CHINA DIGITAL MEDIA (OTC BB:CDGT)

On January 13, 2011, China Digital Media Corporation submitted an offer of settlement to the Securities and Exchange Commission in an effort to settle potential claims arising in connection with an offering of securities made by the Company in 2005 in reliance upon Regulation E of the Securities Act of 1933, as amended. Without admitting or denying any allegations against it, the Company agreed to consent to the entry of a court order: ordering it to pay disgorgement in the amount of $200,000, payable over a one-year period; and cancelling 17,398,440 shares of common stock and 1,403,100 shares of Series A Convertible Preferred Stock held by Chi Shing Ng, the Company’s chief executive officer and director.   As part of the settlement offer, the Company also offered to consent to the entry of an administrative order pursuant to which the registration of the Company’s securities under Section 12 of the Exchange Act will be revoked.  That administrative order, among other things, would terminate the Company’s obligation to file public reports with the SEC, and would result in the cessation of trading in the securities of the Company in the United States; and broker-dealers in the United States would be precluded from facilitating the sale or purchase of the Company’s securities.

 

 

 

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.

• Total net sales for the three  months ended September 30, 2010 were ~ flat at $2,691,189 or 14% to $7,602,870 from $6,640,199 for the same period ended September 30, 2009.

• Gross Profit for the three months ended September 30, 2010 increased to 1,072,509 from  $875,394 as compared with the same period last year.

• Net loss after tax was $7,629,363 for the three months period ended September 30, 2010, compared to a net gain of $969,203 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.
  

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.

On July 20, 2010, the Company's Board of Directors entered into an extension agreement (the “Extension Agreement”) with Vision Opportunity Master Fund Ltd. (“Vision”) in connection with the convertible debenture discussed below.

On November 17, 2006, the Company issued to Vision, and Vision purchased from the Company, a convertible debenture in the amount of Two Million One Hundred Fifty Thousand Dollars ($2,150,000), which carries interest thereon at a rate of four percent (4%) per annum and is convertible at $0.45 per share (the “Debenture”).  The Debenture carries penalty interest, payable in cash and monthly, at a simple rate of 1.5% per month until the principal and interest has been paid in full.  To date, Vision has converted $135,000 of the Debenture principal into shares of Company common stock.

In connection with the Debenture, the Company issued Vision three (3) warrants consisting of (i) a Class A Warrant to purchase 4,777,773 common shares at an exercise price of $0.80 per share, (ii) a Class B Warrant to purchase 4,777,773 common shares at an exercise price of $1.20 per share, and (iii) a Class C Warrant to purchase 2,388,887 common shares at an exercise price of $2.25 (collectively, the “Warrants”).

The maturity date of the Debenture was May 17, 2008. The Company had not repaid the outstanding amounts on the Debenture, and the Company was in default on the Debenture, which had a balance of principal in the amount of $2,015,000.00.

The debenture was then extended on December 8, 2008, and such extension agreement was then amended on May 7, 2009.  It was agreed to be extended to June 30, 2010.  The outstanding principal of the Debenture was mature on June 30, 2010.  The Company has not repaid the outstanding amounts on the Debenture, and the Company is in default on the Debenture, which has a balance of principal in the amount of $1,914,250 (the “Principal”).  The Company requested for further extending the debenture and has entered into a Second Extension Agreement with Vision.