U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2010
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
For the Transition Period From ____to _____
Commission file number 000-52407
(Name of Small Business Issuer in its Charter)
NEVADA
(State or Other Jurisdiction of Incorporation of Organization)
94-3251254
(I.R.S. Employer Identification No.)
8/F, Tower B, National Software Industry Zone,
Gao Tang Xin Jian Zone, Tian He District
Guangzhou, P.R.China 510663
(Address of principal executive offices)
(8620) 6108-8998 - Tel
(8620) 6108-8999 - Fax
(Issuer's telephone number)
Indicate by check mark if the registrant is a well-know seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [x]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act
Yes [ ] No [x]
Indicate by check mark whether the registrant (1) has 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 has submitted electronically and posted on its corporate Website, 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 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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ |
Non-accelerated filer | ¨(Do not check if a smaller reporting company) |
Accelerated filer | ¨ |
Smaller reporting company | x |
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 preferred stock, par value $.0001, outstanding as of May 18, 2010: 870,000
Number of shares of common stock, par value $.0001, outstanding as of May 18, 2010: 26,767,798
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
The discussion contained in this 10-Q under the Securities Exchange Act of 1934, as amended, contains forward-looking statements that involve risks and uncertainties. The issuer's actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "the Company believes," "management believes" and similar language, including those set forth in the discussions under "Notes to Financial Statements" and "Management's Discussion and Analysis or Plan of Operation" as well as those discussed elsewhere in this Form 10-Q. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements that are subject to the "safe harbor" created by the Private Securities Litigation Reform Act of 1995.
INDEX TO FORM 10-Q
PART I | Page No. |
Item 1. Financial Statements | 3 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 10 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 12 |
Item 4. Controls and Procedures | 12 |
Item 4T. Controls and Procedures | 12 |
PART II | |
Item 1. Legal Proceedings | 13 |
Item 1A. Risk Factors | 13 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 13 |
Item 3. Defaults Upon Senior Securities | 13 |
Item 4. Submission of Matters to a Vote of Security Holders | 13 |
Item 5. Other Information | 13 |
Item 6. Exhibits | 14 |
2
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CHINA EDUCATION TECHNOLOGY, INC. FINANCIAL STATEMENTS
Page | ||||
Unaudited Condensed Consolidated Balance Sheets | 4 | |||
Unaudited Condensed Consolidated Statements of Operations And Comprehensive Income | 5 | |||
Unaudited Condensed Consolidated Statements of Cash Flows | 6 | |||
Notes to Unaudited Financial Statements | 7 | |||
3
CHINA EDUCATION TECHNOLOGY INC. AND SUBSIDIARIES | ||||||||
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||
AS OF MARCH 31, 2010 AND DECEMBER 31, 2009 | ||||||||
ASSETS | ||||||||
March 31, 2010 | December 31, 2009 | |||||||
Current assets: | Audited | |||||||
Cash and cash equivalents | $ | 41,074 | $ | 29,656 | ||||
Trade receivables, net | 796,868 | 822,926 | ||||||
Inventories | 412,893 | 372,971 | ||||||
Prepayments | 483,947 | 483,812 | ||||||
Other receivables | 2,475 | 5,339 | ||||||
Refundable deposit | 220,910 | 220,849 | ||||||
Total current assets | 1,958,167 | 1,935,552 | ||||||
Property, plant and equipment, net | 123,909 | 131,867 | ||||||
Non-current assets: | ||||||||
Others | 67,069 | 67,050 | ||||||
Total non-current assests | 67,069 | 67,050 | ||||||
Total assets | $ | 2,149,145 | $ | 2,134,470 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term note payable | 732,461 | 732,257 | ||||||
Trade payables | 272,158 | 272,083 | ||||||
Salary payable | 4,395 | 4,936 | ||||||
Other payables and accrued expenses | 94,172 | 32,865 | ||||||
Amount due to a director | 97,297 | 97,279 | ||||||
Income tax payable | 29,044 | 29,277 | ||||||
Total current liabilities | 1,229,527 | 1,168,698 | ||||||
Long-term liabilities: | ||||||||
Warranty and maintenance reserves | 44,308 | 50,976 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, | 87 | 87 | ||||||
870,000 shares issued and outstanding as of March 31, 2010 and December 31, 2009 | ||||||||
Common stock, $0.0001 par value, 50,000,000 shares authorized, | 2,677 | 2,677 | ||||||
26,767,798 shares issued and outstanding as of March 31, 2010 and December 31, 2009 | ||||||||
Additional paid in captial | 120,438 | 120,438 | ||||||
Statutory and other reserves | 69,565 | 69,565 | ||||||
Accumulated other comprehensive income | 76,512 | 76,246 | ||||||
Retained earnings | 606,031 | 645,783 | ||||||
Total stockholders’ equity | 875,311 | 914,796 | ||||||
Total liabilities and stockholders’ equity | 2,149,145 | 2,134,470 | ||||||
See accompanying notes to consolidated financial statements. |
4
CHINA EDUCATION TECHNOLOGY INC. AND SUBSIDIARIES | ||||||||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME | ||||||||
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 | ||||||||
For the Three Months Ended | ||||||||
March 31, 2010 | March 31, 2009 | |||||||
Sales | $ | 6,682 | $ | 223,865 | ||||
Cost of goods sold | - | (90,207 | ) | |||||
Gross profit | 6,682 | 133,658 | ||||||
Operating expenses | ||||||||
General and administrative expenses | 19,892 | 51,019 | ||||||
Research and development expenses | - | 28,564 | ||||||
Selling expenses | 26,304 | 18,603 | ||||||
Total operating expenses | 46,196 | 98,185 | ||||||
Net operating Income (loss) | (39,514 | ) | 35,473 | |||||
Other income | ||||||||
Subsidy income from the PRC authorities for general operations | - | 19,571 | ||||||
Interest income (expenses) | (237 | ) | (6,330 | ) | ||||
Other income (expenses) | - | 35,089 | ||||||
Total other income | (237 | ) | 48,330 | |||||
Income before income taxes | (39,752 | ) | 83,803 | |||||
Income taxes | - | (13,204 | ) | |||||
Net Income (loss) | $ | (39,752 | ) | $ | 70,599 | |||
Other comprehensive income (loss) | ||||||||
Foreign currency translation adjustment | 266 | (1,518 | ) | |||||
Total comprehensive income (loss) | $ | (39,486 | ) | $ | 69,081 | |||
Earnings (loss) per share | ||||||||
Basic | ** | $ | 0.02 | |||||
Diluted | ** | ** | ||||||
Weighted average number of shares outstanding | ||||||||
Basic | 26,767,798 | 2,767,798 | ||||||
Diluted | 70,267,798 | 70,267,798 | ||||||
** Less than $.01 | ||||||||
See accompanying notes to consolidated financial statements. |
5
CHINA EDUCATION TECHNOLOGY INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 | ||||||||
For the Three Months Ended | ||||||||
March 31, 2010 | March 31, 2009 | |||||||
Cash flows from operating activities | ||||||||
Net income (loss) | $ | (39,752 | ) | $ | 70,599 | |||
Adjustments to reconcile net loss to net cash used in | ||||||||
operating activities: | ||||||||
Depreciation | 7,994 | 3,518 | ||||||
Changes in operating assets and liabilities: | ||||||||
Trade receivables | 26,286 | 50,209 | ||||||
Inventories | (39,816 | ) | (38,082 | ) | ||||
Other receivables and prepayments | 2,866 | (167,178 | ) | |||||
Refundable deposits | - | - | ||||||
Other noncurrent assets | - | (1,838 | ) | |||||
Warranty and maintenance reserves | (6,682 | ) | (3,496 | ) | ||||
Trade payables | - | 68,147 | ||||||
Salary payable | (543 | ) | - | |||||
Other payables and accrued expenses | 61,302 | 40,876 | ||||||
Income tax payable | (241 | ) | 14,244 | |||||
Net cash flows used in operating activities | 11,414 | 36,999 | ||||||
Cash flows from investing activities | ||||||||
Payments to acquire property, plant and equipment | - | (1,258 | ) | |||||
Net cash flows used in investing activities | - | (1,258 | ) | |||||
Cash flows from financing activities | ||||||||
Net cash flows provided by financing activities | - | - | ||||||
Effect of foreign currency translation on cash and cash equivalents | 4 | (129 | ) | |||||
Net increase in cash and cash equivalents | 11,418 | 35,612 | ||||||
Cash and cash equivalents - beginning of year | 29,656 | 87,254 | ||||||
Cash and cash equivalents - end of year | 41,074 | 122,866 | ||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for: | ||||||||
Interest | $ | - | $ | - | ||||
Income taxes | $ | - | $ | - | ||||
See accompanying notes to consolidated financial statements. |
6
CHINA EDUCATION TECHNOLOGY INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2010 and 2009
(Stated in US Dollars)
1. | BASIS OF PRESENTATION |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the Company’s annual audited consolidated financial statements for the preceding fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the years ended December 31, 2009 and 2008 thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2009.
2. | ORGANIZATION AND BUSINESS BACKGROUND |
China Education Technology Inc. (the “Company”) was incorporated in the state of Delaware in 1996 in name of Envirosafe Corporation. Its shares were traded on the OTC Bulletin Board of the United States of America.
On October 6, 2008, the Company redomiciled from Delaware to Nevada. Additionally, on October 9, 2008, the Company’s board of directors authorized and approved a reverse stock split (the “Reverse Split”) of the Company’s common stock on the basis of one share for eight shares currently authorized or issued and outstanding. Accordingly, the number of authorized shares of common stock decreased from 400,000,000 shares to 50,000,000 shares and the number of issued and outstanding shares decreased from 22,141,375 shares to 2,767,672 shares. The Reverse Split was effective on October 31, 2008. The Company has retroactively adjusted all the share information to reflect the reverse stock split in the audited condensed consolidated financial statements.
The Company is an investment holding company, whose only asset is 100% equity interest in ADDE Education Hldgs Limited (“ADDE”). ADDE is a corporation organized and existing under the laws of Hong Kong Special Administrative Region of People’s Republic of China (the “PRC”) and is an investment holding company whose only asset is 100% equity interest in Guangzhou Haoyu Educational Technology Company Limited (“Haoyu”). Haoyu was established in the PRC on March 27, 2001 as a domestic enterprise.
On March 1, 2008, ADDE entered into an agreement with the then sole stockholder of Haoyu to acquire the stockholder’s entire interest in Haoyu (the “Transfer”) at a consideration of Renminbi (“RMB”) 1 million. Haoyu was wholly owned by the spouse of ADDE’s sole stockholder before the consummation of the Transfer. The Transfer was subsequently approved by the government bureau in May 2008. Haoyu re-registered as a wholly foreign owned enterprise and obtained its business license in August 2008.
On March 4, 2008, a Plan of Exchange (the “Exchange”) was executed between and among the Company, ADDE, the majority stockholder of the Company and the stockholder of ADDE. The Exchange was consummated on July 31, 2008, pursuant to which 2,500,000 (after taking into account the Reverse Split) shares of the Company’s common stock and 1,350,000 shares of the Company’s preferred stock were issued to the stockholder of ADDE. Thereafter, ADDE and Haoyu became the Company’s wholly-owned subsidiaries and the former stockholder of ADDE owned 93.2% of the Company’s issued and outstanding shares.
The Exchange and the Transfer have been respectively accounted for as reverse acquisition and recapitalization of the Company and ADDE whereby ADDE is deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquiree (legal acquirer) under the Exchange, and Haoyu is deemed to be the accounting acquirer (legal acquiree) and ADDE to be the accounting acquiree (legal acquirer) under the Transfer. The audited condensed consolidated financial statements are in substance those of Haoyu, with the assets and liabilities, and revenues and expenses, of the Company and ADDE being included effective from the respective consummation dates of the Exchange and the Transfer.
China Education Technology Inc. and its wholly-owned subsidiaries, ADDE and Haoyu, are hereafter referred to as (the “Company”).
On April 3, 2008, the Company changed its corporate name to China Education Technology Inc. to more accurately reflect its business after the Exchange transaction with ADDE and Hao Yu.
3. | DESCRIPTION OF BUSINESS |
The Company’s primary business operations are conducted through Haoyu, which is specialized in the research and development of educational products and technology applications. Haoyu is located in the Guangzhou Province of the PRC with three manufacture bases for research and development purpose.
The educational software developed by the Company is in conformity to the new educational purpose. The software uses the advanced technology of data collection, sensor and wireless control and video image with handy appearance, which can virtually upload the live experiment and analyze the information collected. Teachers and students can have the experiments done automatically instead of the traditional method by hand.
The Company also engages in the trading of hardware and computer products such as monitors and computer notebooks.
7
CHINA EDUCATION TECHNOLOGY INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2010 and 2009
(Stated in US Dollars)
4. | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
Fair Value Measurements and Disclosures
(Accounting Standards Update (“ASU”) 2010-06)
In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements.” ASU 2010-06 requires new disclosures regarding transfers in and out of the Level 1 and 2 and activity within Level 3 fair value measurements and clarifies existing disclosures of inputs and valuation techniques for Level 2 and 3 fair value measurements. ASU 2010-06 also includes conforming amendments to employers’ disclosures about postretirement benefit plan assets. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those years. The adoption of this statement is not expected to have a material impact on our consolidated financial position or results of operation.
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 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 year ended December 31, 2009. As a result of the Company’s implementation of the Codification during the three months ended March 31, 2010, previous references to new accounting standards and literature are no longer applicable. In the current annual 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.
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 through 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 expense 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.
Management does not believe that any other recently issued, but not yet effective, accounting standards or pronouncements, if currently adopted, would have a material effect on the Company’s financial statements.
8
CHINA EDUCATION TECHNOLOGY INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2010 and 2009
(Stated in US Dollars)
5. | INVENTORIES |
March 31, 2010 | December 31, 2009 | |||||||
(Unaudited) | (Audited) | |||||||
Raw materials | $ | 47,063 | $ | 7,243 | ||||
Finished goods | 365,830 | 365,728 | ||||||
412,893 | 372,971 | |||||||
Provision for obsolete inventories | - | - | ||||||
$ | 412,893 | $ | 372,971 |
The Company had no provision for obsolete inventories charged to the statements of operations for the three months ended March 31, 2010 and for the year ended December 31, 2009.
6. | PREPAYMENTS |
The balances of $483,947 and $483,812 as of March 31, 2010 and December 31, 2009, respectively, represented prepaid goods, supplies and other items used in packaging of the products.
7. | REFUNDABLE DEPOSIT |
The balance of $220,910 and $220,849 as of March 31, 2010 and December 31, 2009, respectively, represented the deposit to an independent party, which acts as a guarantor issuing the guarantee to the Company in connection with a short-term loan from a bank. (see Note 9)
8. | WARRANTY |
The Company maintains a policy of providing after sales support for certain products by way of a warranty program. The Company provided 3 years warranties for the software products to certain customers. Further, the relevant customers are allowed to defer the settlement of certain percentage (normally 5%) of the billed amount for certain period of time (normally three year) after acceptance of the Company’s products under the warranty program.
Since the aforementioned products were well developed, the Company did not encounter any claims from such customers. However, the Company will periodically assess the estimation of its warranty liability and recognize the reserve when necessary based on the actual experience.
As of March 31, 2010 and December 31, 2009, the Company had warranty and maintenance reserves of $44,308 and $50,976, respectively.
9. | SHORT-TERM NOTE PAYABLE |
The short-term note payable was the loan from a bank denominated in RMB and repayable within one year. It carries annual interest at 6.903%, which is determined by the benchmark rate of 5.31% in the People’s Bank of China (the “PBOC”) for six-month to one-year short-term loans per annum, and the floating rate of 30%.
The bank loan is secured by a guarantee put up by an independent party, as well as a real estate with the market value of approximately $295,000 deposited to the bank as collateral. The guarantor received $220,910 from the Company for issuing the guarantee. The receivable due from the guarantor was recorded as refundable deposit under current assets as of March 31, 2010.
10. | AMOUNT DUE TO A DIRECTOR |
The balances due to a director represented unsecured advances which are interest-free and repayable on demand. As of March 31, 2010 and December 31, 2009, the balances of due to a director were $97,297 and $97,279, respectively.
11. | SUBSEQUENT EVENTS |
We evaluated subsequent events through the date and time our financial statements were issued on May 18, 2010. There are no subsequent events through May 18, 2010.
9
FORWARD LOOKING STATEMENTS
Management’s Discussion and Analysis contains various “forward looking statements” within regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this 10-Q, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates”, “believes”, “plans”, “expects”, “future” and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company’s business, including but not limited to, reliance on key customers and competition in its markets, market demand, product performance, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel and any changes in current accounting rules, all of which may be beyond the control of the Company. Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets (i.e. SBDC). The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.
Management’s Discussion and Analysis of Results of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the financial statements included herein.
OVERVIEW
As used herein the terms "We", the "Company", "CEDT", the "Registrant," or the "Issuer" refers to China Education Technology Inc., its subsidiary and predecessors, unless indicated otherwise. We were originally incorporated in Delaware in 1996 as Envirosafe Corporation. On October 6, 2008, our board decided to redomicile from the State of Delaware to the State of Nevada. Their decision was approved by the holders of a majority of the voting rights of our common stock. On April 3, 2009, we changed our name to China Education Technology, Inc. to more accurately reflect our business after the Exchange (as defined below) between ADDE and Haoyu.
We are an investment holding company, whose only asset is a 100% equity interest in ADDE Education Hldgs Limited (“ADDE”). ADDE is a corporation organized and existing under the laws of Hong Kong Special Administrative Region of the People’s Republic of China (the “PRC”) and is an investment holding company whose only asset is a 100% equity interest in Guangzhou Haoyu Educational Technology Company Limited (“Haoyu”). Haoyu was originally established in the PRC on March 27, 2001 as a domestic enterprise.
On March 1, 2008, ADDE entered into an agreement with the then sole stockholder of Haoyu to acquire the stockholder’s entire interest in Haoyu (the “Transfer”) for consideration of 1,000,000 Renminbi (“RMB”). Haoyu was wholly owned by the spouse of ADDE’s sole stockholder before the consummation of the Transfer. The Transfer was subsequently approved by the government bureau in May 2008. Haoyu re-registered as a wholly foreign owned enterprise and obtained its business license in August 2008.
On March 4, 2008, a Plan of Exchange (the “Exchange”) was executed between and among the Company, ADDE, the majority stockholder of the Company and the majority stockholder of ADDE. The Exchange was consummated on July 31, 2008, pursuant to which 2,500,000 (after taking into account the Reverse Split) shares of the Company’s common stock and 1,350,000 shares of the Company’s preferred stock were issued to the stockholder of ADDE. Thereafter, ADDE and Haoyu became the Company’s wholly-owned subsidiaries and the former stockholder of ADDE owned 93.2% of the Company’s issued and outstanding shares.
The Exchange and the Transfer have been respectively accounted for as a reverse acquisition and recapitalization of the Company and ADDE whereby ADDE is deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquiree (legal acquirer) under the Exchange, and Haoyu is deemed to be the accounting acquirer (legal acquiree) and ADDE to be the accounting acquiree (legal acquirer) under the Transfer. The audited condensed consolidated financial statements are in substance those of Haoyu, with the assets and liabilities, and revenues and expenses, of the Company and ADDE being included effective from the respective consummation dates of the Exchange and the Transfer.
Since the reverse merger was consummated, we have continued operation conducted through Haoyu, which is specializes in the research and development of educational products and technology applications. Haoyu is located in the Guangzhou Province of the PRC with three manufacture bases for research and development purpose.
The educational software developed by the Company is in conformity to the new educational purpose. The software uses advanced technology of data collection, sensor and wireless control and video imaging, which can virtually upload live media and analyze the information collected. Our software allows teachers and students to conduct experiments automatically instead of the traditional method by hand.
The Company also engages in the trading of hardware and computer products such as monitors and computer notebooks.
10
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Unaudited Condensed Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Estimates are based on historical experience, knowledge of economic and market factors and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from those estimates.
On a regular basis we evaluate our estimates, assumptions and judgments and make changes accordingly. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. We believe that the estimates, assumptions and judgments involved in revenue recognition, receivables and allowances for doubtful accounts, accruals, inventories, income taxes, warranty, warranty and maintenance reserves have the greatest potential impact on our condensed consolidated financial statements, so we consider these to be our critical accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
For a description of the new accounting standards that affect us, see Note 4 of notes to our unaudited condensed consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
Revenues
We had sales of $6,682 and $223,865 for the three months ended March 31, 2010 and 2009, respectively. We generated our revenues from sales of information collectors, sensors, digital meteorological stations, and digital analyzing software, certain products of which were covered by a warranty program for 3 years provided by the Company. The warranty liability will be assessed periodically and amortized overtime when no actual claims occurred. We had no actual sales for the three months ended March 31, 2010 since the current market demand for digital labs dropped significantly as results of the decrease in government subsidy. The revenues of $6,682 for this period were due primarily to the amortization of the warranty liabilities.
Income / Loss
We had a net loss of $39,752 for the three months ended March 31, 2010, compared to the net income of $70,599 for the three months ended March 31, 2009. The increase by $110,351 in net loss in the first quarter of 2010 was due primarily to the decrease in sales by $217,183, and a decrease in subsidy income by $19,629. In addition, our selling expenses increased by $7,701 in the first quarter of 2010.
Expenses
Operating expenses for the three months ended March 31, 2010 and 2009 were $46,196 and $98,185 respectively. The decrease in the first quarter of 2010 was due primarily to the decrease in research and development expenses to $0 in 2010 from $28,564 in 2009. The general and administrative expenses also decreased to $19,892 in the first quarter of 2010 from $51,019 during the same period in 2009. The decrease in these operating expenses can be attributed to the decrease in sales as set forth above.
Cost of Goods Sold
Cost of goods sold included expenses directly related to the manufacturing and selling our products. Product delivery and direct labor would be examples of cost of goods sold items. We had no cost of goods sold during the three months ended March 31, 2010 due to the revenues for this period primarily from the amortization of the warranty liabilities. Comparably, we had $90,207 in cost of goods sold, or 40.30% of sales revenue during the three months ended March 31, 2009.
Impact of Inflation
We believe that inflation has had a negligible effect on operations during this period. We believe that we can offset inflationary increases in the cost of sales by increasing sales and improving operating efficiencies.
Liquidity and Capital Resources
Cash flows provided by operating activities were $11,414 and $36,999 for the three months ended March 31, 2010 and 2009, respectively. Positive cash flows used in operations in the first quarter of 2010 were due primarily to the collection in trade receivables in amount of $26,286, and the increase in other payables in the amount of $61,302, partially offset by the net loss of $39,752 and increase in inventories by $39,816. Positive cash flows from operations in the first quarter of 2009 were due primarily to the net income of $70,599, plus the increase in trade payables, other payables and income tax payables in the amounts of $68,147, $40,876 and $14,244, respectively.
We had no cash flows from investing activities during the three months ended March 31, 2010. Cash flows of $1,258 used in investing activities during the three months ended March 31, 2009 were attributable to payments to acquire property, plant, and equipment.
We did not have any cash flows from financing activities for both three months ended March 31, 2010 and 2009.
Overall, we have funded our cash needs from inception through March 31, 2010 with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on operations and financial condition.
We had cash of $41,074 on hand and a working capital of $728,640 as of March 31, 2010. Currently, we do not have enough cash to fund our operations for about six months. This is based on our projected revenues. We will then need to obtain additional capital through equity or debt financing to sustain operations for an additional year. Our current level of operations would require capital of approximately $300,000 to sustain operations through year 2010 and approximately $500,000 per year thereafter. Modifications to our business plans may require additional capital for us to operate. For example, if we are unable to raise additional capital in the future we may need to curtail our number of product offers or limit our marketing efforts to the most profitable geographical areas. This may result in lower revenues and market share for us. In addition, there can be no assurance that additional capital will be available to us when needed or available on terms favorable to us.
11
We do not use derivative financial instruments in our investment portfolio and has no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable and long-term obligations. We consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. However, in order to manage the foreign exchange risks, we may engage in hedging activities to manage our financial exposure related to currency exchange fluctuation. In these hedging activities, we might use fixed-price, forward, futures, financial swaps and option contracts traded in the over-the-counter markets or on exchanges, as well as long-term structured transactions when feasible.
Foreign Exchange Rates
All of our sales are denominated in Renminbi (“RMB”). As a result, changes in the relative values of U.S. Dollars and RMB affect our reported levels of revenues and profitability as the results are translated into U.S. Dollars for reporting purposes. Fluctuations in exchange rates between the U.S. dollar and RMB affect our gross and net profit margins and could result in foreign exchange and operating losses.
Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We recorded net foreign currency gain of $323 for the three months ended March 31, 2010, compared to net foreign currency loss of $1,518 for the three months ended March 31, 2009. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future.
Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. The value of your investment in our stock will be affected by the foreign exchange rate between U.S. dollars and RMB. To the extent we hold assets denominated in U.S. dollars, including the net proceeds to us from this offering, any appreciation of the RMB against the U.S. dollar could result in a change to our statement of operations and a reduction in the value of our U.S. dollar denominated assets. On the other hand, a decline in the value of RMB against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the price of our stock.
2010 | 2009 | |
Balance sheet items, except for the registered and paid-up capital as of March 31, 2010 and 2009 | USD 0.146:RMB 1 | USD 0.146:RMB 1 |
Amounts included in the statements of operations, and statements of cash flows for the three months ended March 31, 2010 and 2009 | USD 0.146:RMB 1 | USD 0.146:RMB 1 |
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the specified time periods. Our Chief Executive Officer and its Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for maintaining our disclosure controls and procedures. The controls and procedures established by us are designed to provide reasonable assurance that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.
As of the end of the period covered by this report, the Certifying Officers evaluated the effectiveness of our disclosure controls and procedures. Based on the evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure.
The Certifying Officers have also concluded, based on their evaluation of our controls and procedures that as of March 31, 2010, our internal controls over financial reporting are effective and provide a reasonable assurance of achieving their objective.
The Certifying Officers have also concluded that there was no change in our internal controls over financial reporting identified in connection with the evaluation that occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 4T. CONTROLS AND PROCEDURES
(a) Conclusions regarding disclosure controls and procedures. Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management is responsible for establishing and maintaining adequate internal control over financial reporting.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Exchange Act as of March 31, 2010, and, based on their evaluation, as of the end of such period, the our disclosure controls and procedures were effective as of the end of the period covered by the Quarterly Report,
(b) Management’s Report On Internal Control Over Financial Reporting. It is management’s responsibilities to establish and maintain adequate internal controls over the Company’s financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers and effected by the issuer’s management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management of the issuer; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.
As of the end of the period covered by the Quarterly Report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our internal control over financial reporting.
Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, internal controls over financial reporting were effective as of the end of the period covered by the Report.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
This Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Quarterly Report.
(c) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
12
PART II. OTHER INFORMATION
As of the date of this report, we are not a party to any pending legal proceeding and are not aware of any threatened legal proceeding.
ITEM 1A. RISK FACTORS
The information to be reported under this item has not changed since the previously filed 10K, for the year ended December 31, 2009.
We have not had any default upon senior securities.
We have not had any submission of matters to a vote of security holders.
We do not have any other information to report.
ITEM 6. EXHIBITS
None
13
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 EDUCATION TECHNOLOGY, INC. (Registrant) | ||
Date: May 18, 2010 | By: | /s/ Yan Bin Guo |
Yan Bin Guo President, Chief Executive Officer |