form10-q.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

 [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934 for the transition period from _______ to _______

CHINA DIGITAL MEDIA CORPORATION

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

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

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

(Address of principal executive offices)

(011) 852-2390-8600

(Issuer's telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNo 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [ ]

Non-accelerated filer [ ] Smaller reporting company [X]

(Do not check if a smaller reporting company)

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

Number of shares of common stock outstanding as of November 3, 2010: 42,706,363

Number of shares of preferred stock outstanding as of November 3, 2010: 1,875,000

CHINA DIGITAL MEDIA CORPORATION

INDEX TO FORM 10-Q

		Page No.

PART I

Item 1. Financial Statements

	Condensed Consolidated Balance Sheet - September 30, 2010 (unaudited)	3

	Condensed Consolidated Statements of Operations And Comprehensive Income - Nine months Ended September 30, 2010 and 2009 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows - Nine months Ended September 30, 2010 and 2009 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6 - 9

Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations		10

Item 4. Controls and Procedures		12

PART II

	Item 1. Legal Proceedings	13

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	13

	Item 3. Defaults Upon Senior Securities	13

	Item 4. Reserved	13

	Item 5. Other Information	13

	Item 6. Exhibits	13

	Signatures	14

ITEM 1. FINANCIAL STATEMENTS

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2010 (UNAUDITED)

ASSETS
	September 30, 2010			December 31, 2009
	(Unaudited)			(Audited)
CURRENT ASSETS
Cash and cash equivalents	$	397,817		$	1,639,971
Restricted cash		1,951,847			1,960,612
Accounts receivable, net of allowances		2,362,373			1,449,800
Inventories, net		789,539			658,734
Other receivables and prepaid expenses		94,640			308,519
Due from a related company		112,008			238,016
Deferred tax asset		1,144,093			1,064,552
Total Current Assets		6,852,317			7,320,204

INTANGIBLE ASSETS, NET of impairment of $3,996,595		324,330			324,330
PROPERTY AND EQUIPMENT, NET of impairment of $7,777,071		7,089,806			18,067,189
TOTAL ASSETS	$	14,266,453		$	25,711,723

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Convertible debentures, net of discount	$	950,000		$	2,864,250
Bank loans		4,032,258			4,149,135
Accounts payable		5,463,790			7,505,024
Other payables and accrued liabilities		1,778,300			1,413,979
Due to directors		307,186			180,157
Due to a stockholder		9,270			9,270
Due to related companies		483,325			464,566
Business and other tax payable		2,937			19,015
Income tax payable		617,728			620,458
Total Current Liabilities		13,644,794			17,225,854

LONG TERM LIABILITIES
Convertible debentures, net of discount		1,814,250			-
Accounts payable		479,079			2,125,773
Total Long Term Liabilities		2,293,329			2,125,773

COMMITMENTS AND CONTINGENCIES		-			-


STOCKHOLDERS' EQUITY
Series A convertible preferred stock ($0.001 par value, 40,000,000 shares
authorized,1,875,000 shares issued and outstanding as of
September 30, 2010 and December 31, 2009)		1,875			1,875
Common stock ($0.001 par value, 500,000,000 shares authorized,
42,706,363 shares issued and outstanding as of September 30, 2010
and December 31, 2009)		42,706			42,706
Additional paid-in capital		14,984,021			14,984,021
Retained earnings
Unappropriated		(19,839,283	)		(12,136,140	)
Appropriated		1,521,997			1,521,997
Accumulated other comprehensive income		1,617,014			1,945,637
Total Stockholders' Equity		(1,671,670	)		6,360,096

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	14,266,453		$	25,711,723

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

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 and 2009

(UNAUDITED)

	For the three months ended						For the nine months ended
	September 30						September 30
	2010			2009			2010			2009

NET SALES
Revenue from digitalization of television signals	$	2,190,892		$	2,560,278		$	6,641,290		$	6,367,291
Revenue from television advertising		500,297			94,984			961,580			239,287
Revenue from software development		-			33,621			-			33,621
		2,691,189			2,688,883			7,602,870			6,640,199
COST OF SALES
Cost of Sales - digitalization of television signals		(199,008)			(531,531	)		(689,642	)		(1,025,858	)
Depreciation - digitalization of television signals		(1,028,582)			(1,156,772	)		(3,582,315)			(3,433,479	)
Cost of Sales - television advertising		(391,090)			(125,186	)		(782,165	)		(203,852	)
		(1,618,680)			(1,813,489	)		(5,054,122	)		(4,663,189	)
GROSS PROFIT		1,072,509			875,394			2,568,748			1,977,010

OPERATING EXPENSES
Selling, general and administrative expenses		(836,844	)		(777,031	)		(2,366,359	)		(1,962,391	)
Impairment loss of tangible assets		(7,777,071	)		-			(7,777,071	)		-
Depreciation and amortization		(19,974	)		(19,394	)		(56,172	)		(62,309	)
Total Operating Expenses		(8,633,889	)		(796,425	)		(10,199,602	)		(2,024,700	)

(LOSS) INCOME FROM OPERATION		(4,160,001	)		78,969			(4,249,475	)		(47,690	)

OTHER INCOME (EXPENSES)
Interest income		3,370			477			24,407			1,401
Other income		170,361			985,582			474,209			1,268,100
Interest expense		(137,852	)		(89,649	)		(336,061	)		(254,344	)
Interest paid to related companies and directors		(4,993	)		(5,676	)		(14,346	)		(17,438	)
Other expenses		(98,869	)		(500	)		(115,644	)		(2,225	)
Total Other Income, net		(67,983	)		890,234			32,565			995,494

NET (LOSS) INCOME BEFORE TAXES		(7,629,363	)		969,203			(7,618,289	)		947,804

Income tax (expense) income		(71,603	)		1,118,824			(84,853	)		1,071,466
NET (LOSS) INCOME		(7,700,966	)		2,088,027			(7,703,142	)		2,019,270

OTHER COMPREHENSIVE INCOME
Foreign currency translation loss		(274,913	)		(224,626	)		(328,623	)		(209,992	)

COMPREHENSIVE (LOSS) INCOME	$	(7,978,879	)	$	1,863,401		$	(8,031,765	)	$	1,809,278

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

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 and 2009

(UNAUDITED)

	2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES
Total net loss	$	(7,703,143	)	$	(68,757	)
Adjusted to reconcile net loss to cash provided by operating activities:
Depreciation-cost of sales		3,582,315			2,276,707
Depreciation and amortization		56,172			42,915
Provision for doubtful debts		(276,825	)		-
Impairment loss of tangible assets		7,777,071			-
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable		(635,748	)		(695,792	)
Other receivables and prepaid expenses		134,338			(637,173	)
Due from a related company		126,008			-
Inventories		352,961			265,256
Increase (decrease) in:
Accounts payable		(3,687,928	)		928,455
Other payables and accrued liabilities		364,321			(177,616	)
Business tax payable		(16,078	)		(1,646	)
Income tax payable		(2,730	)		47,285
Net cash provided by operating activities		70,734			1,979,634

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(1,362,120	)		(1,856,677	)
Net cash used in investing activities		(1,362,120	)		(1,856,677	)

CASH FLOWS FROM FINANCING ACTIVITIES
Due to related companies		18,759			66,098
Convertible debentures redeemed		(100,000	)		-
Bank loans drawn down		(116,877	)		-
Due to a stockholder		-			(387,061	)
Due to directors		127,029			187
Net cash used in financing activities		(71,089	)		(320,776	)

EFFECT OF EXCHANGE RATE ON CASH		111,556			13,327

NET INCREASE IN CASH AND CASH EQUIVALENTS		(1,250,919	)		(184,492	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		3,600,583			436,062

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	2,349,664		$	251,570

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	221,831		$	247,650
Cash paid for income tax	$	2,787		$	-

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
No non-cash financing actiivities were noted during the period

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

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2010 (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

(A) Basis of Presentation

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

In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments consisting only of normal recurring accruals considered necessary to present fairly the Company's consolidated financial position at September 30, 2010, the consolidated results of operations for the nine months ended September 30, 2010 and 2009, and consolidated statements of cash flows for the nine months ended September 30, 2010 and 2009. The consolidated results for the nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2010. These consolidated financial statement should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2009 appearing in the Company's annual report on Form 10-K as filed with the Securities and Exchange Commission.

(B)	Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements for the nine months ended September 30, 2010 include the unaudited financial statements of China Digital Media Corporation (“CDMC”) and its wholly owned or controlled subsidiaries, China Digimedia Holding Limited (“CDHL”), Arcotect (Guangzhou) Limited (“AGL”), Guangdong M-Rider Media Company (“M-Rider”), its 100% variable interest entity (“VIE”) in Guangdong HuaGuang DigiMedia Culture Development Limited (“HuaGuang”), and Arable Media Limited (“Arable”) and Arable (Guangzhou) Limited (“Arable GZ”) (collectively, “the Company”).

The accompanying unaudited condensed consolidated financial statements for the nine months ended September 30, 2009 include the financial statements of CDMC and its wholly owned subsidiaries, CDHL, AGL, M-Rider, Arable, Arable GZ and its 100% VIE in HuaGuang.

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

(C)	Revenue Recognition

Digitalization of Television Signals

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

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

Television Advertising Sales

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

Software Development

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

(D)	Property and Equipment

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

Depreciation of STB

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

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2010 (UNAUDITED)

(E)	Valuation of Financial Instruments

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

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

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

The Company accounts for non-hedging contracts that are indexed to, and potentially settled in, its own common stock in accordance with the provisions of Emerging Issues Task Force 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”). These non-hedging contracts accounted for in accordance with EITF 00-19 include freestanding warrants to purchase the Company’s common stock as well as embedded conversation features that have been bifurcated from the host contract in accordance with the requirements of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). Under certain circumstances that could require the Company to settle these equity items in cash or stock, and wit hout regard to probability, EITF 00-19 could require the classification of all or part of the item as a liability and the adjustment of that reclassified amount to fair value at each reporting period, with such adjustments reflected in the line item of change in valuation of derivative as other income (expenses) in the statements of operations.

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

(F)	Recent Accounting Pronouncements

FASB Accounting Standards Codification (Accounting Standards Update (“ASU”) 2009-01)

In June 2009, FASB approved the FASB Accounting Standards Codification (“the Codification”) as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (“SEC”), have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become nonauthoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for interim or annual periods ending after September 0;15, 2009, and impacts the Company’s financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There have been no changes to the content of the Company’s financial statements or disclosures as a result of implementing the Codification during the quarter ended September 30, 2009.

As a result of the Company’s implementation of the Codification during the quarter ended September 30, 2010, previous references to new accounting standards and literature are no longer applicable. In the current quarter financial statements, the Company will provide reference to both new and old guidance to assist in understanding the impacts of recently adopted accounting literature, particularly for guidance adopted since the beginning of the current fiscal year but prior to the Codification. The adoption of this standard did not have any impact on the Company's results of operations, cash flows or financial positions for the year ended September 30, 2009.

Subsequent Events

(Included in Accounting Standards Codification (“ASC”) 855 “Subsequent Events”, previously SFAS No. 165 “Subsequent Events”)

SFAS No. 165 established general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or available to be issued (“subsequent events”). An entity is required to disclose the date through which subsequent events have been evaluated and the basis for that date. For public entities, this is the date the financial statements are issued. SFAS No. 165 does not apply to subsequent events or transactions that are within the scope of other GAAP and did not result in significant changes in the subsequent events reported by the Company. SFAS No. 165 became effective for interim or annual periods ending after June 15, 2009 and did not impact the Company’s financial statements. The Company evaluated for subsequent events thro ugh the issuance date of the Company’s financial statements. No recognized or non-recognized subsequent events were noted.

Determination of the Useful Life of Intangible Assets

(Included in ASC 350 “Intangibles — Goodwill and Other”, previously FSP SFAS No. 142-3 “Determination of the Useful Lives of Intangible Assets”)

FSP SFAS No. 142-3 amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under previously issued goodwill and intangible assets topics. This change was intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under topics related to business combinations and other GAAP. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. FSP SFAS No. 142-3 became effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of FSP SFAS No. 142-3 did not impact the Company’s financial statements.

Noncontrolling Interests

(Included in ASC 810 “Consolidation”, previously SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51”)

SFAS No. 160 changed the accounting and reporting for minority interests such that they will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 became effective for fiscal years beginning after December 15, 2008 with early application prohibited. The Company implemented SFAS No. 160 at the start of fiscal 2009 and no longer records an intangible asset when the purchase price of a noncontrolling interest exceeds the book value at the time of buyout. Any excess or shortfall for buyouts of noncontrolling interests in mature restaurants is recognized as an adjustment to additional paid-in capital in stockholders’ equity. Any shortfall resulting from the early buyout of noncontrolling interests will continue to be recognized as a benefit in partner investment expens e up to the initial amount recognized at the time of buy-in. Additionally, operating losses can be allocated to noncontrolling interests even when such allocation results in a deficit balance (i.e. book value can go negative).

The Company presents noncontrolling interests (previously shown as minority interest) as a component of equity on its consolidated balance sheets. Minority interest expense is no longer separately reported as a reduction to net income on the consolidated income statement, but is instead shown below net income under the heading “net income attributable to noncontrolling interests.” The adoption of SFAS No. 160 did not have any other material impact on the Company’s financial statements.

Consolidation of Variable Interest Entities — Amended

(To be included in ASC 810 “Consolidation”, SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”)

SFAS No. 167 amends FASB Interpretation No. 46(R) “Consolidation of Variable Interest Entities regarding certain guidance for determining whether an entity is a variable interest entity and modifies the methods allowed for determining the primary beneficiary of a variable interest entity. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS No. 167 is effective for the first annual reporting period beginning after November 15, 2009, with earlier adoption prohibited. The Company will adopt SFAS No. 167 in fiscal 2010 and does not anticipate any material impact on the Company’s financial statements.

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2010 (UNAUDITED)

NOTE 2 - SEGMENT INFORMATION

The Company operates in four reportable segments; digitalization of television signals, television advertising sales, software development, and investment in television series. The accounting policies of the segments are the same as described in the summary of significant accounting policies. The Company evaluates segment performance based on income from operations. All inter-company transactions between segments have been eliminated on consolidation. As a result, the components of operating income for one segment may not be comparable to another segment. The following is an unaudited summary of our segment information for the nine months ended September 30, 2010 and 2009:

	Digitalization									Investments
	of Television			Television			Software			in Television
	Signals			Advertising			Development			Series			Total
2010
Revenues	$	6,641,290		$	961,580		$	-		$	-		$	7,602,870
Gross profit		2,369,334			179,414			-			-			2,548,748
Net loss		(6,871,309	)		(47,788	)		(104,867	)		(108,349	)		(7,132,313	)
Total assets		11,274,701			1,336,867			1,651,823			3,062			14,266,453
Capital expenditure		(742,197	)		114,084			-			(2,394	)		(630,507	)
Depreciation and amortization	$	3,617,992		$	-		$	20,495		$	-		$	3,638,487

2009
Revenues	$	6,367,291		$	239,287		$	33,621		$	-		$	6,640,199
Gross profit		1,907,954			35,435			33,621			-			1,977,010
Net Income (loss)		2,773,396			(54,862	)		(142,625	)		(10,285	)		2,565,624
Total assets		18,800,158			984,207			1,553,554			104,758			21,442,677
Capital expenditure		4,515,325			8,430			38,108			454			4,562,317
Depreciation and amortization	$	3,472,757		$	-		$	22,748		$	283		$	3,495,788

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

	2010			2009

Total net (loss) income for reportable segments	$	(7,132,313	)	$	2,565,624
Unallocated amounts relating to corporate operations
Interest expenses		205,615			239,889
Interest paid to related companies and directors		14,346			17,438
Administration expenses		161,100			233,246
Professional fees		74,125			53,555
Other expense		115,644			2,225

Total net (loss) income	$	(7,703,142	)	$	2,019,270

NOTE 3 - EARNINGS PER SHARE

As of September 30, 2010, the Company has outstanding:

-	42,706,363 shares of common stock;
-	1,875,000 shares of preferred stock;
-	6,888,882 shares of common stock to be issued upon conversion of convertible debenture;
-	warrants to purchase 6,888,882 shares of common stock at an exercise price of $0.80 per share, expire in November 2012;
-	warrants to purchase 6,888,882 shares of common stock at an exercise price of $1.20 per share, expire in November 2012; and
-	warrants to purchase 3,444,441 shares of common stock at an exercise price of $2.25 per share, expire in November 2012.

In accordance with paragraph 40 and 41 of SFAS 128 and EITF 03-6, basic and diluted earnings per share on a two classes method for the nine months ended September 30, 2010 and 2009 are calculated as follows:

	2010			2009

Net (Loss) Income	$	(7,703,142	)	$	2,019,270

Basic - 2 classes method
(Loss) Income available to common stockholders	$	(7,703,142	)	$	2,019,270

Weighted-average common stock outstanding		42,706,363			42,706,363

Basic earnings per share - Common Stock	$	(0.18	)	$	0.05

Diluted
(Loss) Income available to common stockholders	$	(7,703,142	)	$	2,019,270

Diluted weighted-average common stock outstanding		63,005,030			63,005,030

Diluted earnings per share	$	(0.12	)	$	0.03

Warrants to purchase 6,888,882 shares of common stock at $0.80 per share, 6,888,882 shares of common stock at $1.20 per share and 3,444,441 shares of common stock at $2.25 per share were outstanding as of September 30, 2010 but were not included in the computation of diluted earnings per share because the warrants’ exercise price was greater than the market price of the common shares.

CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2010 (UNAUDITED)

NOTE 4 - COMMITMENTS AND CONTINGENCIES

Contingencies

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

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

The Company contests the allegations of the Plaintiffs and has retained counsel admitted to practice in the U.S. District Court for the Southern District of New York to vigorously defend the action. The Company did not hire a stock promoter or a spammer to distribute the alleged e-mails, and the alleged emails themselves recite that they were not paid for by the Company or an affiliate. The United States District Court for the Southern District of New York issued a decision dismissing Ziegler’s lawsuit against the Company in its entirety on July 12, 2010. The Plaintiffs did not file any appeal within the one month period. And the case is closed.

NOTE 5 - COMMON STOCK

During the nine months ended September 30, 2010, the Company did not issue any shares.

NOTE 6 - CONVERTIBLE DEBENTURE

The following is a summary of debenture as at September 30, 2010 and December 31, 2009.

		September 30,		December 31,
		2010		2009
		(Unaudited)		(Audited)


$2,150,000 Convertible Debentures, net of $135,000 conversions, $100,750 redemption and unamortized discount of $0 as of September 30, 2010 and December 31, 2009 and another $100,000 redemption as of September 30, 2010 at 10% interest per annum due each quarter end in 2010 and 2011 which expires on December 31, 2011	$	1,814,250	$	1,914,250


$500,000 Convertible Debentures, net of unamortized discount of $0 as of September 30, 2010 and December 31, 2009 at 13% interest per annum for the year 2009 due at the end of 2009, and at 14% interest per annum for the year 2010 which expired on December 31, 2010.		500,000		500,000


$200,000 Convertible Debentures, net of unamortized discount of $0 as of September 30, 2010 and December 31, 2009 respectively at 4% interest per annum which expired in May 2008, in default		200,000		200,000


$150,000 Convertible Debentures, net of unamortized discount of $0 as of September 30, 2010 and December 31, 2009 at 10% per annum respectively which expires on December 31, 2010		150,000		150,000


$100,000 Convertible Debentures, net of unamortized discount of $0 as of September 30, 2010 and December 31, 2009 at 4% interest per annum which expired in June 2008, in default		100,000		100,000

	$	2,764,250	$	2,864,250

For the fiscal quarter ended September 30, 2010, the Company has convertible debentures with total value of $2,764,250 outstanding. The aforesaid convertible debentures were issued pursuant to the private equity financing where the Company sold a total 31 units of securities. Each unit consists of (i) an eighteen-month 4% interest bearing convertible debenture in the principal amount of $100,000, convertible at $0.45 per share, (ii) a six-year Class A warrant to purchase 222,222 shares of the Company’s common stock, par value $0.001 per share at an exercise price of $0.80 per share, a (iii) six-year Class B warrant to purchase 222,222 shares of the Company’s common stock at an exercise price of $1.20 per share, and (iv) a six-year Class C warrant to purchase 111,111 shares of the Company’s common stock at an exercise price of $2.25 per share. The securities issuable upon conversion of the debenture and exercise of the warrants are eligible for certain registration rights.

On December 08, 2008, March 24, 2009 and December 1, 2009, the Company entered into various extension agreements (the “Extension Agreement”) with three of the debenture holders in connection with the convertible debenture for the amount of $2,665,000 because the Company did not have sufficient fund to repay the debenture due. One of the Extension Agreement was filed with the Form 8-K on December 12, 2008. The Company is also in contact with other debenture holders but has not agreed on any terms of extension up to the date of this report.

On July 20, 2010, the Company entered into a second extension agreement with one of the debenture holders in connection with the convertible debenture for the amount of $1,914,250 because the Company did not have sufficient fund to repay the debenture due on June 30, 2010. Such extension agreement was filed with the Form 8-K on July 21, 2010.

NOTE 8 - RELATED PARTY TRANSACTIONS

As of September 30, 2010, the Company owed two directors $426,810 for short-term advances. Interest is charged at 6% per annum on the amount owed.

As of September 30, 2010, the Company owed to related companies $371,317 for short-term unsecured advances made. Interest is charged at 6% per annum on the amount owed.

As of September 30, 2010, the Company owed to a stockholder $9,270 for short-term advances made. Interest is charged at 6% per annum on the amount owed.

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

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

We caution that the factors described herein, as well as the factors described generally in our Form 10-K for the year ended December 31, 2009, and specifically the factors described in such Form 10-K in the section entitled “Item 1. Business - Risk Factors”-, could cause actual results to differ materially from those expressed in any forward-looking statements and that the investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events or circumstances. Consequently, no forward-looking statement can be gua ranteed.

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

Overview

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

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

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

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

Cable TV operations and digital broadcast technology development

AGL, a wholly owned foreign subsidiary of CDMC incorporated in China, is the sole contractor and operator of digital television (“DTV”) services in Nanhai, Guangdong Province, a city with over 440,000 residential and commercial cable television subscribers.

On February 6, 2004, we signed a 20-year Co-operative Agreement for Total Migration into DTV System for the Nanhai District and subsequently signed a supplementary agreement on July 8, 2005 (collectively, the “Co-operative Agreements”) with Nanhai Network Company, a city-owned cable network operator in Guangdong Province. Pursuant to the Co-operative Agreements, the Company was responsible for migrating all cable television subscribers in Nanhai from an analog to a digital system (“Migration”) by the end of 2008. Owing to certain technical issues of the local network upgrade of the Nanhai Network Company, the Migration completion date was re-scheduled to the end of 2009. The Company entered into three supplementary agreements with the Nanhai Network Company in May and December 2007, and in February 2009 pursuant to the Co-operative Agreements, for re-scheduling the Migration completion date to the end of 2008 and then end of 2009. As of September 30, 2010, the Company has migrated about 446,419 subscribers into the digital system and the migration program is completed.

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

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

The broadcast system that decrypts the signal with the Company’s set-top-box and appropriate smart cards can carry up to 800 digital channels of pay-TV programs and value added multimedia services. Currently, the services consist of 85 channels, including a 51-channel basic package , 51 pay channels and 7 high definition TV channels bundled into various value added packages, such as Life & Leisure, World Sports, News, Drama and Family.

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

TV and radio advertising sales

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

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

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

The Company relied on two suppliers for approximately 99% of its purchases in the first six months of 2010 for the Nanhai digitalization of TV system in the Nanhai project. As of September 30, 2010, accounts payable to these suppliers amounted to $5,152,085 and $85,995 for the Nanhai project.

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

RESULTS OF OPERATIONS

Statements of Operations Items:

Sales

Total net sales for the nine months ended September 30, 2010 increased by $962,671 or 14% to $7,602,870 from $6,640,199 for the same period ended September 30, 2009. The increase in total net sales was due to the increase in cable TV subscription fee income out of the increased number of DTV subscribers during the year of 2009 through migration. The basic and additional STBs registered increased from about 540,020 as of September 30, 2009 to 592,975 as of September 30, 2010.

Gross Profit

Gross Profit for the nine months ended September 30, 2010 increased by $571,738 or 29% as compared with the same period last year. The increase was mainly due to the increase in DTV basic subscription fee income as a result of increased number of migrated DTV users since the completion of full migration in Nanhai at the end of 2009, and the increase in advertising income as a result of increased number of customers..

Expenses

Selling, general, administrative and depreciation and amortization (not related directly to generation of revenue) expenses for the nine months ended September 30, 2010 increased by $403,968 or 21% to $2,366,359 in comparison with the nine months period ended September 30, 2009. The increase in these expenses was due to the increased research and development expenses incurred for the value added services for DTV users in NH to be launched at the end of this year.

Impairment loss of tangible assets of $7,777,071 was incurred during the quarter ended September 30, 2010 as a result of the write-down of asset values of STB installed over two years as basic STB provided to the Nanhai users. The Company was instructed by the Nanhai Network Partner Company as a government policy for transferring the titles of STB installed in Nanhai over 2 years as basic STB provided to the Nanhai users free of charge. Accordingly, the net value of the STB classified as tangible assets over 2 years is to be fully impaired.

Net Loss

Net loss after tax was $7,703,142 for the nine months period ended September 30, 2010, compared to a net gain of $2,019,270 for the same period ended September 30, 2009. The increase in net loss was mainly because of the impairment loss of tangible assets booked in this quarter and the lack of tax provision reversed.

Balance Sheet Items:

Current Assets

Current Assets of the Company decreased by $0.5 million to $6.9 million during the first nine months of 2010. As the Company paid several suppliers during the month of September this year before the receipt of the monthly settlement from the Nanhai Network Company, the cash level at month end of September is lower as a result.

Property and Equipment, Net

The net decrease in property and equipment of the Company of $11.0 million is due to a reclassification of STBs from fixed assets to inventory for the returned STBs from the migrated subscribers during the first quarter of 2010, where such returned STBs were held for sales purpose. During September, 2010, the Company was required to transfer the title of all the basic STB to the Nanhai users for those installed over 2 years free of charge. This is in accordance with the policy implemented by the local government and the Nanhai Network Company with a view to reducing the maintenance costs of the basic STB. Accordingly, the Company has changed its depreciation policy of estimated useful life of STB installed which were booked as tangible assets from 5 years to 2 years. Therefore, an impairment loss of $7,777,071 was incurred during the period. Such policy does not change the current level and base of monthly subscription fee income received by the Company from the Nanhai Network Company.

Other Asset

Other assets represent utility deposits, cash advance for business trips to staff and prepayment for general expenses.

Current Liabilities

Current liabilities of the Company decreased by $3.6 million to $13.6 million during the first nine months of 2010. The decrease was mainly attributable to the decrease in account payable to the supplier of STBs as the purchase of STB is greatly reduced from last year as a result of completion of DTV migration at last year end. And the reclassification of the convertible debenture to long term portion as a result of the extension to the end of the year 2011 also caused part of the decrease.

Liquidity and Capital Resources

On September 30, 2010, we had cash of $2,349,664 and a working capital deficit of $6,792,477. This compares with cash of $3,600,583 and a working capital deficit of $9,905,650 at December 31, 2009. The decrease in cash was mainly due to the settlement to the suppliers before month end in September 2010.

Operating activities had a net generation of cash in the amount of $70,734 during the nine months ended September 30, 2010 (2009: $1,979,634) reflecting an excess of revenues over expenditure.

Net cash used in investing activities for the nine months ended September 30, 2010 was $1,362,120 as compared with net cash used in investing activities of $1,856,677 for the nine months ended September 30, 2009. The decrease in net cash used in investing activities was due to the decrease in purchases of STBs in the first nine months of this year.

Net cash used in financing activities for the nine months ended September 30, 2010 was $71,089 representing the partial redemption of the convertible debenture during the period.(2009: used in financing activities $320,776 ).

We continued to receive cash from Nanhai Network Company according to the project schedule and plan of television digitalization migration. The Company's investment in STBs and smart cards remained the substantial accounts payable at September 30, 2010. For further business expansion and acquisition, the Company is considering various financing methods for funding, although there is no assurance that the Company will be able to raise additional funding on favorable terms, if at all.

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

The Company issued a total of $3.1 million in convertible debentures in November and December 2006, which matured in May and June 2008. Due to the Company’s current financial situation with most of the Company’s cash being utilized to make the upfront investment for the Migration, the Company did not have enough cash to repay the debentures. The Company has negotiated with some of the debenture holders to extend the debentures. As of the date of this report, the Company has entered into agreement with three debenture holders holding $650,000 and $1,814,250 in debentures that provided for the extension of their debentures to December 31, 2010 and December 31, 2011 respectively. The Company redeemed partially a debenture for $100,750 from one of the debenture holder on December 31, 2009 and $100,000 from the same debenture holder in July 2010.

Off-Balance Sheet Transactions

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

Foreign Currency Translation Risk

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

The financial statements of the subsidiaries (whose functional currency is HK$ or RMB) are translated into US$ using the closing rate method. The balance sheet items are translated into US$ using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the year. All exchange differences on currency translations are recorded within equity. Translation loss for the nine months ended September 30, 2010 was $328,623.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

During the nine months ended September 30, 2010, the Company did not issue any securities.

Item 3. Defaults Upon Senior Securities

Owing to its tight financial situation, the Company did not fully redeem the debentures that matured in May and June 2008, and June 2010 but offered extension terms to all the debenture holders. The Company paid the debenture interests due on June 30, 2010 to one of the debenture holders who had extended the debenture and redeemed partially such debenture for $200,750 from the same debenture holder on the same date. As of date of this report, three out of five debenture holders have accepted the extension offer.

Item 4. Reserved

Item 5. Other Information

None.

Item 6. Exhibits

EXHIBIT NO		DESCRIPTION OF EXHIBIT

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CHINA DIGITAL MEDIA CORPORATION

(Registrant)

Date: November 10, 2010

/s/ Ng Chi Shing

Ng Chi Shing

Chief Executive Officer

Date:November 10, 2010

/s/ Chung Lai Lok

Chung Lai Lok

Chief Financial Officer