10QSB/A 1 amq093007cdmc.htm CHINA DIGITAL MEDIA FORM 10-QSB/A 093007 amq093007cdmc.htm
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-QSB/A
Amendment No. 1


x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______


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


HAIRMAX INTERNATIONAL CORP.
(Former name of registrant)


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


2505-06, 25/F, Stelux House, 698 Prince Edward Road E. Kowloon, Hong Kong
(Address of principal executive offices)


(011) 852 - 2390 - 8600
(Issuer's telephone number)


Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No ¨

Indicate by check mark whether the registrant 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 8, 2007: 41,602,365

Number of shares of preferred stock outstanding as of November 8, 2007: 1,875,000

 
 

 
 
EXPLANATORY NOTE
 

This Amendment No. 1 to this Quarterly Report of Form 10-QSB for the nine months ended September, 2007 was filed in order to restate the consolidated financial statements as of and for the nine months ended 30 September, 2007 to revise the accounting treatment for the interest cost out of the convertible feature of the debenture issued.  The convertible debenture was issued in Nov 2006. As a result of discussion within our management team, the Company determined that the embedded conversion feature should be recorded based on the relative fair market value of the liability and equity portions. Therefore, the debenture liabilities should be presented at less than their eventual maturity values. The liability and equity components are further reduced for issuance costs initially incurred. The discount of the liability component, net of issuance costs, as compared to maturity value is accreted by the effective interest method over the debenture term.

Part 1 has been amended herein to reflect this change. This amendment does not otherwise update information in the original filing to reflect facts or events occurring subsequent to the date of the original filing.

All other information is unchanged and this Amendment continues to speak as of the date of the Original Filing and the Company has not updated the disclosure in this Amendment to speak to any later date. All information contained in the Amendment and the Original Filing is subject to updating and supplementing as provided in the Registrant’s subsequent periodic reports filed with the Securities and Exchange Commission.
 
 

 


 
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CHINA DIGITAL MEDIA CORPORATION

INDEX TO FORM 10-QSB/A

   
Page
     
PART I
  
     
 
Item 1.  Financial Statements 3
  
     
 
       Condensed Consolidated Balance Sheet - September 30, 2007 (unaudited)
4
     
 
       Condensed Consolidated Statements of Operations And Comprehensive Income
           - Three Months and Nine Months Ended September 30, 2007 and 2006 (unaudited)
5
     
 
       Condensed Consolidated Statements of Cash Flows
           - Nine Months Ended September 30, 2007 and 2006 (unaudited)
6
     
 
       Notes to Condensed Consolidated Financial Statements (unaudited)
7 - 16
     
 
Item 2.  Management's Discussion and Analysis of Financial Condition And  Results of Operations
17
     
 
Item 3.  Controls  and  Procedures
20
     
PART II
  
     
 
Item 1.  Legal  Proceedings
21
     
 
Item 1A. Risk Factors
21
     
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
21
     
 
Item 3.  Defaults Upon Senior Securities
21
     
 
Item 4.  Submission of Matters to a Vote of Security Holders
21
     
 
Item 5.  Other Information
21
     
 
Item 6.  Exhibits and Reports
21
     
           Signatures
22


 
- 3 -
 

PART I

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2007 (RESTATED)
(UNAUDITED)

   
(Restated)
  
       
ASSETS
      
       
CURRENT ASSETS
      
Cash and cash equivalents
   $ 406,679  
Accounts receivable, net of allowances
     9,700,914  
Inventories, net
     657,392  
Other receivables and prepaid expenses
     995,689  
Value added taxes recoverable
     25,077  
Total Current Assets
     11,785,751  
         
INTANGIBLE ASSETS
     4,448,791  
INVESTMENTS IN TELEVISION SERIES, NET
     641,969  
PROPERTY AND EQUIPMENT, NET
     10,613,748  
DEFERRED TAX ASSET
     152,224  
OTHER ASSETS
     902,990  
TOTAL ASSETS
   $ 28,545,473  
         
LIABILITIES AND STOCKHOLDERS' EQUITY
        
         
CURRENT LIABILITIES
        
Convertible debentures
   $ 1,796,851  
Accounts payable
     4,743,823  
Other payables and accrued liabilities
     1,623,746  
Due to a director
     167,167  
Due to related companies
     376,947  
Business tax payable
     112,152  
Income tax payable
     2,333,558  
Other tax payable
     9,940  
Total Current Liabilities
     11,164,184  
         
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, 2007)
     1,875  
Common stock ($0.001 par value, 500,000,000 shares authorized,
      31,602,365 shares issued and outstanding as of September 30, 2007)
     31,602  
Common stock to be issued ($0.001 par value, 10,000,000 shares)
     10,000  
Additional paid-in capital
     14,562,806  
Deferred stock compensation
     (37,100 )
Retained earnings
        
   Unappropriated
     1,352,923  
   Appropriated
     1,521,999  
Accumulated other comprehensive loss
     (62,816 ) 
Total Stockholders' Equity
     17,381,289  
         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   $ 28,545,473  

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

 
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CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)

   
For the three months Ended
    
For the nine months Ended
  
   
September 30,
    
September 30,
  
   
2007
    
2006
    
2007
    
2006
  
   
(Restated)
    
(Restated)
    
(Restated)
    
(Restated)
  
                         
NET SALES
                        
Revenue from digitalization of television signals
  
$
1,361,511
    
$
1,906,869
    
$
4,119,214
    
$
5,514,175
  
Revenue from television advertising
    
33,493
      
1,862,009
      
330,791
      
5,470,873
  
Revenue from software development
    
168
      
8,284
      
22,188
      
41,507
  
Revenue from investments in television series
    
-
      
90,510
      
-
      
265,530
  
Government grant received
    
320,546
      
323,252
      
977,102
      
948,322
  
     
1,715,718
      
4,190,924
      
5,449,295
      
12,240,407
  
COST OF SALES
                                
   Cost of Sales - digitalization of television signals
    
(189,612
)
    
(339,197
)
    
(537,990
)
    
(908,249
)
   Depreciation - digitalization of television signals
    
(817,728
)
    
(674,141
)
    
(2,289,627
)
    
(1,724,427
)
   Cost of Sales - television advertising
    
2,433
      
(1,889,649
)
    
(307,394
)
    
(4,791,220
)
   Cost of Sales - software development
    
-
      
(11
)
    
-
      
(54
)
   Cost of Sales - investment in television series
    
-
      
(61,552
)
    
-
      
(180,942
)
GROSS PROFIT
    
710,811
      
1,226,374
      
2,314,284
      
4,635,515
  
                                 
OPERATING EXPENSES
                                
Selling, general and administrative expenses
    
(1,279,662
)
    
(618,924
)
    
(2,539,668
)
    
(1,709,230
)
Depreciation and amortization
    
(24,679
)
    
282,159
      
(72,775
)
    
(89,213
)
Total Operating Expenses
    
(1,304,341
)
    
(336,765
)
    
(2,612,443
)
    
(1,798,443
)
                                 
(LOSS) INCOME FROM OPERATION
    
(593,530
)
    
889,609
      
(298,159
)
    
2,837,072
  
                                 
OTHER INCOME (EXPENSES)
                                
    Equity loss of affiliates
    
--
      
 --
      
(22,396
) 
    
 --
  
Interest income
    
796
      
267
      
1,666
      
25,631
  
Other income
    
40,773
      
1,899
      
63,831
      
80,020
  
Amortization of convertible debt discount
    
(516,666
)
    
--
      
(1,549,998
)
    
--
  
Interest expenses
    
(32,087
)
    
(4,948
)
    
(95,115
)
    
(4,948
)
Interest paid to related companies and directors
    
(4,293
)
    
(4,045
)
    
(10,037
)
    
(10,479
)
Other expenses
    
2,411
      
-
      
(28,905
)
    
--
  
Total Other (Expenses) Income, net
    
(509,066)
      
(6,827
)
    
(1,640,954
)
    
90,224
  
                                 
NET (LOSS) INCOME BEFORE TAXES
    
(1,102,596
)
    
882,782
      
(1,939,113
)
    
2,927,296
  
    Income tax expense
    
(82,334
)
    
(191,386
)
    
(129,128
)
    
(887,488
)
NET (LOSS) INCOME FROM CONTINUING OPERATIONS
    
(1,184,930
)
    
691,396
      
(2,068,241
)
    
2,039,808
  
                                 
DISCONTINUED OPERATIONS
                                
Equity (loss) gain of affiliates
    
(2,104
) 
    
253
      
(14,538
) 
    
(1,149
)
Loss from subsidiary
    
-
      
(41,376
)
    
-
      
(45,688
)
Gain on disposal of subsidiary
    
362,109
      
-
      
225,415
      
-
  
Gain on disposal of affiliate
    
86,059
      
-
      
86,059
      
-
  
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
    
446,064
      
(41,123
)
    
296,936
      
(46,837
)
                                 
NET (LOSS) INCOME
  
$
(738,866
)
  
$
650,273
    
$
(1,771,305
)
  
$
1,992,971
  
                                 
OTHER COMPREHENSIVE LOSS
                                
Foreign currency translation loss
    
(156,180
) 
    
(48,723
)
    
(37,601
) 
    
(48,363
)
                                 
COMPREHENSIVE (LOSS) INCOME
  
$
(895,046
)
  
$
601,550
    
$
(1,808,906
)
  
$
1,944,608
  
                                 
Net income per share-basic - two classes method
  
$
-0.01
    
$
0.02
    
$
-0.04
    
$
0.06
  
                                 
Net income per share-diluted
  
$
0.00
    
$
0.02
    
$
0.00
    
$
0.05
  
                                 
Weighted average number of shares outstanding during the period - basic
    
41,602,365
      
31,748,365
      
36,405,232
      
31,471,286
  
                                 
Number of preferred shares outstanding during the period
    
1,875,000
      
1,875,000
      
1,875,000
      
1,875,000
  
                                 
Weighted average number of shares outstanding during the period- diluted
    
57,866,247
      
41,220,139
      
52,669,114
      
40,878,544
  

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

 
- 5 -
 
 
CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
 
   
2007
    
2006
  
   
(Restated)
    
(Restated)
  
             
CASH FLOWS FROM OPERATING ACTIVITIES
            
    Net (loss) income
  
$
(1,771,305
)
  
$
1,992,971
  
Adjusted to reconcile net income to cash provided by operating activities:
                
Equity loss of affiliate
    
36,934
      
1,149
  
Amortization - cost of sales
    
-
      
160,892
  
Depreciation-cost of sales
    
2,289,627
      
1,724,427
  
Depreciation and amortization
    
72,775
      
98,101
  
Provision for doubtful debts
    
977,972
      
-
  
Gain on disposal of interest in subsidiary
    
(255,415
)
    
-
  
Gain on disposal of affiliate
    
(86,059
) 
    
-
  
Stock issued for services
    
-
      
128,500
  
Amortization on stock compensation
    
47,700
      
-
  
Amortization of convertible debt discount
    
1,549,998
      
-
  
Minority interests
    
-
      
(63,322
)
Changes in operating assets and liabilities:
                
(Increase) decrease in:
                
  Accounts receivable
    
(890,135
)
    
(5,165,390
)
  Other receivables and prepaid expenses
    
(650,165
)
    
(705,200
)
  Inventories
    
(181,911
)
    
(102,984
)
  Deferred tax asset
    
(152,224
)
    
-
  
  Other assets
    
156,504
      
-
  
Increase (decrease) in:
                
  Due to a related company
    
-
      
(125,602
)
  Accounts payable
    
(1,147,515
)
    
3,462,529
  
  Other payables and accrued liabilities
    
(161,599
)
    
996,543
  
  Business tax payable
    
(153,503
)
    
-
  
  Value added taxes payable
    
38,133
      
(7,690
)
  Income tax payable
    
378,758
      
936,224
  
  Other tax payable
    
(23,937
)
    
-
  
Net cash provided by operating activities
    
74,633
      
3,331,148
  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
                
Net cash inflow from business combination (Note 2)
    
61
      
-
  
Disposal (acquisition) of affiliates
    
265,924
      
(323,128
)
Investment in affiliate
    
360,684
      
-
  
Disposal of subsidiary (Note 5)
    
87,333
      
-
  
Purchase of property and equipment
    
(1,470,751
)
    
(5,590,817
)
Net cash used in investing activities
    
(756,749
)
    
(5,913,945
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
                
Due to related companies
    
(3,539
)
    
-
  
Proceeds from stock issuance in private placement
    
-
      
387,500
  
Proceeds from convertible debentures
    
-
      
1,100,000
  
Minority interests
    
92,918
      
122,514
  
Due to a stockholder
    
779,101
      
 -
  
Due to a director
    
82,511
      
84,472
  
Net cash provided by financing activities
    
950,991
      
1,694,486
  
                 
EFFECT OF EXCHANGE RATE ON CASH
    
(264,787
) 
    
14,662
  
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
4,088
      
(873,649
)
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
402,591
      
1,124,912
  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  
$
406,679
    
$
251,263
  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                
Cash paid for interest
  
$
-
    
$
-
  
Cash paid for income tax
  
$
-
    
$
-
  

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

 
- 6 -
 
 
CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
AS OF SEPTEMBER 30, 2007 (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, 2007, the consolidated results of operations for the three months and nine months ended September 30, 2007 and 2006, and consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006. The consolidated results for the three months and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2007. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2006 appearing in the Company's annual report on Form 10-KSB as filed with the Securities and Exchange Commission.

(B)
Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements for the three months and nine months ended September 30, 2007 include the unaudited financial statements of China Digital Media Corporation (“CDMC”), its wholly owned or controlled subsidiaries, China Digimedia Holding Limited (“CDHL”), Arcotect (Guangzhou) Limited (“AGL”),  Guangdong M-Rider Media Company (“M-Rider”),  Digimedia Services (Shenzhen) Limited (“Digimedia Shenzhen”), Maxcomm Limited (“Maxcomm”), Arable Media Limited (“Arable”) and its 100% variable interest entity (“VIE”) in Guangdong HuaGuang DigiMedia Culture Development Limited (“HuaGuang”).

The accompanying unaudited condensed consolidated financial statements for the three months and nine months ended September 30, 2006 include the financial statements of CDMC, its wholly owned subsidiaries, CDHL, AGL, M-Rider, Digimedia Shenzhen, and its 90% VIE in HuaGuang. The minority interests represent the minority shareholders’ 10% and 54.1% proportionate share of the results of HuaGuang and Guishi Digimedia respectively.

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 charges installation fees and 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 Nanhai 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 Nanhai Network Company.

Government grant

The local government of Nanhai City also approved a grant of Rmb10,000,000 each year for five years from 2004 to finance the purchase of STB and smart cards for sale and lease to subscribers. The grant is recognized as revenue on a straight line basis.

Television advertising sales

The Company acts as an advertising agent 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. During 2007, the Company purchase blocks of advertising slots and was the primary obligor and carried all of the credit risk for the advertisement placements and accordingly, recorded the full amount of such billings from the advertisement placements as revenue. Deferred revenues are recognized as a liability when billings are received in advance of the date before revenues are earned.

- 7 -
CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
AS OF SEPTEMBER 30, 2007 (UNAUDITED)
 
 
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.

Television series

The Company invested in the production of two television series. Revenue from investments in television series is recognized upon receipt from the production company.

Supplier rebate

Rebate or refund received by the Company from its supplier, either in cash or trade discount, will be considered as an adjustment of the prices of the supplier’s products purchased by the Company. Therefore, it will be characterized as (a) a reduction of cost of sales for subsequent selling of the products by the Company; or (b) a reduction of Property and Equipment for products booked as fixed assets of the Company and subject to deprecation in line with the depreciable life of the relevant products; or (c) a reduction of Inventories for products maintained in stock.

(D)
Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation provides that the tax effects from an uncertain tax position can be recognized in the Company’s financial statements, only if the position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of fiscal 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company does not expect the adoption of FIN 48 to have an impact on the Company’s results of operations or financial condition.

In September 2006, FASB issued Statement 157, Fair Value Measurements. This statement defines fair value and establishes a framework for measuring fair value in generally accepted accounting principles (GAAP). More precisely, this statement sets forth a standard definition of fair value as it applies to assets or liabilities, the principal market (or most advantageous market) for determining fair value (price), the market participants, inputs and the application of the derived fair value to those assets and liabilities. The effective date of this pronouncement is for all full fiscal and interim periods beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 to have an impact on the Company’s results of operations or financial condition.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will become effective for us on January 1, 2008. The Company is currently evaluating the impact this new Standard, but believes that it will not have that it will not have a material impact on the Company’s financial position.

NOTE 2 – BUSINESS COMBINATION

On May 21, 2007, CDHL entered into Stock Purchase and Transfer Agreement (the “Purchase Agreement”) with Lippo Star Investment Limited to purchase 100% of Maxcomm Limited, a corporation incorporated in the British Virgin Islands, which sole asset is an 80% equity interest in Arable Media Limited (“Arable”) in exchange for 10,000,000 shares of restricted common stock of the Company, having a fair value of $3.76 million, based on the 10 days' volume weighted average price. Accordingly, after the acquisition, the Company’s interest in Arable has been increased from 20% to 100%. Arable is a software developer specialised in middleware products and applications for digital TV set-top box and broadcasting technologies. The acquisition was accounted for under the purchase method of accounting in accordance with step acquisition rules in Statement of Financial Accounting Statements No. 141, “Business Combinations.” Accordingly, the operating results of Maxcomm have been included in the consolidated statements of operation and comprehensive income after the effective date of the acquisition of May 21, 2007.
The preliminary allocation of the net liabilities taken over is as follows:

Cash and cash equivalent
   $ 61  
Other receivables and prepaid expenses
     323,452  
Total current assets
     323,513  
         
Property and equipment
     701  
Capitalized software development cost
     592,756  
Total assets
     916,970  
         
Accounts payable and accruals liabilities
     (1,106,823 )
Net liabilities acquired
     (189,853 )
Minority interest
     (2,559 )
Share of pre-acquisition losses prior to becoming a subsidiary
     27,361  
    $ (165,051 )
Consideration for acquisition
     3,760,000  
Goodwill
   $ 3,925,051  

Analysis of the net inflow of cash and cash equivalents in respect of the business combination is as follows:

Cash and cash equivalents acquired
  
$
61
  
Net cash inflow
  
$
61
  

The following table reflects the unaudited pro forma combined results of operations for the six months ended June 30, 2007, assuming the acquisition had occurred at the beginning of 2007.

Revenue
  
$
4,281,485
  
Net loss
  
$
(105,563
)
Net loss per share  -  basic and diluted
  
$
0.00
  

In accordance with SFAS No. 142 “Goodwill and other intangible assets,” goodwill is not amortized but is tested for impairment. The Company performed an assessment on goodwill arising from Maxcomm acquisition and concluded there was no impairment as to the carrying value of the goodwill in this reporting period.

NOTE 3 – BUSINESS DISPOSAL

On August 17, 2007, HuaGuang entered into an Agreement on Transfer of the Equity in Guizhou Guishi Digimedia Advertising Company Limited (“Guishi Digimedia”) and Guizhou Guishi Huaguang Media Company Limited (Guishi Huaguang”) (the “Transfer of Equity Agreement”) with Guizhou Tianma Advertising Co., Ltd. ("Tianma") to sell its shares in Guishi Digimedia (51%) and Guishi Huaguang (49%) to Tianma for a total consideration of US$ 445,000. The Company’s Form 8-K has been filed with the Commission on August 17, 2007.

The consideration will be payable in three installments: (i) 40% of the purchase price was payable within seven business days of execution of the agreement, (ii) 30% of the purchase price is payable within five business days of the completion of the equity transfer, and (iii) 30% of the purchase price is payable by November 30, 2007. If the equity transfer is not completed for reasons not attributable to either party, either party may terminate the agreement and the transaction will be reversed in its entirety. On the completion of the sale, the Company recorded a gain on the disposal of Guishi Digimedia and Guishi Huaguang of $311,474.

- 9 -
CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
AS OF SEPTEMBER 30, 2007 (UNAUDITED)
 

NOTE 4 - INVESTMENT IN AFFILIATES

The Company’s effective interest of 49% in Guishi Huaguang is accounted for using the equity method of accounting and is stated at cost plus equity in undistributed earnings or losses since acquisition. The Company’s share of the net loss for the three months and nine months ended September 30, 2007 was $2,104 and $14,538 respectively. The Company has disposed its 49% equity interest in Guishi Huaguang on August 17, 2007.

A summary of the unaudited condensed financial statements of the affiliate as of August 17, 2007 is as follows:

Current assets
  
$
520,779
  
Non-current assets
    
225,746
  
Total Assets
  
$
746,525
  
         
Current liabilities
  
$
379,454
  
Stockholders’ equity
    
367,071
  
Total Liabilities and Stockholders’ Equity
  
$
746,525
  
         
Revenues
  
$
-
  
Gross Profit
  
$
-
  
Net loss
  
$
29,669
  

The Company’s share of the loss of this year up to August 17, 2007 is as follows:

Company share at 49%
  
$
14,538
  
Equity in loss of affiliate
  
$
14,538
  

Prior to the acquisition of the remaining 80% interest, the Company’s effective interest of 20% in Arable is accounted for using the equity method of accounting and is stated at cost plus equity in undistributed earnings since subscription. The Company’s share of the loss of this year up to May 20, 2007 is as follows:

Company share at 20%
  
$
26,614
  
Equity in loss of affiliate
  
$
26,614
  

NOTE 5 - DISPOSAL OF SUBSIDIARY

According to the Transfer of Equity Agreement, HuaGuang sells its 51% equity interest in Guishi Digimedia.

A summary of the unaudited condensed financial statements of Guishi Digimedia as of August 17 2007 is as follows:

Fixed Assets
  
$
628,560
  
Cash and bank balance
    
97,186
  
Accounts receivable
    
38,927
  
Other receivables
    
85,898
  
Prepaid expenses
    
216,080
  
Due to Stockholders
    
(779,101
)
Accounts payable
    
(77,440
)
Other payables
    
(128,361
)
Accrued liabilities
    
(35,607
)
Deposit received
    
(48,922
)
Minority interest
    
(68,116
)
     
(70,896
)
Gain on disposal of interest in subsidiary
    
373,185
  
Consideration
    
302,289
  
         
Satisfied by:
        
Cash consideration received
    
184,519
  
         
Net cash inflow arising on disposal
        
         
Cash consideration received
    
184,519
  
Cash and bank balance disposed of
    
(97,186
)
     
87,333
  
 

 
NOTE 6 - SEGMENT INFORMATION

The Company operates in five reportable segments; digitalization of television signals, television advertising sales, software development, investment in television series and others. 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, 2007 and 2006:

   
Digitalization of Television Signal
    
Television Advertising
    
Software Development
    
Investments in Television Series
    
Other
    
Total
  
                                     
2007 (Restated)
                                    
 Revenues
  
$
5,096,316
    
$
330,791
    
$
22,188
    
$
-
    
$
-
    
$
5,449,295
  
 Gross profit
    
2,268,699
      
23,397
      
22,188
      
-
      
-
      
2,314,284
  
 Net Income (Loss)
    
934,754
      
(512,663
)
    
(144,672
)
    
(101,358
)
    
(1,947,367
)
    
(1,771,305
)
 Total assets
    
21,135,031
      
265,417
      
1,453,152
      
954,703
      
4,737,170
      
28,545,473
  
 Capital expenditure
    
1,402,139
      
(584,613
)
    
17,376
      
390
      
7,600
      
842,892
  
 Depreciation and amortization
    
2,320,525
      
-
      
6,151
      
28,373
      
7,353
      
2,362,402
  
                                                 
2006 (Restated)
                                                
 Revenues
  
$
6,462,497
    
$
5,470,873
    
$
41,507
    
$
265,530
    
$
-
    
$
12,240,407
  
 Gross profit
    
3,629,594
      
581,826
      
339,507
      
84,588
      
-
      
4,635,515
  
 Net Income
    
2,094,083
      
137,843
      
(105,829
)
    
83,094
      
(216,220
)
    
1,992,971
  
 Total assets
    
18,950,123
      
4,420,163
      
52,965
      
1,100,684
      
862,555
      
25,386,490
  
 Capital expenditure
    
5,061,156
      
416,272
      
3,507
      
104,137
      
5,745
      
5,590,817
  
 Depreciation and amortization
    
1,919,918
      
20,166
      
9,730
      
27,532
      
6,074
      
1,983,420
  

NOTE 7 – EARNINGS PER SHARE

As of September 30, 2007, the Company has outstanding:

-  
31,602,365 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 7,333,323 shares of common stock at an exercise price of $0.80 per share, expire in November 2012;

-  
warrants to purchase 7,333,323 shares of common stock at an exercise price of $1.20 per share, expire in November 2012;

-  
warrants to purchase 3,666,662 shares of common stock at an exercise price of $2.25 per share, expire in November 2012;

-  
warrants to purchase 100,000 shares of common stock at an exercise price of $1.50 per share, expire in July 2011; and

-  
10,000,000 shares of common stock to be issued for the acquisition of Maxcomm.
 

 
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, 2007 and 2006 are calculated as follows:

   
2007
    
2006
  
   
(Restated)
    
(Restated)
  
Earnings
            
Net (Loss)/Income
    
(1,771,305
)
    
1,992,971
  
                 
Basic - 2 classes method
                
(Loss) / Income available to common stockholders
    
(1,771,305
)
    
1,992,971
  
                 
Weighted-average common stock outstanding
    
36,405,232
      
31,471,286
  
Number of preferred stock
    
1,875,000
      
1,875,000
  
Weighted-average common stock outstanding - assume CD converted
    
6,888,882
      
0
  
                 
Basic earnings per share - Common Stock
    
-0.04
      
0.06
  
Basic earnings per share - Preferred Stock
    
-0.04
      
0.06
  
Basic earnings per share - CD
    
-0.04
      
0.00
  
                 
Diluted
                
(Loss) / Income available to common stockholders
    
(1,771,305
)
    
1,992,971
  
(Loss) / Income available to common stockholders & assumed CD converted
    
(128,562
)
    
1,992,971
  
                 
Diluted weighted-average common stock outstanding
    
52,669,114
      
40,878,544
  
                 
Diluted earnings per share
    
0.00
      
0.05
  
 
Warrants to purchase 7,333,323 shares of common stock at $0.80 per share, 7,333,323 shares of common stock at $1.20 per share, 3,666,662 shares of common stock at $2.25 per share, and 100,000 shares of common stock at $1.50 per share were outstanding as of September 30, 2007 but were not included in the computation of diluted earnings per share because the warrants’ exercise price was greater than the market price of the common shares.

NOTE 8 - 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 September 30, 2007 and management’s opinion as to the likelihood of loss in respect of each loss contingency.

On May 24, 2005, Ziegler, Ziegler & Associates LLP and Scott Ziegler filed a Complaint against the Company in the United States District Court for the Southern District of New York for using their internet domain name to distribute the Company’s promotional information over the internet. The Plaintiffs seek several types of damages in an amount not less than $1,250,000. The Company’s counsel was instructed to vigorously defend the action as the emails in question were distributed by a party not hired nor associated with the Company. Accordingly, no provision has been made.

On January 18, 2006, counsel for the plaintiff threatened to file a complaint in the County Court in and for Miami-Dade County, Florida against the Company in an action for damages that does not exceed $15,000, exclusive of court costs, attorney’s fees and interest. The plaintiff alleged that the Company was a guarantor of a lease entered into by its Hairmax of Florida, Inc. subsidiary, which abandoned the lease and failed to pay the full rental due under the lease.

The Company has made a settlement offer to the plaintiff of an amount equal to $9,000, and is awaiting the plaintiff’s response. As part of any settlement, the Company will insist upon the execution and delivery of a binding release of all claims in favor of the Company. The Company has accrued $9,000 in the past financial statements.
NOTE 9 - COMMON STOCK

No change in the Company’s common stock for the nine months ended September 30, 2007.

On November 17, 2007, the Company issued 10,000,000 shares of restricted common stock with a fair value of $3,760,000 for the acquisition of Maxcomm Limited, which sole asset is an 80% equity interest in Arable Media Limited. The Company relied on an exemption from registration pursuant to Section 4(2) under the Securities Act in connection with the issuance of the shares.

NOTE 10 – CONVERTIBLE DEBENTURE

For the fiscal quarter ended September 30, 2007, the Company has convertible debentures with total value of $3.1 million outstanding. The aforesaid convertible debentures were issued pursuant to the private equity financing where the Company sold a total 31 units of securities. Each unit consists of (i) an eighteen-month 4% interest bearing convertible debenture in the principal amount of $100,000, convertible at $0.45 per share, (ii) a six-year Class A warrant to purchase 222,222 shares of the Company’s common stock, par value $0.001 per share at an exercise price of $0.80 per share, a (iii) six-year Class B warrant to purchase 222,222 shares of the Company’s common stock at an exercise price of $1.20 per share, and (iv) a six-year Class C warrant to purchase 111,111 shares of the Company’s common stock at an exercise price of $2.25 per share. The securities issuable upon conversion of the debenture and exercise of the warrants are eligible for certain registration rights.

NOTE 11 – RELATED PARTY TRANSACTIONS

As of September 30, 2007, the Company owed a director $167,167 for short-term advances. Interest is charged at 6% per annum on the amount owed.

As of September 30, 2007, the Company owed to a related company $376,947 for short-term unsecured advances made. Interest is charged at 6% per annum on the amount owed.

NOTE 12 - RECLASSIFICATIONS

Certain reclassifications have been made in the condensed consolidated financial statements for the nine months ended September 30, 2006 to conform to the current period’s presentation.

NOTE 13 - RESTATEMENT OF FINANCIAL STATEMENTS

As stated in the Forms 8-K filed on March 20, 2007 and April 4, 2007 respectively, the Company has decided to restate certain financial statements previously reported to reclassify a volume discount (“consideration”) agreed with its STB supplier previously recorded as other income to be applied as a reduction against inventory, cost of goods sold or as a reduction of the balance of Property and Equipment for STB that have been leased to customers. The change in accounting treatment resulting in this restatement is in accordance with the Company’s accounting policy on supplier rebate shown in note 1 (C). The portion of consideration credited to Property and Equipment is recognized as income over the depreciable life of STB of five years by way of a reduced depreciation charge.

The changes to financial statements are as follows:

   
September 30, 2006
  
   
Previously reported
    
Restated
  
             
CURRENT ASSETS
    
11,831,309
      
11,825,373
  
                 
PROPERTY AND EQUIPMENT, NET
    
13,358,246
      
12,236,394
  
OTHER ASSETS
    
1,324,723
      
1,324,723
  
TOTAL ASSETS
  
$
26,514,278
    
$
25,386,490
  
                 
LIABILITIES
    
12,988,368
      
12,616,198
  
                 
MINORITY INTERESTS
    
87,249
      
87,249
  
                 
STOCKHOLDERS' EQUITY
                
 Series A convertible preferred stock
    
1,875
      
1,875
  
 Common stock
    
31,757
      
31,757
  
 Additional paid-in capital
    
5,939,862
      
5,939,862
  
 Deferred stock compensation
    
(1,333
)
    
(1,333
)
 Retained earnings
    
7,553,569
      
6,797,951
  
 Accumulated other comprehensive loss
    
(87,069
)
    
(87,069
)
Total Stockholders' Equity
    
13,438,661
      
12,683,043
  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  
$
26,514,278
    
$
25,386,490
  
 

- 13 -
 
CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
AS OF SEPTEMBER 30, 2007 (UNAUDITED)
 
   
Three months ended
September 30, 2006
    
Nine months ended
September 30, 2006
  
   
Previously reported
    
Restated
    
Previously reported
    
Restated
  
                         
NET SALES
  
$
4,269,045
    
$
4,190,924
    
$
12,318,528
    
$
12,240,407
  
                                 
COST OF SALES
    
(3,957,537
)
    
(2,964,550
)
    
(7,875,084
)
    
(7,604,892
)
                                 
GROSS PROFIT
    
311,508
      
1,226,374
      
4,443,444
      
4,635,515
  
                                 
OPERATING EXPENSES
    
568,261
      
(336,765
)
    
(1,783,338
)
    
(1,798,443
)
                                 
INCOME FROM OPERATION
    
879,769
      
889,609
      
2,660,106
      
2,837,072
  
                                 
OTHER INCOME (EXPENSES)
    
(84,948
)
    
(6,827
)
    
12,103
      
90,224
  
                                 
 NET INCOME BEFORE TAXES AND DISCONTINUED OPERATION
    
794,821
      
882,782
      
2,672,209
      
2,927,296
  
                                 
 Income tax expense
    
(162,358
)
    
(191,386
)
    
(803,309
)
    
(887,488
)
  Loss from discontinued operations
    
(41,124
)
    
(41,124
)
    
(46,837
)
    
(46,837
)
 NET INCOME
  
$
591,339
    
$
650,272
    
$
1,822,063
    
$
1,992,971
  
                                 
 Foreign currency translation gain (loss)
    
(48,723
)
    
(48,723
)
    
(48,363
)
    
(48,363
)
                                 
 COMPREHENSIVE INCOME
    
542,616
      
601,549
      
1,773,690
      
1,944,608
  
                                 
 Net income per share-basic - two classes method
  
$
0.02
    
$
0.02
    
$
0.05
    
$
0.06
  
                                 
 Net income per share-diluted
  
$
0.01
    
$
0.02
    
$
0.04
    
$
0.05
  
                                 
 Weighted average number of shares outstanding during the year - basic
    
31,748,365
      
31,748,365
      
31,471,286
      
31,471,286
  
                                 
 Number of preferred shares outstanding during the year
    
1,875,000
      
1,875,000
      
1,875,000
      
1,875,000
  
                                 
 Weighted average number of shares outstanding during the year- diluted
    
41,220,139
      
41,220,139
      
40,878,544
      
40,878,544
  

Secondly, as stated in the Forms 8-K filed on March 27, 2008, the Company has also decided to restate the financial statements previously reported as at 30 September 2007 to record the interest cost out of the convertible feature for the convertible debenture issued in Nov 2006, which was previously unrecorded. The accounting treatment resulting in this restatement is in accordance with the US GAAP. The amount of interest cost is recognized as an interest charge in the income statement by way of a reduced convertible debenture balance and an increase in additional paid-in capital.
The changes to financial statements are as follows:

 
September 30, 2007
  
 
Previously reported
    
Restated
  
           
TOTAL ASSETS
  
28,545,473
      
28,545,473
  
               
CURRENT LIABILITIES
              
Convertible debentures   3,100,000       1,796,851  
Other current liabilities
  
9,367,333
      
9,367,333
  
 
$
12,467,333
      
11,164,184
  
               
MINORITY INTERESTS
  
--
      
--
  
               
STOCKHOLDERS' EQUITY
              
 Series A convertible preferred stock
  
1,875
      
1,875
  
 Common stock
  
31,602
      
31,602
  
Common stock to be issued
  
10,000
      
10,000
  
 Additional paid-in capital
  
9,413,917
      
14,562,806
  
 Deferred stock compensation
  
(37,100
)
    
(37,100
)
 Retained earnings
  
6,720,662
      
6,720,662
  
 Accumulated other comprehensive loss
  
(62,816
)
    
(62,816
)
Total Stockholders' Equity
  
16,078,140
      
17,381,289
  
               
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
28,545,473
    
$
28,545,473
  
 
 

 
- 15 -
 
CHINA DIGITAL MEDIA CORPORATION AND SUBSIDIARIES
AS OF SEPTEMBER 30, 2007 (UNAUDITED)
 
 
   
Three months ended
September 30, 2007
    
Nine months ended
September 30, 2007
  
   
Previously reported
    
Restated
    
Previously reported
    
Restated
  
                         
NET SALES
  
$
1,715,718
      
1,715,718
      
5,449,295
      
5,449,295
  
                                 
COST OF SALES
    
1,004,907
      
1,004,907
      
3,135,011
      
3,135,011
  
                                 
GROSS PROFIT
    
710,811
      
710,811
      
2,314,284
      
2,314,284
  
                                 
OPERATING EXPENSES
    
(1,304,341)
      
(1,304,341)
      
(2,612,443)
      
(2,612,443)
  
                                 
LOSS FROM OPERATION
    
(593,530)
      
(593,530)
      
(298,159)
      
(298,159)
  
                                 
OTHER INCOME (EXPENSES)
    
7,600
      
(509,066)
      
(90,956)
      
(1,640,954)
  
                                 
NET LOSS BEFORE TAXES
    
(585,930)
      
(1,102,596)
      
(389,115)
      
(1,939,113)
  
                                 
 Income tax expense
    
(82,334)
      
(82,334)
      
(129,128)
      
(129,128)
  
                                 
NET LOSS FROM CONTINUING OPERATIONS
    
(668,264)
      
(1,184,930)
      
(518,243)
      
(2,068,241)
  
                                 
 Income from discontinued operations
    
446,064
      
446,064
      
296,936
      
296,936
  
 NET LOSS
  
$
(222,200)
      
(738,866)
      
(221,307)
      
(1,771,305)
  
                                 
 Foreign currency translation loss
    
(156,180)
      
(156,180)
      
(37,601)
      
(37,601)
  
                                 
 COMPREHENSIVE LOSS
    
(378,380)
      
(895,046)
      
(258,908)
      
(1,808,906)
  
                                 
 Net income per share-basic - two classes method
  
$
0.00
    
$
-0.01
    
$
0.00
    
$
-0.04
  
                                 
 Net income per share - diluted
  
$
0.00
    
$
0.00
    
$
0.00
    
$
0.00
  
                                 
 Weighted average number of shares outstanding during the year - basic
    
41,602,365
      
41,602,365
      
36,405,232
      
36,405,232
  
                                 
 Number of preferred shares outstanding during the year
    
1,875,000
      
1,875,000
      
1,875,000
      
1,875,000
  
                                 
 Weighted average number of shares outstanding during the year - diluted
    
57,866,247
      
57,866,247
      
52,669,114
      
52,669,114
  
 

 
- 16 -
 

 
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-QSB. 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-KSB for the year ended December 31, 2006, and specifically the factors described in such Form 10-KSB in the section entitled “Item 1. Business – Risk Factors”-, could cause actual results to differ materially from those expressed in any forward-looking statements and that the investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events or circumstances. Consequently, no forward-looking statement can be guaranteed.

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

Overview

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

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

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

-  
Television advertising sales;

-  
Television program production.

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 410,000 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 and May 18, 2007 (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 is responsible for migrating all cable television subscribers in Nanhai from an analog to a digital system (“Migration”) by the end of 2007. As of September 30, 2007, more than 240,000 sets of digital STB are installed in Nanhai and the migration program is on schedule.

According to the Co-operative Agreements, AGL is entitled to share the subscription fees paid by all cable television subscribers as well as paid by DTV subscribers for additional services, including pay-TV services, 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. If subscribers want an additional set-top-box, the subscriber must purchase the set-top-box from the Company.  The Company is also responsible for providing operational support services including migration planning, marketing and sales, software development, customer service and logistics administration.  The Company’s proprietary operating support system automates many of the processes, such as database management, billing, work orders and inventory control, and assists in the operation of a 24/7 call center for technical support and customer care. The city-owned cable company retains management of the broadcasting system and the fiber-optic network and is responsible for compliance with national broadcasting policies.

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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 126 channels, including a 48-channel basic package , 77 pay channels and 3 high definition TV channels bundled into various value added packages, such as Life & Leisure, World Sports, News, Drama and Family.

The Company has deployed an IP (Internet Protocol) based set-top-box which is developed by our wholly owned subsidiary Arable Media Limited, a software developer specialised 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.

During the second quarter of 2007, the Company started a trial to sell the first value added service through the DTV platform: a real time stock information system.  The subscribers can subscribe to receive the real time stock information for the Chinese companies which are listed in the Chinese stock market (namely “A” shares and “B” shares) with charts, analysis and related information on the television set through the Company’s developed middleware platform.
 
TV advertising sales
 
M-Rider, a company incorporated in China and 100% owned by the Company under a trust arrangement, is an advertising sales company engaged in the distribution of television commercials. The Company is responsible for reselling commercial airtime to international and local advertising customers, either directly or through agents and receiving agency fees and services fee. The Company has many years of experience in providing consultancy and media planning services to clients, and assisting them to deliver their messages precisely and professionally to their targeted audiences efficiently. In addition, the Company believes that it can manage advertising resources more effectively to enhance value of the advertising space.

In February, 2007, 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, 2007. 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.

TV channel management and program production

On August 17, 2007, HuaGuang a subsidiary of the Company, entered into an Agreement on Transfer of the Equity in Guizhou Guishi Digimedia Advertising Company Limited and Guizhou Guishi Huaguang Media Company Limited with Guizhou Tianma Advertising Co., Ltd. to sell its shares in Guishi Digimedia (51%) and Guishi Huaguang (49%) for a total consideration of approximately US$ 445,000, as of the date of this report we had received $178,988.

Besides, HuaGuang has made a minority investment in two television series, XiGuan Affairs and The Story of a Small Town.

The Company relied on two suppliers for approximately 91% of its purchases for the nine months ended September 30, 2007 for the Nanhai TV digitalization project. As of September 30, 2007, accounts payable due to these suppliers amounted to $3,215,626 and $618,551 respectively.

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

RESULTS OF OPERATIONS

Statements of Operations Items:

Sales

Total revenue for the three months ended September 30, 2007 decreased by $2,475,206 or 59% to $1,715,718 from $4,190,924 for the same period ended September 30, 2006.  For nine months ended September 30, 2007, we recorded total revenue of $5,449,295, or 55% decrease compared to total revenue of $12,240,407 for the same period last year. The decrease in total net sales was due to (1) the reduction in TV advertising sales after the Company decided to discontinue its agreement to act as the sole advertising agent of a TV channel in Guangzhou during 2007 as such operations had shown during 2006 not to be profitable; and (2) reduction in sale of STBs as the larger scale migration process for the Nanhai TV migration did not yet commence in the first half of the year in accordance with the Network Company’s schedule.

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Gross Profit

Gross Profit for the three months and nine months ended September 30, 2007 decreased by $515,563 or 42% to $710,811 and $2,321,231 or 50% to $2,314,284, respectively, as compared with the same periods from last year because of the reduction in TV advertising sales, the increase in depreciation of STBs, and the reduction of STB sales as described above during the first nine months of 2007.

Expenses

Selling, general, administrative and depreciation and amortization (not related directly to generation of revenue) expenses for the three months ended September 30, 2007 increased by $967,576 or 287% to $1,304,341 and increased by $814,000 or 45% to $2,612,443 for the nine months ended September 30, 2007 in comparison with the same periods for 2006, where the increase was mainly due to the additional expenditure required for the development of new value-added business, provision for doubtful debt and corporate expenses.

Income (Loss) from Discontinued Operation

Income (Loss) from discontinued operation in the statement of operation represents the shareholders’ share of an operating result in Guishi Digimedia, a 51% subsidiary, and Guishi Huaguang, a 49% affiliate, being disposed of during the period.  For the nine months ended September 30, 2007, we recognized the income from the discontinued operation of $311,474.

Net Income

The Company had a restated net loss of $738,866 and $1,771,304 for the three month and nine month periods ended September 30, 2007 respectively, compared to net income of $650,273 and $1,992,971 for the same periods ended September 30, 2006. The decrease in net income is because of the reduction in net sales from operation, increase in general expenses and the amortization of the convertible debt discount of $516,666 and $1,549,998 for the three month and nine month periods ended September 30, 2007 respectively.

Balance Sheet Items:

Current Assets

Current assets of the Company increased by $0.8 million to $11.8 million during the first nine months of 2007, as the Company kept higher stock level of STBs for the DTV migration in the last quarter. Accounts receivable decreased by $0.1 million.

Intangible Assets

Intangible assets increased by $4.1 million during the first nine months of 2007 which is the goodwill generated from the acquisition of Maxcomm.

Property and Equipment, Net

The net decrease in property and equipment of the Company of $1.5 million to $10.6 million represented depreciation of STB offset by purchase of STBs during the first nine months of 2007.

Other Asset

Other assets include capitalized software development costs of $692,307 related to the development of middleware of Arable. Such costs have not yet been transferred to the Fixed Assets of the Company and so no amortization was made.

Current Liabilities

Current liabilities of the Company were reduced by $1.7 million to $11.2 million (restated) during the first nine months of 2007 which was mainly due to the reduction in accounts payable.
 

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Liquidity and Capital Resources

On September 30, 2007, we had cash on hand of $406,679 and a working capital surplus of $621,567 (restated).  This compares with cash of $402,591 and working capital deficit of $790,825 at September 30, 2006. The increase in working capital was mainly attributable to the reduction in account payable by $2.9 million and notes payable by $1.1 million which is offset by the increase of convertible debenture by $1.8 million.

Operating activities provided cash of $74,633 during the nine months ended September 30, 2007, as compared to $3,331,148 for the nine month period ended September 30, 2006. The reduction of cash from operating activities was mainly attributable to settlement of payables due to suppliers.

Net cash used in investing activities for the nine months ended September 30, 2007 was $756,749 as compared with net cash used in investing activities of $5,913,945 for the nine months ended September 30, 2006. The decrease in net cash used in investing activities was due to lesser purchases of STBs in the first nine months of this year.

Net cash provided by financing activities for the nine months ended September 30, 2007 was $950,991 representing funding from a director (2006: $1,694,486 of which $387,500 represented funds from a private placement, and $1.1 million represented funds from the issuance of a convertible debenture).

We continued to receive cash from the 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, 2007. 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. With the Company’s further effort to expedite the collection of receivables and without considering further expansion, the Company is expected to have sufficient cash generated from operating activities to get through its business in the next 12 months.

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 from bank borrowings and equity financing from potential investors and partners. However, if the Company is unable to raise additional capital, its growth potential is likely to be affected.

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 three months and nine months ended September 30, 2007 was $156,180 and $37,601, respectively.



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

Changes in Internal Control

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

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PART II. OTHER INFORMATION


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

The Company contested 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 promotional e-mails, and the emails themselves recite that they were paid for by a shareholder of our Company, and not by the Company or an affiliate.  We believe that the shareholder referred to in the emails was promoting its own interest and we had nothing to do with such activity. We believe we have no liability in this matter.

On January 18, 2006, counsel for the plaintiff threatened to file a complaint in the County Court in and for Miami-Dade County, Florida against the Company in an action for damages that does not exceed $15,000, exclusive of court costs, attorney’s fees and interest. The plaintiff alleged that the Company was a guarantor of a lease entered into by its Hairmax of Florida, Inc. subsidiary, which abandoned the lease and failed to pay the full rental due under the lease.

The Company has made a settlement offer to the plaintiff of an amount equal to $9,000, and is awaiting the plaintiff’s response.  As part of any settlement, the Company will insist upon the execution and delivery of a binding release of all claims in favor of the Company. The Company has accrued $9,000 in the past financial statements.

Item 1A. Risk Factors

There have not been any material changes in the risk factors previously disclosed in our Form 10-K for the period ended December 31, 2006 filed with the SEC on March 30, 2007.


As of the reported date, we issued certain unregistered securities as described in our Form 8-K filed May 21, 2007.

Item 3. Defaults Upon Senior Securities

None.


None.

Item 5.  Other Information

None.

Item 6. Exhibits

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


- 21 -


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: May 6, 2008
/s/ Ng Chi Shing
 
Ng Chi Shing
 
Chief Executive Officer
   
   
Date: May 6, 2008
/s/ Ng Chi Shing
 
Ng Chi Shing
 
Chief Financial Officer

 

 
 
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