption is prohibited. The standards shall be applied prospectively as of the beginning of the fiscal year in which initially applied, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company does not anticipate that the adoption of SFAS No. 141R and No. 160 will have an impact on the Company's overall results of operations or financial position, unless the Company makes a business acquisition in which there is a non-controlling interest.
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 June 30, 2009 and 2008, the net accounts receivable were $1,443,440 and $680,522, respectively. The bad debt reserve for the current fiscal year is $15,464.
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 $1,443,440 and $680,522 as of June 30, 2009 and June 30, 2008, respectively.
5. INVENTORIES
Inventory consisted of the following:
CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 & JUNE 30, 2008
5. INVENTORIES (continued)
The Company changed its primary operations from IT construction to animation development during the year. As a result, the Company sold its entire inventory, which was not usable for animation development.
. PROPERTY, PLANT & EQUIPMENT, NET
Property, Plant & Equipment consisted of the following:
Depreciation expense for the years ended June 30, 2009 and 2008 was $443,698 and $207,574, respectively.
During the fiscal year, Hairong disposed of a large sum of old assets that cannot be used in the company’s production operations. At the same time, Hairong purchases a large quantity of software for animation production and computer related equipment.
7. LAND USE RIGHT AND OTHER INTANGIBLES
The changes in intangible assets for fiscal 2009 and the net book value of intangible assets at June 30, 2009 and 2008 were as follows:
CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 & JUNE 30, 2008
7. LAND USE RIGHT AND OTHER INTANGIBLES (continued)
Total amortization expense related to intangible assets was ($19,034) and $31,534 in fiscal 2009 and 2008, respectively. The negative amortization expense during the 2009 fiscal year was due to the disposal of the intangible asset and write off of the accumulated amortization.
8. LONG TERM INVESTMENT
On April 24, 2009, the Company deposited $ 2,191,457 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
$ 54,786 during the period from April 25, 2009 to June 30, 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 fiscal years ended June 30, 2009 and June 30, 2008 as follows:
CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 & JUNE 30, 2008
. STOCKHOLDERS’ EQUITY
As of June 30, 2009, 500,000,000 shares have been authorized and 20,000,000 shares are outstanding.
The Company implemented a 1-for-25 reverse split on January 30, 2009. Retroactive effect is being given to the reverse split in these financial statement. Income statements have retroactively used the new outstanding shares to calculate the EPS. Stated par value in the stockholders’ equity section has been reduced accordingly.
11. SEGMENT INFORMATION
Segment revenue and operating income was as follows:
CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 & JUNE 30, 2008
11. SEGMENT INFORMATION
SFAS No. 131, 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.
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.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. As of June 30, 2009 and 2008, substantially all of the Company’s cash and cash equivalents were held by major banks located in the PRC of which the Company’s management believes are of high credit quality. With respect to accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition and customer payment practices to minimize collection risk on account receivable.
The Company had two major customers who accounted for 11% and 30% of the total sales for the year ended June 30, 2009. Accounts receivable from these customers were $853,207. That amount represented 61% of the total accounts receivable as of June 30, 2009.
For the year ended June 30, 2008, the Company had three major customers. Accounts receivable from these customers were $547,522. That amount represented 67% of the total accounts receivable as of June 30, 2008.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report (the “Evaluation Date”). Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective.
(b) Changes in Internal Controls.
The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of the year covered by this annual report, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
(c) Management’s Report on Internal Control over Financial Reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. We have assessed the effectiveness of those internal controls as of June 30, 2009, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control - Integrated Framework as a basis for our assessment.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected. In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified one material weaknesses in our internal control over financial reporting. This material weakness consisted of:
a. Lack of expertise in U.S accounting principles among the personnel in our Chinese headquarters. Our books are maintained and our financial statements are prepared by the personnel employed at our executive offices in the City of Jiamusi. Few of our employees have experience or familiarity with U.S accounting principles. The lack of personnel in our Jiamusi office who are trained in U.S. accounting principles is a weakness because it could lead to improper classification of items and other failures to make the entries and adjustments necessary to comply with U.S. GAAP.
Management is currently reviewing its staffing and their training in order to remedy the weaknesses identified in this assessment. To date, we are not aware of significant accounting problems resulting from these weaknesses; so we have to weigh the cost of improvement against the benefit of strengthened controls. However, because of the above conditions, management’s assessment is that the Company’s internal controls over financial reporting were not effective as of June 30, 2009.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
On October 12, 2009 Fu Zhiguo resigned from his position as a member of the Board of Directors of China Digital Animation Development, Inc.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The officers and directors of the Company are:
The following sets forth biographical information regarding the Company’s directors.
Fu Qiang. Mr. Fu has been employed since 2003 as the President of our subsidiary, Heilongjiang Hairong Science and Technology Development Co Ltd. (“Hairong”). Previously Fu Qiang was employed as Vice General Manager by Heilongjiang Guangsha Group, a construction company, where he was responsible for business development and new construction management. In 1998 Fu Qiang earned a Bachelor’s Degree in Business Administration from Beijing Union University. In 1996 he earned a Bachelor’s Degree in Law from Heilongjiang Political Management and Law College.
Zong Guoqing. Mr. Zong joined Hairong this year as General Manager. In 2006 and 2007 Mr. Zong was employed as Manager of the Marketing Department of Sweden SINO, an international transportation logistics company. From 2003 to 2006 Mr. Zong was employed as Manager of the International Department of Harbin Sihai CNC Group, which manufactured CNC systems for the production of H-steel. Previously Mr. Zong had been employed as Assistant Manager of Canada Sefon Investment Co., Ltd., an investment consultant, and as the Supervisor of Development of Harbin Landscaping & Development Co., which provided landscaping design and equipment for the construction industry in China. In 2002 Mr. Zong was awarded a B.A. in computer science by QGI Institute of Information Technology in Vancouver, British Columbia. He has also received a diploma in computer information from the Southern Alberta Technology Institute.
Hu Yumei. Ms. Hu has been employed as Chief Financial Officer of Hairong and its predecessor since 2006, with responsibilities for both the accounting and the finance departments. From 1986 to 2003 Ms. Hu served as Chief Financial Officer of Harbin XinYang Group, which was engaged in the construction industry. In 1986 Ms. Hu was awarded a Bachelor’s Degree with a concentration in Economics by the Heilongjiang Province Economy Institute of Cadres Management.
Huo Hong. Ms. Huo has been employed by Hairong as its U.S. agent since 2008. Since 2006 Ms. Huo has also been employed as Producer, Financial Reporter, and Marketing Director by Wall Street Multimedia, which provides financial news content in the U.S. and China. Since 2004 Ms. Huo has also been employed as a Correspondent by The Global Times. From 2004 to 2006 Ms. Huo was employed as a Marketing Executive by Jam-Aimee Jewelry, and from 2002 to 2004 Ms. Huo was employed as Assistant to the President of American Jewelry Design, Inc. In 2006 Ms. Huo was awarded a Masters Degree in Marketing by Baruch University; in 2002 she was awarded a B.A. with a concentration in Business Administration by the University of Colorado.
All of our directors hold offices until the next annual meeting of the shareholders of the Company, and until their successors have been qualified after being elected or appointed. Officers serve at the discretion of the board of directors.
Audit Committee; Compensation Committee; Nominating Committee.
Due to the small size of our Board of Directors, we have not constituted an audit committee, a compensation committee or a nominating committee. Decisions regarding nominations to the Board will be made by all currently-serving members of the Board. For the same reason, we do not have an audit committee financial expert among the members of our Board of Directors.
Code of Ethics
The Board of Directors has not adopted a code of ethics applicable to the Company’s executive officers. The Board believes that the small number of individuals involved in the Company’s management makes such a code unnecessary.
Section 16(a) Beneficial Ownership Reporting Compliance
None of the officers, directors or beneficial owners of more than 10% of the Company’s common stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during the year ended June 30, 2009, except that Ligang Shang was late in filing his Form 3.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or paid by the companies that are currently subsidiaries of China Digital Animation to Fu Qiang, the Company’s Chief Executive Officer, and to Hu Yumei, its Chief Financial Officer, for services rendered in all capacities to the Company during the years ended June 30, 2009, 2008 and 2007. There were no other executive officers whose total salary and bonus for the fiscal year ended June 30, 2009 exceeded $100,000.
_______________________________
(1)
Hairong has permitted Fu Qiang to use for personal business an automobile purchased by Hairong for $168,621.
Employment Agreements
All of our officers and directors serve on an at-will basis.
Compensation of Directors
The Board of Directors has not adopted any policy regarding the compensation of directors. Both of the current directors are employees of Hairong, and receive no separate compensation for service on the Board of Directors.
Equity Grants
The following tables set forth certain information regarding the stock options acquired by the Company’s Chief Executive Officer and Chief Financial Officer during the year ended June 30, 2009 and those options held by him and her on June 30, 2009.
Option Grants in the Last Fiscal Year
The following tables set forth certain information regarding the stock grants received by the executive officers named in the table above during the year ended June 30, 2009 and held by them unvested at June 30, 2009.
Unvested Stock Awards in the Last Fiscal Year
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information known to us with respect to the beneficial ownership of our common stock as of the date of this prospectus by the following:
·
each shareholder known by us to own beneficially more than 5% of our common stock;
·
Fu Qiang, our Chief Executive Officer
·
each of our directors; and
·
all directors and executive officers as a group.
There are 20,000,000 shares of our common stock outstanding on the date of this report. Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below have sole voting power and investment power with respect to their shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission.
In computing the number of shares beneficially owned by a person and the percent ownership of that person, we include shares of common stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days. We do not, however, include these “issuable” shares in the outstanding shares when we compute the percent ownership of any other person.
________________________________
(1)
The address for Fu Qiang and Fu Zhiguo is 15 West 39th Street, Suite 14A, New York, NY 10018.
(2)
The address for Zong Guoqing and Hu Yumei is Hairong’s address in Harbin.
(3)
All shares are owned both of record and beneficially.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
On October 1, 2007 Fu Qiang, the Chairman of Hairong, contributed to Hairong 70% of the ownership interest in Fortune Global Investment Advisory Co., Ltd. In January 2009 Mr. Fu contributed the remaining 30%. Mr. Fu made the contribution without payment by Hairong.
Other than the aforesaid relationship, none of the officers or directors of China Digita Animation has engaged in any transaction with China Digital Animation or its subsidiaries during the past two fiscal years or the current fiscal year that had a transaction value in excess of $120,000.
Director Independence
None of the members of the Company’s Board of Directors is an independent director, pursuant to the definition of “independent director” under the Rules of The NASDAQ Stock Market.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
P.C. Liu, CPA P.C. has been the independent accountant for Hairong since 2007. In November 2008, when China Digital Animation acquired Hairong, P.C. Liu, CPA P.C. became the independent accountant for China Digital Animation.
Audit Fees
P.C. Liu, CPA P.C. billed $45,000 to the Company for professional services rendered for the audit of financial statements for the fiscal year ended June 30, 2009.
Audit-Related Fees
P.C. Liu, CPA P.C. billed $0 to the Company during 2009 for assurance and related services that are reasonably related to the performance of the 2009 audit or review of the quarterly financial statements. .
Tax Fees
P.C. Liu, CPA P.C. billed $0 to the Company during fiscal 2009 for professional services rendered for tax compliance, tax advice and tax planning.
All Other Fees
P.C. Liu, CPA P.C. billed $0 to the Company in fiscal 2009 for services not described above.
It is the policy of the Company that all services other than audit, review or attest services must be pre-approved by the Board of Directors. No such services have been performed by P.C. Liu, CPA P.C..
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibit List
3-a
Certificate of Incorporation, as amended through 2003 - Filed as an exhibit to the Company’s Registration Statement on Form 10-SB (File No. 000-50441) and incorporated herein by reference.
3-a(1)
Certificate of Amendment of Certificate of Incorporation, filed on January 30, 2009 - filed as an exhibit to the Current Report on Form 8-K dated January 30, 2009 and filed on February 4, 2009 and incorporated herein by reference.
3-b
Bylaws - Filed as an exhibit to the Company’s Registration Statement on Form 10-SB (File No. 000-50441) and incorporated herein by reference.
10-a
Consulting Services Agreement dated June 27, 2008 between RDX Holdings Limited and Heilongjiang Hairong Science and Technology Development Co., Ltd. (1)
10-b
Operating Agreement dated June 27, 2008 among RDX Holdings Limited, Heilongjiang Hairong Science and Technology Development Co., Ltd., and the shareholders of Heilongjiang Hairong Science and Technology Development Co., Ltd.(1)
10-c
Equity Pledge Agreement dated June 27, 2008 between RDX Holdings Limited and the shareholders of Heilongjiang Hairong Science and Technology Development Co., Ltd.(1)
10-d
Option Agreement dated June 27, 2008 among RDX Holdings Limited, Heilongjiang Hairong Science and Technology Development Co., Ltd., and the shareholders of Heilongjiang Hairong Science and Technology Development Co., Ltd.(1)
10-e
Proxy Agreement dated June 27, 2008 among RDX Holdings Limited, Heilongjiang Hairong Science and Technology Development Co., Ltd., and the shareholders of Heilongjiang Hairong Science and Technology Development Co., Ltd.(1)
Subsidiaries - RDX Holdings Limited , British Virgin Islands corporation
31.1
Rule 13a-14(a) Certification - CEO
31.2
Rule 13a-14(a) Certification - CFO
Rule 13a-14(b) Certifications
_____________________________________
(1)
Filed as an Exhibit to the Current Report on Form 8-K dated November 12, 2008 and filed on November 12, 2008, and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA DIGITAL ANIMATION DEVELOPMENT, INC.
Date: October 20, 2009
By: /s/ Fu Qiang
Fu Qiang, Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Fu Qiang
October 20, 2009
Fu Qiang
Director, Chief Executive Officer
/s/ Hu Yumei
October 20, 2009
Hu Yumei
Chief Financial and Accounting Officer
/s/ Zong Guoqing
October 20, 2009
Zong Guoqing, Director