UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: March 31, 2012
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to _____________
Commission File Number: 000-54086
CHINA EXECUTIVE EDUCATION CORP.
(Exact Name of Registrant as Specified in Its Charter)
Nevada | 75-3268300 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
c/o Hangzhou MYL Business Administration Consulting Co. Ltd.
Room 307, Hualong Business Building
110 Moganshan Road, Hangzhou 310005
People’s Republic of China
(Address of principal executive offices, Zip Code)
(+86) 0571-8880-8109
(Registrant’s telephone number, including area code)
_____________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated Filer o | ||
Non-Accelerated Filer o (Do not check if a smaller reporting company) | Smaller reporting company x |
The number of shares outstanding of each of the issuer’s classes of common stock, as of May 14, 2012 is as follows:
Class of Securities | Shares Outstanding | |
Common Stock, $0.001 par value | 22,834,100 |
Quarterly Report on Form 10-Q
Period Ended March 31, 2012
TABLE OF CONTENTS
Page | |
PART I FINANCIAL INFORMATION | |
Item 1. Financial Statements. | 2 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 21 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk. | 30 |
Item 4. Controls and Procedures. | 30 |
PART II OTHER INFORMATION | |
Item 1. Legal Proceedings. | 31 |
Item 1A. Risks Factors. | 31 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. | 32 |
Item 3. Defaults Upon Senior Securities. | 32 |
Item 4. Mine Safety Disclosures | 32 |
Item 5. Other Information. | 32 |
Item 6. Exhibits. | 32 |
1
PART I
FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS. |
CHINA EXECUTIVE EDUCATION CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
Page | ||
Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011 | 3 | |
Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2012 and 2011 (unaudited) | 4 | |
Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (unaudited) | 5 | |
Notes to Consolidated Financial Statements (unaudited) | 6-20 |
2
CHINA EXECUTIVE EDUCATION CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT MARCH 31, 2012 AND DECEMBER 31, 2011
(Stated in US Dollars)
March 31, 2012 | December 31, 2011 | |||||||
ASSETS | (Unaudited) | |||||||
Current assets: | ||||||||
Cash and cash equivalents-Unrestricted (including cash and cash equivalents-Unrestricted of the consolidated VIE without recourse to China Executive Education Corp of US$2,148,224 and US$294,841 as of March 31,2012 and December 31,2011, respectively) | $ | 2,665,379 | $ | 3,570,740 | ||||
Cash and cash equivalents-Restricted cash (including cash and cash equivalents-Restricted cash of the consolidated VIE without recourse to China Executive Education Corp of US$317,664 and US$317,178 as of March 31,2012 and December 31,2011, respectively) | 317,664 | 317,178 | ||||||
Advance to vendors (including advance to vendors of the consolidated VIE without recourse to China Executive Education Corp of US$24,246 and nil as of March 31,2012 and December 31,2011, respectively) | 605,007 | 602,685 | ||||||
Receivables from shareholder (including receivables from shareholder of the consolidated VIE without recourse to China Executive Education Corp of nil and nil as of March 31,2012 and December 31,2011, respectively) | 1,759,062 | 1,914,964 | ||||||
Other receivables (including other receivables of the consolidated VIE without recourse to China Executive Education Corp of US$4,989,161 and US$3,749,545 as of March 31,2012 and December 31,2011, respectively) | 3,762,149 | 2,934,815 | ||||||
Total current assets | 9,109,261 | 9,340,382 | ||||||
Property, plant and equipment, net (including property, plant and equipment, net of the consolidated VIE without recourse to China Executive Education Corp of US$1,333 and US$458 as of March 31,2012 and December 31,2011, respectively) | 1,035,665 | 1,128,447 | ||||||
Total Assets | $ | 10,144,926 | $ | 10,468,829 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Customer deposits (including customer deposits of the consolidated VIE without recourse to China Executive Education Corp of US$3,696,743 and US$2,605,864 as of March 31,2012 and December 31,2011, respectively) | $ | 3,706,801 | $ | 2,605,864 | ||||
Accrued expenses (including accrued expenses of the consolidated VIE without recourse to China Executive Education Corp of nil and US$205,666 as of March 31,2012 and December 31,2011, respectively) | - | 352,655 | ||||||
Deferred revenue (including deferred revenue of the consolidated VIE without recourse to China Executive Education Corp of US$7,090,798 and US$7,188,008 as of March 31,2012 and December 31,2011, respectively) | 7,090,798 | 7,188,008 | ||||||
Other payables (including other payables of the consolidated VIE without recourse to China Executive Education Corp of US$3,390,066 and US$842,546 as of March 31,2012 and December 31,2011, respectively) | 64,065 | 523,411 | ||||||
Taxes payable (including taxes payable of the consolidated VIE without recourse to China Executive Education Corp of nil and nil as of March 31,2012 and December 31,2011, respectively) | - | - | ||||||
Total current liabilities | 10,861,664 | 10,669,938 | ||||||
Deferred revenue- noncurrent | 16,460,696 | 16,464,222 | ||||||
Total liabilities | 27,322,360 | 27,134,160 | ||||||
Commitments | ||||||||
Stockholders’ Deficiency | ||||||||
Common stock, $0.001 par value, 70,000,000 shares authorized, 22,834,100 shares issued and outstanding at March 31,2012 and December 31,2011, respectively | $ | 22,834 | $ | 22,834 | ||||
Additional paid-in capital | 1,775,842 | 1,775,842 | ||||||
Accumulated deficits | (17,963,934 | ) | (17,466,892 | ) | ||||
Accumulated other comprehensive loss | (1,012,176 | ) | (997,115 | ) | ||||
Total stockholders’ deficiency | $ | (17,177,434 | ) | $ | (16,665,331 | ) | ||
Total Liabilities and Stockholder's Equity | $ | 10,144,926 | $ | 10,468,829 |
The accompanying notes are an integral part of these consolidated financial statements.
3
CHINA EXECUTIVE EDUCATION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
For the three months ended March 31, | ||||||||
2012 | 2011 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenues | $ | 1,256,317 | $ | 553,056 | ||||
Cost of revenue | 307,577 | 1,040,289 | ||||||
Gross profit | 948,740 | (487,233) | ||||||
Operating expenses | ||||||||
Selling expenses | 775,235 | 1,493,261 | ||||||
General and administrative expenses | 687,221 | 712,079 | ||||||
Total operating expenses | 1,462,456 | 2,205,340 | ||||||
Loss from operations | (513,716 | ) | (2,692,573 | ) | ||||
Other income (expenses) | ||||||||
Interest income | 18,608 | 9,952 | ||||||
Other income | - | 16,653 | ||||||
Other expenses | (1,934 | ) | - | |||||
Total other income | 16,674 | 26,605 | ||||||
Income (loss) before income taxes benefits | (497,042 | ) | (2,665,968 | ) | ||||
Provision for income taxes | - | (249,135 | ) | |||||
Net loss | (497,042 | ) | (2,915,103 | ) | ||||
Comprehensive loss | ||||||||
Net loss | (497,042 | ) | (2,915,103 | ) | ||||
Foreign currency translation loss | (15,060 | ) | (109,969 | ) | ||||
Total comprehensive loss | $ | (512,102 | ) | $ | (3,025,072 | ) | ||
Basic and diluted loss per common share | $ | (0.02) | $ | (0.13) | ||||
Basic and diluted weighted average common shares outstanding | 22,834,100 | 22,834,100 | ||||||
Cash dividends per common share | $ | - | $ | - |
The accompanying notes are an integral part of these consolidated financial statements.
4
CHINA EXECUTIVE EDUCATION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
For the three months ended March 31, | |||||||
2012 | 2011 | ||||||
(Unaudited) | (Unaudited) | ||||||
Cash flows from operating activities | |||||||
Net loss | $ | (497,042 | ) | $ | (2,915,103 | ) | |
Adjustments to reconcile net income to net cash used in operating activities: | |||||||
Depreciation and amortization | 95,451 | 54,318 | |||||
Changes in assets and liabilities: | |||||||
(Increase) decrease in - | |||||||
Other receivables | (821,210 | ) | (545,817 | ) | |||
Advance to vendors | (1,398 | ) | (685,060 | ) | |||
Increase (decrease) in - | |||||||
Other payable | (460,721 | ) | (181,384 | ) | |||
Customer deposits | 1,094,770 | (89,380 | ) | ||||
Accrued expenses | (352,492 | ) | (385,373 | ) | |||
Tax payable | - | (1,113,031 | ) | ||||
Deferred revenue | (136,641 | ) | 4,833,702 | ||||
Net cash used in operating activities | (1,079,283 | ) | (1,027,128 | ) | |||
Cash flows used in investing activities | |||||||
Acquisition of property and equipment | (1,131 | ) | (125,556 | ) | |||
Net cash used in investing activities | (1,131 | ) | (125,556 | ) | |||
Cash flows from financing activities | |||||||
Cash receive from shareholder | 158,515 | - | |||||
Net cash used in financing activities | 158,515 | - | |||||
Effect of exchange rate changes on cash and cash equivalents | 16,538 | 143,268 | |||||
Net decrease in cash and cash equivalents | (905,361 | ) | (1,009,416 | ) | |||
Cash and cash equivalents, beginning of periods | 3,570,740 | 10,272,391 | |||||
Cash and cash equivalents, end of periods | $ | 2,665,379 | $ | 9,262,975 | |||
Supplemental disclosures of cash flow information: | |||||||
Interest paid | $ | - | $ | - | |||
Income taxes paid | $ | - | $ | 1,362,166 | |||
The accompanying notes are an integral part of these consolidated financial statements.
5
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
China Executive Education Corp (the “Company”), formerly known as On Demand Heavy Duty Corp, is a corporation organized under the laws of the State of Nevada.
On February 12, 2010, the Company acquired all of the outstanding capital stock of Surmounting Limit Marketing Adviser Limited (“SLM”), a Hong Kong Corporation, through China Executive Education Corp., a Nevada corporation (the “Merger Sub”) wholly owned by the Company. SLM is a holding company whose only asset, held through a subsidiary, is 100% of the registered capital of Hangzhou MYL Business Administration Consulting Co., Ltd. (“MYL Business”), a limited liability company organized under the laws of the People’s Republic of China (“PRC”). Substantially all of SLM's operations are conducted in China through MYL Business, and through contractual arrangements with several of MYL Business’s affiliated entities in China, including Hangzhou MYL Commercial Services Co., Ltd. (“MYL Commercial”) and its subsidiaries. MYL Commercial is a fast-growing executive education company with dominant operation in Shanghai, the commercial center of China, providing comprehensive consulting services such as business administration, marketing strategy, designing of enterprise image, corporate investment and commerce, business conference as well as professional training programs designed to fit the needs of Chinese entrepreneurs to improve their leadership, management and marketing skills.
In connection with the acquisition, the Merger Sub issued 20 shares of the common stock of the Merger Sub which constituted no more than 10% ownership interest in the Merger Sub to the shareholders of SLM, in exchange for all the shares of the capital stock of SLM (the “Share Exchange” or “Merger”). The 20 shares of the common stock of the Merger Sub were converted into approximately 21,560,000 shares of the common stock of the Company so that upon completion of the Merger, the shareholders of SLM own approximately 98% of the common stock of the Company.
As part of the Merger, pursuant to a stock purchase agreement (the “Stock Purchase Agreement”), the Company transferred all of the outstanding capital of its subsidiary, On Demand Heavy Duty Holdings, Inc. (“Holdings”) to certain of its shareholders in exchange for the cancellation of 3,000,000 shares of the Company’s common stock (the “Split Off Transaction”). In addition, an aggregate of 3,070,000 shares were returned to the transfer agent for cancelation by other shareholders of Holdings. Following the Merger and the Split-Off Transaction, the Company discontinued its former business and is now engaged in the executive education business.
Upon completion of the Merger, there were 22,000,000 shares of the Company’s common stock issued and outstanding.
As a result of these transactions, persons affiliated with the SLM and MYL Business owned securities that in the aggregate represented approximately 98% of the equity in the Company. In addition, in connection with the change of control contemplated by the Share Exchange, the directors and officers of the Company resigned from their positions and new directors and officers affiliated with MYL Business controlled the Board of Directors.
Consequently, the Company’s name was changed from “On Demand Heavy Duty Corp.” to the Merger Sub’s name “China Executive Education Corp.” in order to more effectively reflect the Company’s business and communicate the Company’s brand identity to customers.
6
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
The above mentioned merger transaction has been accounted for as a reverse merger under the purchase method of accounting since there was a change of control. Accordingly, SLM is treated as the continuing entity for accounting purposes. SLM did not commence business operations until April 2009.
SLM does not conduct any substantive operations of its own. Instead, through its subsidiary, MYL Business, it had entered into certain exclusive contractual agreements with Hangzhou MYL Commercial Services Co., Ltd. (“MYL Commercial”), a company incorporated in Hangzhou City, Zhejiang Province, People’s Republic of China (“PRC”) on March 25, 2009. Pursuant to these agreements, SLM is obligated to absorb a majority of the risk of loss from MYL Commercial’s activities and entitled it to receive a majority of its expected residual returns. In addition, MYL Commercial’s shareholders have pledged their equity interest in MYL Commercial to SLM, irrevocably granted SLM an exclusive option to purchase, to the extent permitted under PRC Law, all or part of the equity interests in MYL Commercial and agreed to entrust all the rights to exercise their voting power to the persons appointed by MYL Commercial. Through these contractual arrangements, the Company and SLM hold all the variable interests of MYL Commercial. Therefore, the Company is the primary beneficiary of MYL Commercial.
Based on these contractual arrangements, management believes that MYL Commercial should be considered as a Variable Interest Entity (“VIE”) under ASC 510 “Consolidation of Variable Interest Entities, and Interpretation of ARB No. 51”, because the Company is the primary beneficiary. Accordingly, the Company consolidates MYL Commercial and its subsidiary’s results, assets and liabilities
2. UNCERTAINTY OF ABILITY TO CONTINUE AS A GOING CONCERN
The Company's consolidated financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The continuation of the Company as a going concern is dependent upon the ability of the Company to obtain necessary equity financing to continue operations and the attainment of profitable operations.
As of March 31, 2012 and December 31, 2011, the Company has incurred accumulated deficits totaling $17,963,934 and $17,466,892, with stockholder’s deficiency totaling $17,177,434 and $16,665,331, and its current liabilities exceed its current assets by $1,752,403 and $1,329,556, respectively. For the three months ended March 31, 2012 and 2011, the Company has suffered from net loss of $497,042 and $2,915,013, respectively. These unaudited consolidated financial statements do not include any adjustments relating to the classification of liabilities that might be necessary should the Company be unable to continue as a going concern. These factors noted above raise substantial doubts regarding the Company's ability to continue as a going concern.
3. | RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS |
The Company has restated its consolidated financial statements for the years ended December 31, 2010 and 2009, as previously disclosed in Form 10-K/A for 2010 filed on March 27, 2012. As a result, certain line items have changes and caused the restatement of the interim consolidated financial statement for the quarter ended March 31, 2011.
7
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) | Method of accounting |
The Company’s interim consolidated financial statements have been prepared in accordance with US GAAP.
The interim results of operations are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2012. The Company’s consolidated balance sheet as of December 31, 2011 has been taken from the Company’s audited consolidated balance sheet (restated) as of the date. All other consolidated financial statements contained herein are unaudited and, in the opinion of management, contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows for the period presented. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements (restated) and notes thereto.
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company’s principal subsidiaries, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC, the accounting standards used in the places of their domicile. The accompanying interim consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company's subsidiaries to present them in conformity with US GAAP.
(b) | Principles of consolidation |
The consolidated financial statements are presented in US Dollars and include the accounts of the Company and its subsidiary. All significant inter-company balances and transactions are eliminated in consolidation.
8
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company owned its subsidiaries and variable interest entity (“VIE”) soon after its inception and continued to own the equity’s interests through March 31, 2012. The following table depicts the identity of the subsidiaries and VIE:
Name of the entity | Place of Incorporation | Ownership Percentage | |||
Surmounting Limit Marketing Advisor Limited ("SLM") | Hong Kong, China | 100% | |||
Hangzhou MYL Business Administration Co., Ltd. ("MYL Business") | Hangzhou, China | 100% | |||
Shanghai MYL Consulting Co., Ltd. ("MYL Consulting") | Shanghai, China | 100% | |||
Hangzhou MYL Commercial Service., Ltd. ("MYL Commercial") | Hangzhou, China | VIE | |||
Hangzhou Gongshu MYL Training school ("MYL Training School ") | Hangzhou, China | VIE | |||
(c) | Use of estimates |
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.
(d) | Economic and political risks |
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.
The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
9
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) | Cash and concentration of risk |
Cash includes cash on hand, cash in banks and demand deposits in accounts maintained within the PRC and Hong Kong. The Company has not experienced any losses in such accounts and believes it is not exposed to any risk on its cash in bank accounts.
(f) | Accounting for the impairment of long-lived assets |
The Company periodically evaluates the carrying value of long-lived assets to be held and used, including intangible assets subject to amortization, when events and circumstances warrant such a review, pursuant to the guidelines established in ASC No. 360, “Property, Plant and Equipment”. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.
During the reporting periods, there was no impairment loss.
(g) | Cash and cash equivalents |
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains bank accounts in the Hong Kong. The subsidiaries of the Company maintain bank accounts in Hong Kong and the PRC.
(h) | Retirement benefits |
The employees of the Company are members of a state-managed retirement benefit plan operated by the government of the PRC. The Company is required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Company with respect to the retirement benefit plan is to make the specified contributions.
(i) | Property, plant and equipment |
Plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the property, plant and equipment are as follows:
Buildings | 20 years |
Computer and electronic equipments | 3-5 years |
Leasehold improvement | 3 years |
Motor vehicles | 5 years |
10
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income.
(j) | Foreign currency translation |
The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). The consolidated financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements were as follows:
March 31, 2011 | ||
balance sheet | RMB 6.5486 to US$1.00 | |
Statements of income and comprehensive income | RMB 6.5788 to US$1.00 | |
March 31, 2012 | ||
balance sheet | RMB 6.2950 to US$1.00 | |
Statements of income and comprehensive income | RMB 6.3085 to US$1.00 |
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation. In addition, the current foreign exchange control policies applicable in PRC also restrict the transfer of assets or dividends outside the PRC.
(k) | Accounts receivable |
Accounts receivable is recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Bad debts are written off as incurred. As of March 31, 2012 and December 31, 2011, there were no bad debts.
Outstanding accounts balances are reviewed individually for collectability. The Company does not charge any interest income on trade receivables. Accounts balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. To date, the Company has not charged off any balances as it has yet to exhaust all means of collection.
11
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) | Statutory reserves |
As stipulated by the PRC’s Company Law and as provided in the company Articles of Association, company’s net income after taxation can only be distributed as dividends after appropriation has been made for the following:
i. | Making up cumulative prior years’ losses, if any; |
ii. | Allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital, which is restricted for set off against losses, expansion of production and operation or increase in registered capital; |
iii. | Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's “Statutory common welfare fund”, which is restricted for capital expenditure for the collective benefits of the Company's employees; and |
iv. | Allocations to the discretionary surplus reserve, if approved in the shareholders’ general meeting. |
(m) | Revenue recognition |
The Company records all tuition as deferred revenue when students enroll a course. At the beginning of each course, revenue is recognized on a pro rata basis over the quantity of classes attended by the students. This results in the Company’s balance sheet including future revenues that have not yet been earned as deferred revenue for courses that are not yet attended.
Refund policy permits students who apply for a refund for the portion of the course they did not attend. The Company may refund a portion of fees after negotiated. In the past practice, there are seldom cases that the students apply for refund, and it has no significant impact on revenue recognition of the Company based on the best estimation of the management Refunds result in a reduction in deferred revenue during the period that a student drops or withdraws from a class because associated tuition revenue is recognized pro rata over the quantity of classes are delivered.
Generally, net revenue varies from period to period based on several factors, including the aggregate number of students attending classes, the number of classes held during the period, and the tuition price.
The Company’s revenue is principally derived from tuition and fees associated with two kinds of educational programs to the students: proprietary training courses, and comprehensive training courses.
Proprietary training courses, which normally take several days to complete, primarily consisted of featured lectures. These courses are provided on a roll-over basis over the year. Based on the courses attendance record, the revenue is recognized at the delivered courses to the students.
Comprehensive training courses, which are composed with sixteen individual courses with systematic training in leadership development, i.e. decision making skills, negotiation skills, presentation skills and people skills. Based on the contracts, the students are eligible to enroll the courses within three years period. The revenue is recognized on pro rata basis over the quantity of classes attended.
12
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(n) | Operating lease rental |
The Company did not have a lease that met the criteria of a capital lease. Leases that do not qualify as a capital lease are classified as an operating lease. Operating lease rental payments included in general and administrative expenses for the three months ended March 31, 2012 and 2011 were $231,651 and $191,430, respectively.
(o) | Income taxes |
The Company accounts for income taxes using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future realization is uncertain.
The Company is operating in the PRC, and in accordance with the relevant tax laws and regulations of PRC, the enterprise income tax rate for the three months ended March 31, 2012 and 2011 were 25%.
(p) | Comprehensive income |
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other consolidated financial statements. The Company’s current component of other comprehensive income is the foreign currency translation adjustment.
(q) | Recently implemented standard |
In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is adopted for fiscal years, and interim periods beginning after December 15, 2011 for public entities with retrospective application. There is no material impact on the consolidated financial statements upon adoption.
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. Under the amendments in this ASU, an entity has two options for presenting its total comprehensive income: to present total comprehensive income and its components along with the components of net income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company conforms to the new presentation required in this ASU beginning with its Form 10-Q for the three months ended March 31, 2012.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment, to simplify how entities test goodwill for impairment. ASU No. 2011-08 allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If greater than 50 percent likelihood exists that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in Topic 350 must be performed. The guidance provided by this update becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopts this ASU beginning with its Form 10-Q for the three months ended March 31, 2012. There is no material impact on the consolidated financial statements upon adoption.
13
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210)—Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The update requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The ASU is effective for annual periods beginning on or after January 1, 2013 and interim periods therein. The Company is currently evaluating the impact this update will have on our consolidated financial statements.
In December 2011, FASB issued Accounting Standards Update No. 2011−12, Comprehensive Income (“ASU 2011−12”). Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. Among the new provisions in ASU 2011-05 was a requirement for entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements); however this reclassification requirement is indefinitely deferred by ASU 2011-12 and will be further deliberated by the FASB at a future date.
5. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially expose the company to concentrations of credit risk, consists of cash and accounts receivable as of March 31, 2012 and December 31, 2011. The Company performs ongoing evaluations of its cash position and credit evaluations to ensure sound collections and minimize credit losses exposure.
As of March 31, 2012 and December 31, 2011, all the Company’s bank deposits were conducted with banks in the PRC where there is currently no rule or regulation mandated on obligatory insurance of bank accounts.
For the three months ended March 31, 2012 and 2011, all of the Company’s sales were generated from the PRC. In addition, all accounts receivable as of March 31, 2012 and December 31, 2011 also arose in the PRC.
The maximum amount of loss exposure due to credit risk that the Company would bear if the counter parties of the financial instruments failed to perform represents the carrying amount of each financial asset on the balance sheet.
Normally, the Company does not require collateral from customers or debtors.
6. VARIABLE INTEREST ENTITY
PRC regulations currently limit direct foreign ownership of business entities to engage in education business in the PRC. To comply with these PRC regulations, the Company currently conducts the education business through MYL Commercial, and MYL Training School, VIES.
On May 1, 2009 MYL Business has entered into a series of exclusive contractual arrangements with (the “Contractual Arrangements”) MYL Commercial, pursuant to which MYL Business exercise effective control over the operations of MYL Commercial and receive the economic benefits of MYL Commercial. These agreements are summarized in the following paragraphs.
14
6. VARIABLE INTEREST ENTITY (continued)
Exclusive Services Agreement. Pursuant to an exclusive services agreement by and among MYL Business, MYL Commercial and its subsidiary, dated May 1, 2009, MYL Commercial and its subsidiary irrevocably entrusted to MYL Business the management and operation of MYL Commercial and its subsidiary and the responsibilities and authorities of their shareholders and directors. The service fee to be paid by MYL Commercial and its subsidiary is equal to 95% of their total income which can be waived by MYL Business from time to time in its sole discretion.
Call Option Agreement. Pursuant to a call option agreement by and among MYL Business, MYL Commercial and MYL Commercial’s shareholders and subsidiary, dated as of May 1, 2009, each of MYL Commercial and MYL Commercial’s shareholders have granted MYL Business or its designee an exclusive option to purchase all or part of their equity interests in MYL Commercial and its subsidiary, or all or part of the assets of MYL Commercial, in each case, at any time determined by MYL Business and to the extent permitted by PRC law.
Voting Rights Proxy Agreement. Pursuant to a voting rights proxy agreement by and among MYL Business, MYL Commercial and MYL Commercial’s shareholders and subsidiary, dated as of May 1, 2009, the shareholders of MYL Commercial and its subsidiary have granted the personnel designated by MYL Business the right to appoint directors and senior management of MYL Commercial and its subsidiary and to exercise all of their other voting rights as shareholders of MYL Commercial and its subsidiary, as the case may be, as provided under the articles of association of each such entity. Under the voting rights proxy agreement, there are no restrictions on the number, to the extent allowed under the respective articles of association of MYL Commercial and its subsidiary, or identity of those persons we can appoint as directors and officers.
Equity Pledge Agreement. Pursuant to an equity pledge agreement by and among MYL Business, MYL Commercial and MYL Commercial’s shareholders and subsidiary, dated as of May 1, 2009, each of the shareholders has pledged his or its equity interest in MYL Commercial and its subsidiary as the case may be, to MYL Business to secure their obligations under the relevant contractual control agreements to which each is a party, including but not limited to, the obligations of MYL Commercial and its subsidiary under the exclusive services agreement, call option agreement and voting rights proxy agreement. Under this equity pledge agreement, the shareholders have agreed not to transfer, assign, pledge or otherwise dispose of their interest in MYL Commercial or its subsidiary, as the case may be, without the prior written consent of MYL Business.
As a result of these Contractual Arrangements, under U.S.GAAP, MYL Business is considered the primary beneficiary of MYL Commercial and thus consolidates its results in our consolidated financial statements.
As a result of the Contractual Arrangement, MYL Business was granted with unconstrained decision making rights and power over key operational functions within the MYL Commercial. As a result, MYL Business will bear all of the VIEs operating costs in exchange for 100% of the net income the VIEs. There is not any income or loss of the VIEs attributed to other parties. MYL Business does not have any equity interest in the VIEs, but instead has the right to enjoy economic benefits similar to equity ownership through its Contractual Arrangements with MYL Commercial.
These contractual arrangements may not be as effective in providing MYL Business with control over the MYL Commercial as direct ownership. Due to its VIE structure, MYL Business has to rely on contractual rights to effect control and management of the MYL Commercial, which exposes it to the risk of potential breach of contract by the shareholders of MYL Commercial.
15
6. VARIABLE INTEREST ENTITY (continued)
In addition, as all of these Contractual Arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce these contractual arrangements, it may not be able to exert effective control over the VIEs, and its ability to conduct its business may be materially and adversely affected. At present, the equity interest pledge agreement has not been registered with the PRC regulator.
None of the assets of the VIEs can be used only to settle obligations of the consolidated VIEs. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets.
The following financial statement amounts and balances of the VIEs were included in the accompanying consolidated financial statements:
As of | ||||||||
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
(Unaudited) | ||||||||
Total assets | $ | 7,480,626 | $ | 4,362,026 | ||||
Total liabilities | $ | 30,632,304 | $ | 27,306,306 |
7. PROPERTY, PLANT AND EQUIPMENT, NET
Details of property, plant and equipment are as follows:
As of | ||||||||
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
At cost | (Unaudited) | |||||||
Buildings | $ | 99,241 | $ | 99,089 | ||||
Computer and electronic equipments | 225,134 | 223,659 | ||||||
Leasehold improvement | 493,024 | 492,271 | ||||||
Motor vehicles | 636,732 | 635,760 | ||||||
Less: accumulated depreciation | (418,466 | ) | (322,332 | ) | ||||
$ | 1,035,665 | $ | 1,128,447 |
Depreciation expense included in the general and administrative expenses for the three months ended March 31, 2012 and 2011 was $95,451 and $54,318, respectively.
16
8. OTHER RECEIVABLES
Other receivables were comprised of the following:
As of | ||||||||
March 31, 2012 | December 31, 2011 | |||||||
(Unaudited) | ||||||||
Disbursement and advances to employees | $ | 2,430,129 | $ | 1,586,178 | ||||
Business tax prepaid | 823,064 | 844,757 | ||||||
Deposits paid and others | 508,956 | 503,880 | ||||||
$ | 3,762,149 | $ | 2,934,815 |
9. OTHER PAYABLES
Other payables were comprised of the following:
As of | ||||||||
March 31, 2012 | December 31, 2011 | |||||||
(Unaudited) | ||||||||
Payables to outside service providers | $ | - | $ | 335,575 | ||||
Sundry PRC taxes payables | 31,428 | 29,240 | ||||||
Deposits received and credit guarantees | 16,773 | 11,100 | ||||||
Business taxes payable | 14,911 | 147,496 | ||||||
Sundries | 953 | - | ||||||
$ | 64,065 | $ | 523,411 |
10. DEFERRED REVENUE
Deferred revenue represents the tuition fees from enrolled students for courses not delivered. As of March 31, 2012 and December 31, 2011, deferred revenue included in current liabilities amounted to $7,090,798 and $7,188,008, respectively. Included in non-current liabilities amounted to $16,460,696 and $16,464,222, respectively.
17
11. RELATED PARTY TRANSACTION
On July 2, 2010, the Company declared dividends in the total amount of RMB 12,075,000 (equivalent to $1,784,088) out of the retained earnings balance of Hangzhou MYL for the fiscal year ended December 31, 2009 to its sole shareholder, Surmounting Limit Marketing Adviser Limited(“SLM”). On the same date, SLM also made a resolution to distribute the net tax amount of such dividend that SLM receives to Magic Dream Enterprises Ltd., a company incorporated under the laws of British Virgin Island. And the shareholder Mr. Liang Kaien, the shareholder of the Company and Magic Dream Enterprises Ltd received the dividend payment. However, as at December 31, 2010, the Company’s Board of Directors adopted a resolution, the dividend previously declared invalid, the Company should collect back the payment from the shareholder, Mr. Liang Kaien. As of March 31, 2012, receivable from shareholder amounted to $1,759,062.
The Company has several rental arrangements providing residential units to house key employees, including the Chief Executive Officer Mr. Liang Kaien, Chief Operating Officer Mr. Xu Pokai, and Chief Strategy Officer Mr. Chen Tingyuan. For the three months ended March 31, 2012 and 2011, housing benefit provided to these officers totaled $58,213 and $55,822, respectively.
12. BASIC AND DILUTED LOSSES PER SHARE
In accordance with ASC 260 Earnings per Share, basic losses per common share is computed by using net losses divided by the weighted average number of shares of common stock outstanding for the periods presented. Diluted losses per share reflect the potential dilution of securities that could share in the losses of the Company. Potential common stock shares consist of shares that may arise from outstanding dilutive common stock options and warrants (the number of which is computed using the “treasury stock method”). The calculation of diluted losses per common share assumes that outstanding common shares were increased by shares issuable upon exercise of those stock warrants for which the market price exceeds the exercise price, less shares that could have been purchased by the Company with related proceeds.
For three months ended March 31, | ||||||||
2012 | 2011 | |||||||
(Unaudited) | (Unaudited) | |||||||
Net losses | $ | (497,042 | ) | $ | (2,915,103 | ) | ||
Weighted average number of common shares outstanding – basic and diluted | 22,834,100 | 22,834,100 | ||||||
Losses per share – basic and diluted | $ | (0.02 | ) | $ | (0.13 | ) |
13. PROVISION FOR INCOME TAXES
United States
China Executive Education Corp. is subject to United States tax at a tax rate of 35%. No provision for income tax in the United States has been made as China Executive Education Corp. had no U.S. taxable income for the three months ended March 31, 2012 and 2011.
18
13. PROVISION FOR INCOME TAXES (continued)
Hong Kong
Incorporated in Hong Kong, the company is governed by the income tax law of Hong Kong. According to current Hong Kong income tax law, the applicable income tax rate for the company is 16.5%. No provision for income tax in the Hong Kong has been made as the Company had no Hong Kong taxable income for the three months ended March 31, 2012 and 2011.
PRC
In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income. On March 16, 2007, the National People’s Congress of the PRC enacted a new Enterprise Income Tax Law (“Enterprise Income Tax Law”) under which foreign invested enterprises and domestic companies would be subject to Enterprise Income Tax Law at a uniform rate of 25%. The Enterprise Income Tax Law became effective on January 1, 2008.
The Company’s PRC subsidiaries are subject to income tax at a rate of 25% for the three months ended March 31, 2012 and 2011.
The following table reconciles the Company’s effective tax for the years presented:
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
(Unaudited) | (Unaudited) | |||||||
Loss before income taxes benefits | $ | (497,042 | ) | $ | (2,665,968 | ) | ||
PRC statutory income tax rate | 25 | % | 25 | % | ||||
Income tax at statutory tax rate | (124,261 | ) | (666,492 | ) | ||||
Permanent differences | 124,261 | 915,627 | ||||||
Expected enterprise income tax benefits at statutory tax rate | $ | - | $ | 249,135 |
The significant components of income tax components are as follows:
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
(Unaudited) | (Unaudited) | |||||||
Current: | ||||||||
Provision for PRC Enterprise Income Tax | $ | - | $ | 249,135 | ||||
Deferred: | ||||||||
Provision for PRC Enterprise Income Tax | - | - | ||||||
Income tax expenses (benefits) | $ | - | $ | 249,135 |
19
13. PROVISION FOR INCOME TAXES (continued)
Deferred tax assets reflect the tax effects of temporary differences due to deferred revenue and between the carrying amounts of assets and liabilities for financial reporting purpose and the tax bases used for income tax purpose.
The tax effects of temporary differences that give rise to the Company’s net deferred tax assets and liabilities as of March 31, 2012 and December 31, 2011 are summarized as follows:
As of | ||||||||
March 31, 2012 | December 31, 2011 | |||||||
(Unaudited) | (Unaudited) | |||||||
Deferred tax assets: | ||||||||
Loss carried forward | $ | 5,887,873 | $ | 5,913,058 | ||||
Valuation allowance | (5,887,873 | ) | (5,913,058 | ) | ||||
Net deferred tax assets | $ | - | $ | - |
14. COMMITMENTS AND CONTINGENCIES
The Company did not have any significant capital commitment as of March 31, 2012 and December 31, 2011.
From time to time, the Company leases office spaces in Shanghai and Hangzhou in China to conduct its normal business activities, such as business administration, recruiting students, holding the business conferences and providing professional training courses or featured lectures to students. The Company also has several rental arrangements which provide residential units to house key employees. These lease agreements will expire before April 30, 2014.
Rent expenses for the above rental arrangements total $231,651 and $191,430 for the three months ended March 31, 2012 and 2011, respectively.
The minimum obligations under such commitments (unless otherwise stated) for the years ending December 31 until their expiration are summarized below:
Year | Amount | |||
2012 | $ | 793,704 | ||
2013 | 659,455 | |||
2014 | 211,599 | |||
Total | $ | 1,664,758 |
The Company did not record any contingencies as of March 31, 2012 and December 31, 2011.
15. SUBSEQUENT EVENTS
The Company has evaluated all other subsequent events and determined that there were no other subsequent events or transactions that require recognition or disclosures in the financial statements
20
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Special Note Regarding Forward Looking Statements
In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2011, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.
Use of Terms
· | “Company,” “we,” “us,” and “our” refer to the combined business of China Executive Education Corp., a Nevada corporation, and its consolidated subsidiaries and variable interest entity; |
· | “SLM” refers to our subsidiary Surmounting Limit Marketing Adviser Limited, a Hong Kong limited company; |
· | “MYL Business” refers to our indirect subsidiary Hangzhou MYL Business Administration Consulting Co., Ltd., a PRC limited company; |
· | “Shanghai MYL” refers to our indirect subsidiary Shanghai MYL Business Administration Consulting Co. Ltd., a PRC limited company; |
· | “MYL Commercial” refers to our variable interest entity Hangzhou MYL Commercial Services Co., Ltd., a PRC limited company; |
· | “MYL Training School” refers to MYL Commercial’s subsidiary Hangzhou Gongshu MYL Training School; |
· | “Hong Kong” refers to the Hong Kong Special Administrative Region of the People’s Republic of China; |
· | “PRC” and “China” are to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan; |
· | “SEC” are to the Securities and Exchange Commission; |
· | “Securities Act” are to the Securities Act of 1933, as amended; |
· | “Exchange Act” are to the Securities Exchange Act of 1934, as amended; |
· | “Renminbi” and “RMB” are to the legal currency of China; and |
· | “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States. |
Overview of our Business
We are a fast-growing executive education company with operations in Hangzhou and Shanghai, China. We operate comprehensive business training programs that are designed to fit the needs of Chinese entrepreneurs and to improve their leadership, management and marketing skills, as well as bottom-line results. Our comprehensive business training initiatives integrate research-based, proprietary content with processes that are specifically connected to the critical business issues that most private Chinese companies are facing. Our programs enable the trainees to better achieve their potential and better align their individual goals and competencies with the organizational objectives of their employers or business.
21
Our open-enrollment training programs include our proprietary training courses and comprehensive training courses. Our comprehensive training courses include one package of 16 courses for CEO and C-Level managers, as well as 23 leadership and personal development courses, focusing on management skills, negotiation skills, leadership skills and public speaking skills, among others. Featured lectures, delivered to large audiences, are presented by experts or well-known speakers in each relevant field. In 2011, we organized 4,613 such lectures in Shanghai. We believe that our network of speaking professionals is a leading platform for inspiring audiences to new levels of motivation and commitment.
We market our training programs directly to business executives through promotional seminars. Our websites are www.magicyourlife101.com and www.myl101.com.
Our principal executive offices are located at c/o Hangzhou MYL Business Administration Consulting Co. Ltd., Room 307, Hualong Business Building, 110 Moganshan Road, Hangzhou 310005, People’s Republic of China, and our telephone number is (86) 0571-8880-8109.
Restatement of Previously Issued Financial Statements
The Company has restated its consolidated financial statements for the years ended December 31, 2010 and 2009, as previously disclosed in Form 10-K/A for 2010 filed on March 27, 2012. As a result, certain line items have changes and caused the restatement of the interim financial statement for the quarter ended March 31, 2011.
First Quarter Financial Performance Highlights
The following summarizes certain key financial information for the first quarter of 2012:
· | Revenues: Revenues were $1,256,317 for the three months ended March 31, 2012, an increase of $703,261, or 127%, from $553,056 for the same period last year. |
· | Gross profit and margin: Gross profit was $948,740 for the three months ended March 31, 2012, an increase of $1,435,973, or 294%, from gross loss of $487,233 for the same period last year. Gross margin was 76% for the three months ended March 31, 2012, as compared to negative 88% for the same period last year, a 186% increase. |
· | Net loss: Net loss attributable to the Company was $497,042 for the three months ended March 31, 2012, a decrease of $2,418,061, or 83%, from a net loss of $2,915,103 for the same period of last year. |
· | Fully diluted net loss per share: Fully diluted net loss per share for the three months ended March 31, 2012 was $0.02, as compared to a net loss per share of $0.13 for the same period last year. |
Results of Operations
The following table sets forth key components of our results of operations for the periods indicated.
March 31, | March 31, | ||||||||||||
2012 $ | 2011 $ | Increase (decrease) | Percentage | ||||||||||
(Restated) | |||||||||||||
Revenue | 1,256,317 | 553,056 | 703,261 | 127% | |||||||||
Cost of revenue | 307,577 | 1,040,289 | (732,712) | (70%) | |||||||||
Gross profit (loss) | 948,740 | (487,233) | 1,435,973 | (295%) | |||||||||
Operating expenses | |||||||||||||
Selling and distribution costs | 775,235 | 1,493,261 | (718,026) | (48%) | |||||||||
General and Administrative expenses | 687,221 | 712,079 | (24,858) | (3%) | |||||||||
Total operating expenses | 1,462,456 | 2,205,340 | (742,884) | (34%) | |||||||||
Loss from operations | (513,716) | (2,692,573) | 2,178,857 | (81%) | |||||||||
Total other income (expenses) | 16,674 | 26,605 | (9,931) | (37%) | |||||||||
Loss before income taxes | (497,042) | (2,665,968) | 2,168,926 | (81%) | |||||||||
Income tax provisions | - | (249,135) | (249,135) | (100%) | |||||||||
Net loss | (497,042) | (2,915,103) | 2,418,061 | (83%) |
22
Revenues. We provide two kinds of training programs to students: (1) proprietary training courses and (2) comprehensive training courses. Proprietary training courses, which normally take several days to complete, primarily consist of featured lectures. These courses are provided on a roll-over basis over the year. Our comprehensive training course package includes sixteen individual courses with systematic training in leadership development, i.e. decision making skills, negotiation skills, presentation skills and people skills. Ten of these courses are provided by Chinese lecturers and six by invited foreign lecturers, and normally take several months to complete. We normally collect student tuition before the courses can be arranged and provided, and record what is collected as deferred revenue. Our deferred revenue is subsequently recognized as revenue only to the extent that the courses or trainings have been fully arranged and delivered to the students, evidenced by the student course attendance record. Tuition collection for any un-arranged or un-delivered trainings remain in the deferred revenue pool. This results in a large amount of deferred revenue reported on our balance sheet.
For the three months ended March 31, 2012, net revenue increased by $703,261, or 127% to $1,256,317, from $553,056 for the same period of 2011. The increase in our revenue was attributable to a number of factors. During the three months ended March 31, 2012, our Company continued to expand its business operations to certain new geographic areas other than the previously focused areas of Hangzhou and Shanghai. The business expansion was through developing a cooperative relationship with many local student recruiting agencies, which greatly helped us recruit more students. For the three months ended March 31, 2012, 999 students attended our training courses or featured lectures (including 883 students for proprietary training courses and 116 students for comprehensive training programs) and we initiated more than 20 promotional seminars to sell our training programs. For the same period in 2011, we provided training services to 605 students (including 506 students for proprietary training courses and 99 students for comprehensive training programs) and only 12 promotional seminars were initiated. More marketing and sales efforts as well as advertising have been performed during the three months ended March 31, 2012 as compared to 2011.
The following table provides a breakdown of our revenues for the three months ended March 31, 2012 and 2011, respectively:
Increase | ||||||||||||||||||
2012 | 2011 | (Decrease) | ||||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||
Proprietary Training Courses | $ | 914,378 | 73 | % | $ | 292,218 | 53 | % | $ | 622,160 | 213 | % | ||||||
Comprehensive Training Courses | 341,939 | 27 | % | 260,838 | 47 | % | 81,101 | 31 | % | |||||||||
Total Revenues | $ | 1,256,317 | 100 | % | $ | 553,056 | 100 | % | $ | 703,261 | 127 | % |
First, revenue from preliminary training courses increased $622,160, or 213%, for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. The number of students that participated in the proprietary training courses increased from 506 students in the first quarter of 2011 to 883 students in the first quarter of 2012 as a result of using outsourced local agents to promote our training programs, which broadened our market coverage. In addition, in order to stimulate student registration, we initiated about 20 promotional seminars to sell our training programs to attract student’s participation. Average tuition price increased from $578 per student per course in 2011 to $1,036 per student per course in 2012. Consequently, the increase in student recruiting as well as increased average tuition price led to the increase in our revenue from proprietary courses for the three months ended March 31, 2012.
Second, the Company’s comprehensive training programs included 16 courses, among which 10 courses were taught by Chinese lecturers, and the remaining 6 courses were taught by foreign lecturers. Revenue from comprehensive training programs increased from $260,838 for the three months ended March 31, 2011 to $341,939 for the three months ended March 31, 2012, an increase of $81,101, or 31%. The increase was mainly because more students attended the comprehensive training programs. For the three months ended March 31, 2011, 272 courses have been offered to 254 students to participate in comprehensive training programs at an average tuition price of $959 per course. For the three months ended March 31, 2012, 231 courses have been offered to 164 students to participate in comprehensive training programs at an average tuition price of $1,480 per course. The average tuition price per course increased 54% for the quarter ended March 31, 2012 as compared to the prior comparative period. The increase in revenue from comprehensive training courses reflected the above combined factors.
23
Cost of revenue. Our costs of revenue primarily include expenditures incurred in connection with providing educational services to the students, such as renting conference rooms, booking hotels, compensation for lecturers, renting training equipment and materials as well as other direct labor costs incurred. Our cost of revenue decreased by $732,712, or 70%, to $307,577 for the three months ended March 31, 2012, from $1,040,289 for the same period in 2011.
The following table summarizes the cost of revenue for the three months ended March 31, 2012 and 2011:
For the three months ended March 31, | ||||||||||||||||||||||||
2012 | 2011 | Increase (Decrease) | ||||||||||||||||||||||
$ | % | $ | % | |||||||||||||||||||||
Cost of lecturer's compensation | $ | 72,302 | 23 | % | $ | 454,432 | 44 | % | $ | (382,130 | ) | (84 | %) | |||||||||||
Hotel and conference-room | 125,347 | 41 | % | 244,241 | 23 | % | (118,896 | ) | (49 | %) | ||||||||||||||
Educational facility costs | 15,355 | 5 | % | 10,746 | 1 | % | 4,609 | 43 | % | |||||||||||||||
Administrative support | 21,910 | 7 | % | 55,851 | 5 | % | (33,941 | ) | (61 | %) | ||||||||||||||
Other cost | 1,313 | 1 | % | 4,407 | 1 | % | (3,094 | ) | (70 | %) | ||||||||||||||
Business tax | 71,350 | 23 | % | 270,612 | 26 | % | (199,262 | ) | (74 | %) | ||||||||||||||
Total cost of revenue | $ | 307,577 | 100 | % | $ | 1,040,289 | 100 | % | $ | (732,712 | ) | (70 | %) |
The decrease in costs of revenue was attributable to the cumulative effect of the following factors.
First, cost of lecturer’s compensation amounted to $72,302, or 24% of the total cost of revenue for the three months ended March 31, 2012, representing a $382,130, or 84%, decrease as compared to the corresponding period of 2011. The decrease in lecturers’ compensation cost was twofold: (1) The use of local student recruiting agent to help recruit students and organize localized student trainings lowered the cost of lecturers’ compensation. With the aid of local recruiting agent, student training can be arranged and organized in advance and in the format of centralized training, so that the lecturers can deliver the course training to mass students at one time. This helped to reduce the cost and improve the training efficiency. (2) The reason why lecturer’s compensation expense was much higher in the three months ended March 31, 2011 , was because invited foreign lectures came to China to provide lectures to students during that period of time. Compensation paid to invited foreign lecturers are normally higher than compensation paid to local Chinese lecturers. However, for the same period of 2012, we did not invite any foreign lecturers. As a result, cost of lecturer’s compensation declined accordingly.
Second, the cost of hotel and conference rooms for the three months ended March 31, 2012 decreased $118,896, or 49%, as compared to the prior comparative period. The decrease in hotel and conference room costs was mainly because we shifted and extended the trainings to many local geographic areas other than in Shanghai as we did in the past. Such shift was to provide schedule and transportation convenience many local students. The hotel standard rate in many local areas was much lower than in Shanghai. As a result , our hotel and conference room expenses decreased. In addition, there was no invited foreign lecturer for the three months ended March 31, 2012, as a result, hotel and conference room expense declined for the three months ended March 31, 2012 as compared to the same period of 2011.
Third, the cost of administrative support decreased $33,941, or 61%, when comparing three months ended March 31, 2012 to 2011. The decrease was because many organizational tasks have been undertaken by our local student recruiting agents who helped organize and coordinate the trainings and promotional seminars. As a result, we incurred less administrative support cost in 2012. For the same period in 2011, in order to organize the lecture performed by an invited foreign lecturer in Shanghai, we incurred more administrative support expense.
Fourth, business sales taxes decreased $199,262, or 74%, when comparing three months ended March 31, 2011 to three months ended March 31, 2011. Our Company is subject to 5% business sales tax calculated based on the invoiced amount upon student registration, not based on actual revenue recognized for the period indicated. The decrease in sales tax for the three months ended March 31, 2012 was because the actual invoiced amount was less than in the same period of 2011. In the three months ended March 31, 2011, more students have registered for the courses, but a significant amount of cash collection was not recognized as revenue but recorded as deferred revenue. As a result, sales tax in the three months ended March 31, 2011 was higher than in the same period of 2012.
24
Gross profit and gross margin. Our gross profit is equal to the difference between our revenues and our cost of revenues. Our gross profit increased by $1,435,973, or 295%, to approximately $948,740 for the quarter ended March 31, 2012, from gross loss of $487,233 for the same period of 2011. Our gross profit as a percentage of revenue (gross margin) increased to 76% in the first quarter of 2012 from negative 88% in prior comparative period. The increase in gross margin was due to our increased sales revenue and decreased cost of revenue in 2012. As more students attended trainings, we recognized more revenue in the first quarter of 2012 than in prior comparative period of 2011. In addition, our cost of revenue decreased because we shifted the training locations to many local markets other than in Shanghai which led to decreased lecturers’ compensation and hotel costs as discussed above. In the same period in 2011, we paid more compensation to our lecturers, incurred more hotel and conference room expense and administrative support expenses. As a result of the increase in our revenue and decrease in our cost for the three months ended March 31, 2012, our gross margin increased.
Operating Expenses The following table sets forth our operating expenses for the periods indicated:
2012 | 2011 (Restated) | |||||||
Selling Expenses | $ | 775,235 | $ | 1,493,261 | ||||
General and administrative Expense | 687,221 | 712,079 | ||||||
Total operating expenses | $ | 1,462,456 | $ | 2,205,340 |
Total operating expenses were $1,462,456 for the three months ended March 31, 2012, representing a 34%, or $742,884 decrease, as compared to $2,205,340 for the three months ended March 31, 2011.
Selling expenses. Our selling expenses primarily include advertising expense, sales commission paid to outside agents for student recruiting and salaries paid to our own sales force, professional fees paid to consultants, auditors and legal counsel, rental expenses and other fees.
The decrease in sales and marketing expenses of $718,026, or 48%, was primarily due to our marketing strategy shift to using local student recruiting agents to recruit students for the three months ended March 31, 2012, rather than using our own sales and marketing force to develop business in remote geographic areas other than in our headquartered areas. As a result of this marketing strategy shift, sales consulting fee as well as salary paid to our own sales forces declined accordingly for the three months ended March 31, 2012. For the same period of 2011, we primarily relied on several consulting firms as well as our own sales force to market our training programs and recruit students. Consequently, we incurred higher commission fee and salary expense than in 2012. We expect our selling and marketing expense to remain at a relatively stable level in the near future as we continue to use outsourced sales agents to help promote our training courses and conduct part of the student recruiting tasks.
General and administrative expenses. Our general and administrative expenses principally include staff salaries and benefits, traveling and entertainment expenses, professional fees, such as consulting, audit and legal fees, rent expenses and other associated fees.
The decrease in our general administrative expense by $24,858, or 3%, was primarily due to decreased consulting fees in connection with maintaining the Company’s public company status in the United States. The decrease for the three months ended March 31, 2012 was also due to decreased office expense of $26,912 and decreased employee training expense of $17,766. We expect that our general and administrative expenses will increase as we expand our business and operations. The Company will need to enhance our management’s skill level to adapt to the complex business environment because we are subject to the rules and regulations of the United States securities laws as well as a certain level of corporate governance and internal controls. We believe that we will need to hire more personnel as our business continues to grow, and we believe that we will need to incur additional general and administrative costs in the near future to support our business.
Total other income. Other income (expense) primarily consists of interest income (expense), as well as a tax refund from the relevant tax authority in China. For the three months ended March 31, 2012, we reported net other income of $16,674, which included interest income of $18,608 generated from our bank deposit, as well as other expense of $1,934.
For the three months ended March 31, 2011, we reported net other income of $26,605, which included interest income of $9,952 generated from our bank deposit, plus water tax refund from our local tax authority of $16,653.
Net other income decreased by $9,931, or 37%, for the quarter ended March 31, 2012 as compared to the prior comparative period.
25
Provision for income taxes. Our PRC operating subsidiaries and variable interest entity are governed by the income tax laws of the PRC and are subject to a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.
Due to the operating loss for the quarter ended March 31, 2012, no income tax expense was reported. For the three months ended March 31, 2011, we reported income tax expense of $249,135.
Net loss. As a result of the cumulative effect of the foregoing factors, we reported a net loss of $497,042 for the three months ended March 31, 2012, as compared to a net loss of $2.9 million for the three months ended March 31, 2011, a decrease of $2,418,061, or 83%.
Other comprehensive loss We operate primarily in the PRC and the functional currency of our operating subsidiary is the Chinese Renminbi (“RMB”). The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US Dollars at the rates used in translation.
The financial information is first prepared in RMB and then is translated into U.S. dollars at period-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in shareholders’ equity.
For the three months ended March 31, 2012 and 2011, other comprehensive loss resulting from the currency translation loss amounted to $15,060 and $109,969, respectively.
Liquidity and Capital Resources
Total current assets decreased by $231,121 from $9.34 million as of December 31, 2011to $9.1 million as of March 31, 2012. The primary changes in our current assets during the three months ended March 31, 2012 were from changes in cash and cash equivalents. The decrease in our cash from $3,570,740 at December 31, 2011to $2,665,379 at March 31, 2012 was because our expanded business required cash funds to be injected into the daily operations, such as advances to suppliers, pay tax liabilities, and the purchase of property and equipment, etc.
Total current liabilities as of March 31, 2012 amounted to $10.8 million, as compared to $10.6 million at December 31, 2011. The increase in current liabilities was primarily due to an increase in our customer deposits. Customer deposits represent amounts received in advance from students for tuition paid to attend our professional training courses and featured lectures. Deferred revenue is refundable if the training does not occur within the specified time. We recognize these funds as a current liability until the revenue can be recognized.
As of March 31, 2012, we had cash and cash equivalents of $2,665,379. To date, we have financed our operations primarily through cash flows from operations. Based on our current operating plan, we believe that existing cash and cash equivalents balances, as well as management’s forecast of cash to be generated by operations, will be sufficient to meet our working capital and capital requirements for our current operations.
The following table sets forth a summary of our cash flows for the periods indicated:
Cash Flow
2012 | 2011 (Restated) | |||||||
Cash flows from operating activities | $ | (1,079,283) | $ | (1,027,128) | ||||
Cash flows from investing activities | (1,131) | (125,556) | ) | |||||
Cash flows from financing activities | 158,515 | - | ||||||
Effect of exchange rate changes on cash | 16,538 | 143,268 | ||||||
Net (decrease) increase in cash and cash equivalents | (905,361) | ))) | (1,009,416) | |||||
Cash and cash equivalents, beginning of period | 3,570,740 | 10,272,391 | ||||||
Cash and cash equivalents, end of period | 2,665,379 | 9,262,975 |
26
Operating Activities
Net cash used in operating activities was $1,079,283 for the three months ended March 31, 2012, which consisted of our net loss of $497,042, and noncash adjustments of $95,451, offset by net changes in operating assets and liabilities due to our expanded operating activities, including an increase of other receivables of $821,210, because more advances have been made to employees for marketing and student recruiting purposes, as well as an increase of customer deposits of $1,094,770, representing amounts received in advance from students for tuition paid to attend our professional training courses and featured lectures where the criteria of revenue recognition have not been met.
Net cash used in operating activities during the three months ended March 31, 2011 was $1,027,128, which consisted of our net loss of $2,915,103, and noncash adjustments of $54,318, offset by net changes in operating assets and liabilities due to our expanded operating activities, primarily including a decrease in tax payable of $1,113,031 because we paid the tax liabilities to the local tax authority during the quarter, as well as an increase in deferred revenue in the amount of $4,833,702, representing amounts received in advance from students for tuition paid to attend our professional training courses and featured lectures where the criteria of revenue recognition have not been met.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2012 was $1,131, representing the acquisition of property and equipment, including computer and electronic equipment..
Net cash used in investing activities for the three months ended March 31, 2011 was $125,556, representing the acquisition of property and equipment, including computer and electronic equipment and vehicles to be used in our business operations.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2012 was $158,515, representing a repayment of a shareholder loan back to our Company.
No cash was used in financing activities for the three months ended March 31, 2011.
We expect to use our cash on hand to continue to expand and enhance marketing and sales in fiscal year 2012 and beyond. Part of this strategy involves increasing and improving marketing and sales activities to enhance the market position of our key course offerings, solidifying our market coverage, and increasing promotional activities. Management also plans to selectively pursue strategic acquisition opportunities to further consolidate our resources and expand our market coverage.
Obligations Under Material Contracts
We have no material obligations to pay cash or deliver cash to any other party.
Seasonality
Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introduction.
Inflation
Inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and our industry and continually maintain effective cost controls in operations.
27
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates are used for, but not limited to, the selection of the useful lives of property and equipment, provision necessary for contingent liabilities, taxes and other similar charges. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates.
Fair value of financial instruments
ASC 820, Fair Value Measurements and Disclosures clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The carrying amounts reported in the balance sheets for current assets and current liabilities approximate their fair value based on the short-term maturity of these instruments. The Company’s restricted cash and long-term deposit approximate fair value as these assets represent cash. The Company does not have any assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with ASC 820.
Impairment of long-lived assets
In accordance with ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company is required to review its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are considered necessary. There was no impairment of long-lived assets for the three months ended March 31, 2012 and 2011.
28
Accounts receivable
Accounts receivable is recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Bad debts are written off as incurred. During the reporting years, there were no bad debts.
Outstanding accounts balances are reviewed individually for collectability. The Company does not charge any interest income on trade receivables. Accounts balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. To date, the Company has not charged off any balances as it has yet to exhaust all means of collection.
Revenue recognition
The Company records all tuition as deferred revenue when students enroll in a course. At the beginning of each course, revenue is recognized on a pro rata basis over the quantity of classes attended by the students. This results in the Company’s balance sheet including future revenues that have not yet been earned as deferred revenue for courses that are not yet attended.
Our refund policy permits students to apply for a refund for the portion of a course they did not attend. The Company may refund a portion of the fees. In past practice, there are seldom cases where students apply for a refund, and it has no significant impact on revenue recognition of the Company based on the best estimation of the management. Refunds result in a reduction in deferred revenue during the period that a student drops or withdraws from a class because associated tuition revenue is recognized pro rata over the quantity of classes are delivered.
Generally, net revenue varies from period to period based on several factors, including the aggregate number of students attending classes, the number of classes held during the period, and the tuition price.
The Company’s revenue is principally derived from tuition and fees associated with two kinds of educational programs to the students: proprietary training courses, and comprehensive training courses.
Proprietary training courses, which normally take several days to complete, primarily consisted of featured lectures. These courses are provided on a roll-over basis over the year. Based on the course attendance record, the revenue is recognized as the course is delivered to the students.
Comprehensive training courses, which are composed of sixteen individual courses with systematic training in leadership development, i.e. decision making skills, negotiation skills, presentation skills and people skills. Based on the contracts, the students are eligible to enroll in the courses within a three year period. The revenue is recognized on a pro rata basis over the quantity of classes attended.
Income taxes
The Company accounts for income taxes using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future realization is uncertain.
The Company is operating in the PRC, and in accordance with the relevant tax laws and regulations of PRC, the enterprise income tax rate for the three months ended March 31, 2012 and 2011 were 25%.
Earnings per share
The Company computes earnings per share (“EPS’) in accordance with ASC 260 “Earnings per Share” (“ASC 260”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. No potential common shares were considered anti-dilutive for the periods presented.
29
Risks and uncertainties
The operations of the Company are located in the PRC. Accordingly, the Company’s operations are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Obligations under Material Contracts
We did not have any payment obligations as of March 31, 2012.
Inflation
Inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and our industry and continually maintain effective cost controls in operations.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.
Seasonality
Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introduction.
Recent Accounting Pronouncements
See Note 2 to our unaudited consolidated financial statements included elsewhere in this report.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not applicable.
ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. Kaien Liang, and Chief Financial Officer, Mr. Zhiwei Huang, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2012. Based upon, and as of the date of this evaluation, Messieurs. Liang and Huang determined that, because of the material weakness described in Item 9A “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2011, which we are still in the process of remediating as of March 31, 2012, our disclosure controls and procedures were not effective. Investors are directed to Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2011 for the description of this weakness.
30
Changes in Internal Control over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2011, our management identified a material weakness related to relating to our lack of sufficient accounting personnel with an appropriate understanding of United States generally accepted accounting principles and SEC reporting requirements. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, our management has identified the steps necessary to address the material weakness, and in the first quarter of 2012, we continued to implement these remedial procedures.
Other than in connection with the implementation of the remedial measures described above, there were no changes in our internal controls over financial reporting during the first quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS. |
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
ITEM 1A. | RISK FACTORS. |
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 contains a detailed discussion of risk factors that could materially adversely affect our business, our operating results, or our financial condition. The following risk factor should be read in conjunction with that discussion. Except for the addition of this risk factor, there are no material changes from the risk factors previously disclosed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011.
Our auditor, like other independent registered public accounting firms operating in China, is not inspected by the U.S. Public Company Accounting Oversight Board, or the PCAOB, and as such, our investors currently do not have the benefits of PCAOB oversight.
Auditors of companies that are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the PCAOB and are required by U.S. law to undergo regular inspections by the PCAOB to assess their compliance with U.S. law and professional standards in connection with their audits of public company financial statements filed with the SEC. Because our auditor is located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, the audit work and practices of our auditor, like other registered audit firms operating in China, is currently not inspected by the PCAOB.
This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating audits and quality control procedures of any auditors operating in China, including our auditor. As a result, investors may be deprived of the benefits of PCAOB inspections.
31
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
We have not sold any equity securities during the first quarter of 2012 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during the quarter.
No repurchases of our common stock were made during the first quarter of 2012.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
ITEM 5. | OTHER INFORMATION. |
We have no information to disclose that was required to be in a report on Form 8-K during the first quarter of 2012, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.
ITEM 6. | EXHIBITS. |
The list of exhibits in the Exhibit Index to this report is incorporated herein by reference.
32
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.
Date: May 15, 2012 | CHINA EXECUTIVE EDUCATION CORP. | |
By: | /s/ Kaien Liang | |
Kaien Liang, Chief Executive Officer | ||
(Principal Executive Officer) |
By: | /s/ Zhiwei Huang | |
Zhiwei Huang, Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) |
33
EXHIBIT INDEX
Exhibit No. | Description | |
31.1 | Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith). |
34