Filed
Pursuant to Rule 424(b)(3)
Under
The
Securities Act of 1933
Registration
No: 333-146023
PROSPECTUS
SUPPLEMENT NO. 3
to
Prospectus declared
effective
on December 28, 2007
as
supplemented on February 15, 2008 and February 20, 2008
(Registration
No. 333-146023)
CHINA
EDUCATION ALLIANCE, INC.
This
Prospectus Supplement No. 3 supplements our Prospectus dated December 28,
2007, Prospectus
Supplement No. 1 dated February 15, 2008 and Prospectus Supplement No. 2
dated
February 20, 2008.
The
shares that are the subject of the Prospectus have been registered to permit
their resale to the public by the selling stockholders named in the Prospectus.
We are not selling any shares of common stock in this offering and therefore
will not receive any proceeds from this offering. You should read this
Prospectus Supplement No. 3 together with the Prospectus, the Prospectus
Supplement No. 1 dated February 15, 2008 and the Prospectus Supplement No.
2
dated February 20, 2008.
This
Prospectus Supplement includes the attached Current Report on Form 8-K of
China
Education Alliance, Inc. dated March 17, 2008, as filed by us with the
Securities and Exchange Commission and the attached Annual Report on Form
10-KSB
for the year ended December 31, 2007 as filed by us on March 31, 2008 with
the
Securities and Exchange Commission.
Appendix A
to this Prospectus Supplement provides the “Consent of Independent Registered
Public Accounting Firm” from Sherb & Co. LLP, dated March 31, 2008 for use
herein of their report previously filed with our Annual Report on Form
10-KSB.
Appendix
B to this Prospectus Supplement provides the “Consent of Independent
Registered Public Accounting Firm” from Murrell, Hall, McIntosh & Co., PLLP,
dated March 31, 2008 for use herein of their report previously filed with
our
Annual Report on Form 10-KSB.
Our
common stock is traded on the Over-the-Counter Bulletin Board under the symbol
“CEUA.OB.”
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A
CRIMINAL OFFENSE.
The
date
of this Prospectus Supplement is April 1, 2008
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
|
March
17, 2008
|
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|
Date
of Report (Date of earliest event reported)
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CHINA
EDUCATION ALLIANCE, INC.
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(Exact
name of registrant as specified in charter)
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North
Carolina
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00-52092
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56-2012361
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(State
or other jurisdiction
of
incorporation)
|
|
(Commission
File Number)
|
|
(IRS
Employer
Identification
No.)
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58
Heng Shan Road, Kun Lun Shopping Mall
Harbin,
People’s Republic of China 150090
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(Address
of principal executive offices)
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+86-451-8233-5794
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||
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Registrant’s
telephone number, including area code:
|
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
o
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR
240.14a-12)
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act
(17 CFR 240.14d-2(b))
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act
(17 CFR 240.13e-4(c))
SECTION
7 - REGULATION FD DISCLOSURE
On
March 17, 2008, China Education Alliance, Inc. (the “Company”) issued a
press release announcing that the Company’s board of directors has approved the
repurchase of up to one million shares of the Company’s common stock from time
to time in the open market at prevailing market prices. A copy of the press
release is attached hereto as Exhibit 99.1.
The
information contained in this Current Report on Form 8-K and the exhibits
attached hereto shall not be deemed to be "filed" for purposes of Section
18 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
otherwise subject to the liabilities of that section, nor shall such information
or such exhibits be deemed incorporated by reference in any filing under
the
Securities Act of 1933, as amended, or the Exchange Act, except as shall
be
expressly set forth by specific reference in such a filing. The information
set
forth in or exhibits to this Form 8-K shall not be deemed an admission
as to the
materiality of any information in this report on Form 8-K that is required
to be
disclosed solely to satisfy the requirements of Regulation FD.
Item
9.01. Financial
Statement and Exhibits
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(d)
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Exhibits
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||
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99.1
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Press
Release of the Company, dated March 17,
2008
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||
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 hereunto
duly authorized.
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CHINA
EDUCATION ALLIANCE, INC.
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| |
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| Date: March 17, 2008 | By: | /s/ Xiqun Yu |
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Xiqun
Yu, Chief Executive Officer and President
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||
EXHIBIT
INDEX
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99.1
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Press
Release of the Company, dated March 17,
2008
|
Exhibit
99.1
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Company
Contact:
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Investor
Relations Contact:
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|
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Mr.
Xiqun Yu
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Mr.
Crocker Coulson
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Chairman
and CEO
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President
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China
Education Alliance, Inc.
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CCG
Elite Investor Relations
|
|
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Tel:
+86-451-8233-5794
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Tel:
+1-646-213-1915 (NY Office)
|
|
|
E-mail:
yxq@edu-chn.com
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E-mail:
crocker.coulson@ccgir.com
|
China
Education Alliance Announces Share Repurchase Program
Harbin,
Heilongjiang Province, China - March 17, 2008 - China
Education Alliance, Inc. (OTC Bulletin Board: CEUA.OB) (“China Education
Alliance” or “the Company”), a leading distributor of educational resources,
offering high-quality programs and training both through online networks
and an
on-site training center in China, today announced that its Board of
Directors
has approved to repurchase up to 1 million shares of its common stock
from time
to time in the open-market at prevailing market prices.
The
timing and extent of any purchases will depend upon market conditions,
the
trading price of its common shares and other factors
and will
be subject to the restrictions relating to volume, price and timing
under
applicable law, including Rule
10b-18 promulgated under the Securities Exchange Act of 1934, as amended.
China
Education Alliance expects to implement this share repurchase program
over the
next 12 months, in a manner consistent with market conditions and the
interest
of the shareholders. There
is
no assurance that the Company will purchase securities and the program
may be
suspended or discontinued at any time.
There
are
approximately 21,492,631 shares of its common stock outstanding as
of March 5,
2008.
Management
believes that the Company’s stock is currently undervalued in the marketplace
and that the stock repurchase will be beneficial to, and represents
the
Company’s commitment to its shareholders.
About
China Education Alliance, Inc.
The
Company is an educational resource company offering high-quality educational
programs and training through both online networks and an on-site training
center. The Company’s products include online test preparation materials,
researchers’ materials, study guides, and audio recordings, vocational training
services and vocational certifications. The Company conducts educational
services through three main channels: a large educational online portal,
educational software and media, and education and vocational training
centers.
The Company is currently selling educational products and services
to families,
provincial education officials, administrators, schools and teachers
in
China.
Disclaimer
This
Press Release is not an offer to sell or a solicitation of an offer
to buy any
shares of Common Stock of the Company or any other securities of the
Company.
Safe
Harbor Statement
Safe
Harbor Statement Under the Private Securities Litigation Reform Act
of 1995:
Certain statements in this press release, constitute forward-looking
statements
for purposes of the safe harbor provisions under The Private Securities
Litigation Reform Act of 1995. These statements include, without limitation,
statements regarding our ability to prepare the company for growth,
the
Company’s planned expansion in 2008 and predictions and guidance relating to
the
Company’s future financial performance. We have based these forward-looking
statements largely on our current expectations and projections about
future
events and financial trends that we believe may affect our financial
condition,
results of operations, business strategy and financial needs and are
not a
guarantee of future performance but they involve risks and uncertainties
that
could cause actual results to differ materially from those in the
forward-looking statements, which may include, but are not limited
to, such
factors as unanticipated changes in product demand especially in the
education
industry, pricing and demand trends for the Company’s products, changes to
government regulations, risk associated with operation of the Company’s new
facilities, risk associated with large scale implementation of the
company’s
business plan, the ability to attract new customers, ability to increase
its
product’s applications, cost of raw materials, downturns in the Chinese economy,
the adoption by consumers of its new game business, the unproven advertising
model that is dependent on attracting a large game user base, and other
information detailed from time to time in the Company's filings and
future
filings with the United States Securities and Exchange Commission.
Investors are
urged to consider these factors carefully in evaluating the forward-looking
statements herein and are cautioned not to place undue reliance on
such
forward-looking statements, which are qualified in their entirety by
this
cautionary statement. The forward-looking statements made herein speak
only as
of the date of this press release, readers are cautioned not to place
undue
reliance on any of them and the Company undertakes no duty to update
any
forward-looking statement to conform the statement to actual results
or changes
in the company’s expectations.
#
#
#
United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-KSB
|
x
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
for the period ended December 31,
2007
|
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
for the transition period from _______ to
_______
|
Commission
File Number: 333-101167
CHINA
EDUCATION ALLIANCE, INC.
(Exact
name of small business issuer as specified in its charter)
|
North
Carolina
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56-2012361
|
|
(State
or other jurisdiction of
|
(IRS
Employer identification No.)
|
|
incorporation
or organization)
|
|
58
Heng Shan Road, Kun Lun Shopping Mall
Harbin,
The People’s Republic of China 150090
(Address
of principal executive offices)
011-86-451-8233-5794
(Issuer's
telephone number)
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $.001 Par Value
Check
whether the issuer is not required to file reports pursuant to Section
13 or
15(d) of the Exchange Act. o
Check
whether the issuer (1) filed all reports required to be filed by Section
13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter
period
that the registrant was required to file such reports), and (2) has been
subject
to such filing requirements for the past 90 days.
Yes
x
No o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or
an
amendment to this Form 10-KSB. o
Indicate
by checkmark whether the registrant is a shell company (as defined by Rule
12(b)
of the Exchange Act).
Yes
o
No x
Issuer’s
revenues for its most recent fiscal year:
US$17,323,534.
State
the
aggregate market value of the voting and non-voting common equity held
by
non-affiliates computed by reference to the price at which the common equity
was
sold, or the average bid and asked sale price of such common equity, as
of a
specified date within the past 60 days: approximately US$17,614,591 as
of March
20, 2008. This calculation is based upon the closing sale price of $2.00
per
share on March 20, 2008.
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 21,492,631** shares of common stock
as of
March 20, 2008.
**
Adjusted to reflect a 1-for-3 reverse stock split which was effective as
of
October 12, 2007.
DOCUMENTS
INCORPORATED BY REFERENCE
None
Transitional
Small Business Disclosure Format (check one): Yes o No x
2
FORM 10-KSB
INDEX
|
PART I
|
|
|
|
|
ITEM 1.
|
|
DESCRIPTION
OF BUSINESS
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4
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ITEM 2.
|
|
DESCRIPTION
OF PROPERTIES
|
16
|
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ITEM 3.
|
|
LEGAL
PROCEEDINGS
|
17
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ITEM 4.
|
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
17
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|
|
|
|
|
|
PART II
|
|
|
|
|
ITEM 5.
|
|
MARKET
FOR COMMON EQUITY, RELATED SECURITY HOLDER MATTERS AND SMALL
BUSINESS
ISSUER PURCHASES OF SECURITIES
|
17
|
|
ITEM 6.
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
18
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|
ITEM 7.
|
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FINANCIAL
STATEMENTS
|
24
|
|
ITEM 8.
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
|
25
|
|
ITEM 8A(T).
|
|
CONTROLS
AND PROCEDURES
|
25
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ITEM 8B.
|
|
OTHER
INFORMATION
|
25
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|
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|
PART III
|
|
|
|
|
ITEM 9.
|
|
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
|
26
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ITEM 10.
|
|
EXECUTIVE
COMPENSATION
|
27
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ITEM 11.
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|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
28
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|
ITEM 12.
|
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
29
|
|
ITEM 13.
|
|
EXHIBITS
|
30
|
|
ITEM 14.
|
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
33
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|
SIGNATURES
|
34
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||
|
POWER
OF ATTORNEY
|
34
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||
3
Cautionary
Statement Regarding Forward Looking Statements
The
discussion contained in this Annual Report on Form 10-KSB contains
“forward-looking statements” within the meaning of Section 27A of the United
States Securities Act of 1933, as amended, or the Securities Act, and Section
21E of the United States Securities Exchange Act of 1934, as amended, or
the
Exchange Act. Any statements about our expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts and
may be
forward-looking. These statements are often, but not always, made through
the
use of words or phrases like “anticipate,” “estimate,” “plans,” “projects,”
“continuing,” “ongoing,” “target,” “expects,” “management believes,” “we
believe,” “we intend,” “we may,” “we will,” “we should,” “we seek,” “we plan,”
the negative of those terms, and similar words or phrases. We
base
these forward-looking statements on our expectations, assumptions, estimates
and
projections about our business and the industry in which we operate as
of the
date of this Form 10-KSB. These forward-looking statements are subject
to a
number of risks and uncertainties that cannot be predicted, quantified
or
controlled and that could cause actual results to differ materially from
those
set forth in, contemplated by, or underlying the forward-looking statements.
Statements in this Form 10-KSB describe factors, among others, that could
contribute to or cause these differences. Actual results may vary materially
from those anticipated, estimated, projected or expected should one or
more of
these risks or uncertainties materialize, or should underlying assumptions
prove
incorrect. Because the factors discussed in this Form 10-KSB could cause
actual
results or outcomes to differ materially from those expressed in any
forward-looking statement made by us or on our behalf, you should not place
undue reliance on any such forward-looking statement. New factors emerge
from
time to time, and it is not possible for us to predict which will arise.
In
addition, we cannot assess the impact of each factor on our business or
the
extent to which any factor, or combination of factors, may cause actual
results
to differ materially from those contained in any forward-looking statement.
Except as required by law, we undertake no obligation to publicly revise
our
forward-looking statements to reflect events or circumstances that arise
after
the date of this Form 10-KSB or the date of documents incorporated by reference
herein that include forward-looking statements.
PART
I
ITEM
1.
Description of Business
Overview
We
are an
education service company that provides on-line education and on-site
training in China. We were organized to meet what our founders believe
is an
unmet need for educational resources throughout China. Based on the Chinese
government’s statistical yearbook for 2004, the government invests more than $60
billion on education each year. According to Chinese tradition, spending
on
education resources is one of the family’s major expenditures. However, just as
economic development is not even throughout China, there is an uneven allocation
of educational resources in China. In general, only students who pass the
numerous examinations which are given at various stages of the educational
process, can obtain better educational opportunities at a higher level.
We
believe that the examination-oriented education has created a market for
products from companies that address this need.
Our
principal business is the distribution of educational resources through
the
Internet. Our website, www.edu-chn.com,
is a
comprehensive education network platform which is based on network video
technology and large data sources of elementary education resources. We
have a data base comprised of such resources as test papers that were used
for
secondary education and university level courses as well as video on demand.
Our
data base includes more than 300,000 exams and test papers and courseware
for
college, secondary and elementary schools. While some of these exams were
given
in previous years, we engage instructors to develop new exams and methodologies
for taking the exams. We market this data base under the name “Famous Instructor
Test Paper Store.” We also offer, though our website, video on demand, which
includes tutoring of exam papers and exam techniques. We compliment the
past
exams and test papers by providing an interactive platform for students
to
understand the key points from the papers and exams. Although a number
of the
resources are available through our website without charge, we charge our
subscribers for such services as the “Famous Instructor Test Paper Store” and
the video on demand. Subscribers can purchase debit cards which can be
used to
download material from our website.
We
also
provide on-site teaching services in Harbin, which we market under the
name
“Classroom of Famed Instructors.” We have a 36,600 square foot training facility
in Harbin, Heilonjiang Province, China, which has 17 classrooms and can
accommodate up to 1,200 students. These classes, which complement our on-line
education services, provide classroom and tutoring to our students. The
courses
primarily cover the compulsory education curriculum of junior, middle and
high
school. We charge tuition for these classes.
4
We
are
introducing a program of on-line vocational training services. We have
collaborated with the China Vocation Education Society to set up a website,
www.360ve.com,
which
is an Internet platform for training agencies and schools to offer their
services. We launched www.360ve.com
in
September 2007. We have named this our “Millions of College Students Employment
Crossroad” program. Through this program, we offer job search capability
and career planning courses for university students. We developed this
program
in response to the high unemployment rate for China’s college graduates. Many
college graduates pursue vocational training after college education in
order to
find employment. Our program is designed to establish a long-term training
program for college students to build connections with corporations and
obtain
educational programs prescribed by the hiring corporations. We anticipate
that
we will constantly revise our materials to meet changes in the market as
well as
the demands of university students and graduates who enroll in our courses
in
order to meet their changing needs.
Corporate
History
We
were
incorporated in the State of North Carolina on December 2, 1996 under the
name
of ABC Realty Co. to engage in residential real estate transactions as
a broker
or agent. Following the September 2004 reverse acquisition described below,
our
corporate name was changed to China Education Alliance, Inc. At the time
of the
reverse acquisition, we were not engaged in any business activity and we
were
considered to be a blank-check shell.
On
September 15, 2004, we entered into a Plan of Exchange (the "Agreement")
with
Harbin Zhong He Li Da Jiao Yu Ke Ji You Xian Gong Si (“Harbin Zhong He Li Da”),
a Chinese corporation and Duane Bennett, our former Chairman of the Board
and
controlling stockholder, pursuant to which, on December 13, 2004, the closing
date of the Agreement:
|
·
|
the
stockholders of Harbin Zhong He Li Da transferred all of the
issued and
outstanding stock of Harbin Zhong He Li Da to us and we issued
to those
stockholders a total of 18,333,334 shares of our common stock,
representing 95% of our outstanding common stock after giving
effect to
the transaction;
|
|
·
|
Duane
Bennett caused 3,666,667 shares of common stock that were controlled
by
him to be transferred to us for cancellation, for which Harbin
Zhong He Li
Da or its stockholders paid $400,000, of which $300,000 was paid
in cash
and the balance was paid by a promissory note, which has been
paid in
full; and
|
|
·
|
we
changed our corporate name to China Education Alliance, Inc.
on November
17, 2004.
|
Education
Systems in China
Since
1949 when the People’s Republic of China (or the PRC) was founded, the
government in China has considered education an important component of
its
economic and social development. Recently, with the emergence of its
market economy, education has become a priority in China.
According
to the National Bureau of Statistics of China for 2003, the gross domestic
product of the country was calculated at $1.41 trillion, with an annual
real
rate of GDP growth at 9.1%. The average Chinese family sets aside 10% of
its savings for education according to the United Nations Educational,
Scientific, and Cultural Organization. We believe that many parents are
willing to invest in their children for better and higher education because
it
is critical for their future opportunities and advancement. The
educational system in China is under pressure to reform and develop. On
March 14, 2004, the second session of the 10th National’s People’s Congress
concluded that China advocates “putting people first” as its development model.
The Chinese government sets education as a strategic priority in the China
Agenda for Education.
The
central government in China, through the Ministry of Education, manages
education in China at a macro level, responsible for carrying out related
laws,
regulations, guidelines and policies of the central government; planning
development of the education sector; integrating and coordinating educational
initiatives and programs nationwide; maneuvering and guiding education
reform
countrywide. To a large degree, the provincial governments are left to
implement basic education through development of teaching plans to supplement
the required coursework from the central Ministry of Education and the
funding
of basic education in poorer areas. Provincial level governments have the
main responsibilities for implementing basic education on a day to day
basis.
Since 1978, the government in China has promulgated a number of administrative
regulations relating to education.
5
Education
is funded by a variety of sources: schools directly controlled by the central
government are generally funded from the central financial pool; schools
controlled by local governments are supported by local governments, the
central
government and fund raising projects initiated by these schools themselves;
schools sponsored by township and village governments and by public institutions
are mainly financed by the sponsor institutions and subsidized by local
governments; private schools are funded by sponsors (including collecting
tuition from students and soliciting contributions).
In
China,
primary and secondary education takes 12 years to complete. Primary
education generally is six years, junior middle school is three years,
and
senior middle school is three years. Children generally begin primary school
at
the age of six. In 1986, China passed the Compulsory Education Law, which
dictates that nine years of education (grades 1 through 9) is compulsory
and
requires that provincial and local governments take the necessary steps
to
ensure that all students receive at least the required nine years of education.
The goal of the Compulsory Education Law, as well as the subsequent guidelines,
was to universalize compulsory education and to eliminate illiteracy among
the
Chinese people. According to the Bulletin of Statistics on National Educational
Development in 1999 issued by the Ministry of Education, the nine-year
compulsory education has covered 80% of China’s population since its inception.
In 2002, China began to aggressively incorporate English into its
elementary school curriculum.
On
March
3, 2004, the State Council approved and disseminated the 2003-2007 Action
Plan
for Invigorating Education in the 21st Century, which was formulated by
the
Ministry of Education. The plan recognizes the need to make China
competitive in the world economy and provides a blueprint to speed up
educational reform and development in China. The plan is based on two
fundamental concepts to “Rejuvenating China through Science and Education” and
“Reinvigorating China through Human Resource Development.” The objectives
of the plan are to establish a well-to-do society and perfect the socialistic
market economy in China. The plan has goals to consolidate and
universalize the nine-year compulsory education program and eradicate
illiteracy, to continue educational reforms, to improve the quality of
education
and to provide a system designed to enable the public to have access to
quality
education. The plan emphasizes the use of information technology in education
and training.
Since
2000, the Chinese government has been implementing reform in educational
policy
to change the orientation of the education system from one based on memory
learning to a more individualized creative approach.
On-line
Education
Our
core
business is the exam-oriented education in junior, middle, and high school.
We
believe that our on-line education programs are in line with the government
policy of using information technology to make educational resources available
throughout the country. The reforms in education policy has created a demand
for
new curriculum, updated educational materials and educational resources.
Our portal enables our customers to access the new curriculum created by
various levels of government and leading academic experts, which are endorsed
by
the Ministry of Education. Our courses have the necessary certification
or
registration with the Ministry of Education.
Our
website makes use of its Internet network resources beyond the traditional
teaching methods and face-to-face constraints by providing students with
access
to multi-media resources such as college, middle school and elementary
school
test papers, courseware designed to prepare students for taking the exams,
and
video on demand courseware. We market our website as a platform to offer
services like “Famed Instructors Test Paper Store” by offering prepaid
rechargeable learning debit cards that can be used to purchase our products.
The
users can download materials for off-line education or study the material
on-line.
We
believe that through our website, we can help change the uneven distribution
of
education resources since our material is designed for nationwide exams
and,
though the Internet, students can have access to our material nationwide.
We
sell our exam papers, test papers, and video on demand through our website
www.edu-chn.com.
We
offer both exams that were previously given as well as copyrighted exams
that
were developed by teachers who we hire for that purpose. These examinations
cover Chinese primary, middle and upper school exams which are used by
students
who are primarily in age range of seven to 18.
We
have
developed some educational software and we own a database covering all
levels of
basic education from primary school through high school. Our plans for
expansion
of our business operations include the following:
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Buildup
the infrastructure to ensure fast access and to satisfy the volume
that
would develop with increasing
demand.
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Develop
a nation-wide advertising campaign to increase market awareness
of our
products.
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Engage
or employ a staff to enhance the material that we
offer.
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Open
branch offices in key cities. Even though our website is accessible
from
anywhere in China, course materials are not standardized throughout
China,
and there are many differences in both the course material and
the
resources among the different regions in China. As a result,
we believe
that we can best serve the students in a region by using our
branch
offices to employ local teachers who understand the local educational
system. In this manner, we can customize our course material
to meet the
local educational requirements and develop face-to-face tutorial
centers
to further expand our revenue.
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Training
Center
We
provide on-site teaching services under the “Big Classroom of the Famed
Instructors,” our state-of-the-art training center in Harbin. At this center, we
offer both classroom training and one-on-one tutoring. The training center
has
approximately 36,600 square feet, with 17 modern classrooms and a capacity
for
1,200 students. The courses cover each phase of compulsory education, which
are
junior, middle and high school, with high school as the key part. Our courses
are provided to compliment regular school classes, and will vary depending
on
the age of the students as well as the progress of the class. Class subjects
include math, physics, chemistry, English and Chinese. We charge students
for
each class taken. Thus, we determine our enrollment by the number of classes
that were taken during a given period of time, and not by the number of
individual students. Since the term of the classes vary, we do not schedule
classes on a semester basis.
Vocational
Training
We
are
also introducing a program of on-line vocational training services. We
have
collaborated with the China Vocation Education Society to set up a website,
www.360ve.com,
which
is an Internet platform for training agencies and schools to offer their
services. We launched www.360ve.com
in
September 2007. We are calling this program our “Millions of College Students
Employment Crossroad” program. We offer job search capability and career
planning courses for university students. We developed this program in
response
to the high jobless rate for China’s college graduates. Our program is designed
to establish a long-term training program for college students to build
connections with corporations and obtain educational programs prescribed
by the
hiring corporations. We anticipate that we will constantly revise our materials
to meet changes in the market as well as the demands of university students
and
graduates who enroll in our courses in order to meet their changing
needs.
Through
our “Millions of College Students Employment Crossroad” program, we seek to
address two problems - one of the need for the university students to find
jobs
and the other is to satisfy the needs of businesses to hire qualified
candidates. We cooperate with business and other entities to enable us
to
communicate to the students who enroll in this program companies’ employment
requirements, including necessary skills, so that students can learn the
needs
of the businesses while they are at school and can develop educational
programs
in the universities to enable them to meet the educational requirements
of the
businesses at which they may seek employment after college and to improve
their
probably of securing employment after graduation.
The
China
Vocational Education Society has a large number of institutional members,
including provincial education bureaus and more than 1,000 vocational training
schools across China. We intend to expand our strategic cooperation with
training agencies, especially in the aspects of joint enrollment, the exchange
of resources and on-site training agency facilities.
Through
this program we work with the China Vocational Education Society, which
provides
vocational certification, and coordinates our programs with government
agencies,
including the education and labor ministries, to develop and evaluate programs
for vocational education. We have been authorized to provide on-line vocational
education and to administer the certification process for certain vocations.
However, we are not yet offering theses services.
During
December 2006, we acquired all of the fixed assets and franchise rights
of
Harbin Nangang Compass Computer Training School for approximately $1
million. The Nangang Compass Computer Training School provided classroom
education resources to computer vocational school students. As a result
of this
acquisition, we became the exclusive partner of Beida Qingniao APTEC Software
Engineering within Heilongjiang Province in China for vocational training.
The
acquisition included materials and resources to provide on-site education
classes and patented course materials. The Nangang Compass Computer Training
School currently has two principal education programs focused on network
engineering and ACCP software engineering with 9 on-site classrooms and
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multimedia/computer classrooms at two centers.
7
Marketing
We
employ
sales persons who market our products to the Ministry of Education and
the
provincial education commissions. Although the government agencies do not
purchase our product, we need to obtain their approval for the use of our
programs in connection with the curriculum taught in the schools under
their
jurisdiction. Our sales persons also make marketing calls which we use to
generate information to assist us in developing new educational products
and
opportunities. Our sales force is also actively involved with educators in
developing curriculums based on the products we produce.
We
intend
to use our web-based educational portal to assist us in marketing our
educational products. This portal provides data and other materials free
of
charge and also provides users with the ability to download our products
at a
charge.
We
also
market our Training Center and Vocational products by way of the following
methods: (A) directly at conferences and events where we invite teachers,
students and their families to learn about our education materials; (B)
through
various internet links and search engines; (C) by traditional media advertising,
such as TV and newspaper advertisements; and (D) through fliers and as
gifts
handed out to students in front of high schools and other major education
institutions. We are also able to attract users by word of mouth and referrals
from current students or users.
We
compete with a number of Chinese and international companies that sell
educational materials in the Chinese market. Many of our competitors are
larger,
more established companies, many of which have diverse businesses and are
better
capitalized. In some cases, these are new companies that are entering the
educational market in China and may offer products and services at lower
costs
to build market share.
Government
Regulations
The
education industry in China is heavily regulated at all levels - national,
provincial and local. Chinese practices and policies have limited contracting
with non-Chinese entities in the education industry. In addition, our
business is subject to numerous Chinese rules and regulations, including
restrictions on foreign ownership of Internet and education companies and
regulation of Internet content. Many of the rules and regulations that
we face
are not explicitly communicated, but arise from the fact that education
and the
Internet are politically sensitive areas of the economy. We believe that
the Ministry of Education and the provincial education commissions prefer
to
contract with Chinese companies in the industry of education. As a result,
all of our Chinese subsidiaries are staffed with Chinese nationals. All of
our revenue is derived from our Chinese subsidiaries, and our success is
dependent on the skill and experience of our subsidiaries.
We
are
required to obtain and have obtained government approval for setting our
prices
for classroom coursework and tutorials from the Harbin Commodity Bureau.
Currently, the sale of educational material over the Internet is not presently
subject to price controls thereby allowing us to set our prices as we deem
necessary. We have obtained a license from the appropriate authorities
for the
conduct of our business.
Employment
Contract Law
On
June
29, 2007, the National People’s Congress promulgated the
Employment Contract Law of PRC (Employment
Contract Law), which became effective as of January 1, 2008. The Employment
Contract Law
requires
employers to provide written contracts to their employees, restricts the
use of
temporary workers and aims to give employees long-term job security.
Pursuant
to the Employment
Contract Law,
employment contracts lawfully concluded prior to the implementation of
the
Employment Contract Law
and
continuing as of the date of its implementation shall continue to be performed.
Where an employment relationship was established prior to the implementation
of
the
Employment Contract Law
but no
written employment contract was concluded, a contract must be concluded
within
one month after its implementation.
We
have
entered into written employment contracts with all of our employees pursuant
to
the Employment
Contract Law.
Intellectual
Property
The
exams
and other material that is on our website include material which is generally
available, such as exams that were previously given, and exams and other
material that were developed for us. We engage authors, who are generally
teachers, university professors or experts in their fields, to develop
material
for our websites. Under the terms of our contracts, we own the copyright
on all materials produced for us by these authors. We generally pay each
author
a fixed fee and a royalty based on sales. We also enter into agreements
to use
and publish educational materials developed by others, for which we pay
for the
right to use the materials.
8
During
the fiscal year ended December 31, 2007, we engaged in research and development
activities, in an amount of approximately, $51,500, to research the impact
of
national education changes on students and to develop educational software
for
suitable student study exchanges.
Employees
As
of
December 31, 2007, we had 228 employees, consisting of four executives,
17
administrative and finance employees, 76 marketing and sales personnel,
12
research and development staff, eight information employees, 13 design
staff, 84
teaching and education administrative staff, and 14 other employees engaged
in
security, planning, human resources and other activities. None of our personnel
are represented under collective bargaining agreements and we believe that
we
have good relations with our employees. We have entered into written employment
contracts with all of our employees pursuant to the Employment
Contract Law (as
described above).
Risk
Factors
Risks
Associated with our Business
Our
business is dependent upon the Chinese government’s educational policies and
programs.
As
a
provider of educational services, we are dependent upon government educational
policies. Almost all of our revenue to date has been generated from the
sale of
test papers and materials relating to courses at different educational
levels.
To the extent that the government adopts policies or curriculum changes
that
significantly alter the testing and course material used in the Chinese
educational system, our products could become obsolete, which would affect
our
ability to generate revenue and operate profitably. We cannot assure you
that
the Chinese government agencies would not adopt such changes.
We
are subject to numerous Chinese rules and regulations which restrict the
scope
of our business and could have a material adverse impact on
us.
We
are
subject to numerous rules and regulations in China, including, without
limitation, restrictions on foreign ownership of Internet and education
companies and regulation of Internet content. Many of the rules and regulations
that we face are not explicitly communicated, but arise from the fact that
education and the Internet are politically sensitive areas of the economy.
We are not aware that any of our agreements or our current organizational
structure is in violation of any governmental requirements or restrictions,
explicit or implicit. However, there can be no assurance that we are in
compliance now, or will be in the future. Moreover, operating in China
involves a high risk that restrictive rules and regulations could change.
Indeed, even changes of personnel at certain ministries of the government
could have a negative impact on us. The determination that our structure
or agreements are in violation of governmental rules or regulations in
China
would have a material adverse impact on us, our business and on our financial
results.
Our
business may be subject to seasonal and cyclical fluctuations in
sales.
We
may
experience seasonal fluctuations in our revenue in some regions in China,
based
on the academic year and the tendency of parents and students to make purchases
relating to their education just prior to or at the beginning of the school
year
in the autumn. Any seasonality may cause significant pressure on us to
monitor the development of materials accurately and to anticipate and satisfy
these requirements.
9
Our
business is subject to the health of the Chinese economy.
The
purchase of educational materials not provided by the state educational
system
is discretionary and dependant upon the ability and willingness of families
or
students to spend available funds on extra educational products to prepare
them
for national examinations. A general economic downturn either in our market
or a
general economic downturn in China could have a material adverse effect
on our
revenue, earnings, cash flow and working capital.
We
depend on our senior officers to manage and develop our
business.
Our
success depends on the management skills of Mr. Xiqun Yu, our Chief Executive
Officer and President and his relationships with educators, administrators
and
other business contacts. We also depend on successfully recruiting and
retaining highly skilled and experienced authors, teachers, managers, sales
persons and other personnel who can function effectively in China. In some
cases, the market for these skilled employees is highly competitive. We
may not be able to retain or recruit such personnel, which could materially
and
adversely affect our business, prospects and financial condition. We do
not maintain key person insurance on these individuals. The loss of Mr. Yu
would delay our ability to implement our business plan and would adversely
affect our business.
We
may not be successful in protecting our intellectual property and proprietary
rights.
Our
intellectual property consists of old test papers, which are contained
in our
library, and courseware which we developed by engaging authors and educators
to
develop these materials. Our proprietary software products are primarily
protected by trade secret laws. Although we require our authors and
software development employees to sign confidentiality and non-disclosure
agreements, we cannot assure you that we will be able to enforce those
agreements or that our authors and software development employees will
not be
able to develop competitive products that do not infringe upon our proprietary
rights. We do not know the extent that Chinese courts will enforce our
proprietary rights.
Others
may bring defamation and infringement actions against us, which could be
time-consuming, difficult and expensive to defend.
As
a
distributor of educational materials, we face potential liability for
negligence, copyright, patent or trademark infringement and other claims
based
on the nature and content of the materials that we publish or distribute.
Any claims could result in us incurring significant costs to investigate
and defend regardless of the final outcome. We do not carry general
liability insurance that would cover any potential or actual claims. The
commencement of any legal action against us or any of our affiliates, whether
or
not we are successful in defending the action, could both require us to
suspend
or discontinue the distribution of some or a significant portion of our
educational material and require us to allocate resources to investigating
or
defending claims.
We
depend upon the acquisition and maintenance of licenses to conduct our
business
in China.
In
order
to conduct business in China, we need licenses from the appropriate government
authorities, including general business licenses and an education service
provider license. The loss or failure to obtain or maintain these licenses
in full force and effect will have a material adverse impact on our ability
to
conduct our business and on our financial condition.
Our
growth may be inhibited by the inability of potential customers to fund
purchases of our products and services.
Many
schools in China, especially those in rural areas, do not have sufficient
funds
to purchase textbooks, educational materials or computers to use our web-based
educational portal. In addition, provincial and local governments may not
have the funds to support the implementation of a curriculum using our
educational products or may allocate funds to programs which are different
from
our products. Our failure to be able to sell our products and services
to
students in certain areas of China may inhibit our growth and our ability
to
operate profitably.
Changes
in the policies of the government in China could significant impact our
ability
to operate profitably.
The
economy of China is a planned economy subject to five-year and annual plans
adopted by the government that set down national economic development goals.
Government policies can have significant effect on the economic conditions
of China generally and the educational system in particular. Although the
government in China has confirmed that economic development will follow
a model
of market economy under socialism, a change in the direction of government
planning may materially affect our business, prospects and financial
condition.
10
Inflation
in China could negatively affect our profitability and
growth.
While
the
economy in China has experienced rapid growth, such growth has been uneven
among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and
rising
inflation. If prices for our products rise at a rate that is insufficient
to
compensate for the rise in our costs, it may have an adverse effect on
profitability. In order to control inflation in the past, the government
has
imposed controls in bank credits, limits on loans for fixed assets, and
restrictions on state bank lending. Such an austerity policy can lead to
a
slowing of economic growth which could impair our ability to operate
profitably.
If
we make any acquisitions, they may disrupt or have a negative impact on
our
business.
If
we
make acquisitions, we could have difficulty integrating the acquired companies’
personnel and operations with our own. In addition, the key personnel of
the
acquired business may not be willing to work for us. We cannot predict
the
affect expansion may have on our core business. Regardless of whether we
are
successful in making an acquisition, the negotiations could disrupt our
ongoing
business, distract our management and employees and increase our expenses.
In
addition to the risks described above, acquisitions are accompanied by
a number
of inherent risks, including, without limitation, the following:
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difficulties
in disposing of the excess or idle facilities of an acquired
company or
business and expenses in maintaining such facilities;
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difficulties
in maintaining uniform standards, controls, procedures and
policies;
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the
potential impairment of relationships with employees and customers
as a
result of any integration of new management personnel;
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the
potential inability or failure to achieve additional sales and
enhance our
customer base through cross-marketing of the products to new
and existing
customers;
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the
effect of any government regulations which relate to the business
acquired;
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potential
unknown liabilities associated with acquired businesses or product
lines,
or the need to spend significant amounts to retool, reposition
or modify
the marketing and sales of acquired products or the defense of
any
litigation, whether of not successful, resulting from actions
of the
acquired company prior to our
acquisition.
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Our
business could be severely impaired if and to the extent that we are unable
to
succeed in addressing any of these risks or other problems encountered
in
connection with any acquisitions in which we engage, many of which cannot
be
identified at the time of the acquisition. Such risks and problems could
disrupt
our ongoing business, distract our management and employees, increase our
expenses and adversely affect our results of operations.
Our
operations and assets in China are subject to significant political and
economic
uncertainties.
Government
policies are subject to rapid change, and the government of the PRC, may
adopt
policies which have the effect of hindering private economic activity and
greater economic decentralization. There is no assurance that the government
of
China will not significantly alter its policies from time to time without
notice
in a manner with reduces or eliminates any benefits from its present policies
of
economic reform. In addition, a substantial portion of productive assets
in
China remains government-owned. For instance, all lands are state owned
and
leased to business entities or individuals through governmental granting
of
state-owned land use rights. The granting process is typically based on
government policies at the time of granting, which could be lengthy and
complex.
The government of China also exercises significant control over China’s economic
growth through the allocation of resources, controlling payment of foreign
currency and providing preferential treatment to particular industries
or
companies. Uncertainties may arise with changing of governmental policies
and
measures. In addition, changes in laws and regulations, or their interpretation,
or the imposition of confiscatory taxation, restrictions on currency conversion,
imports and sources of supply, devaluations of currency, the nationalization
or
other expropriation of private enterprises, as well as adverse changes
in the
political, economic or social conditions in China, could have a material
adverse
effect on our business, results of operations and financial
condition.
11
Price
controls may affect both our revenues and net income.
The
laws
of China provide give the government broad power to fix and adjust prices.
We
need to obtain government approval in setting our prices for classroom
coursework and tutorials. Although the sale of educational material over
the
Internet is not presently subject to price controls, we cannot give you
any
assurance that they will not be subject to controls in the future. To the
extent
that we are subject to price control, our revenue, gross profit, gross
margin
and net income will be affected since the revenue we derive from our services
will be limited and we may face no limitation on our costs. As a result,
we may
not be able to pass on to our students any increases in costs we incur
or any
increases in the costs of our faculty. Further, if price controls affect
both
our revenue and our costs, our ability to be profitable and the extent
of our
profitability will be effectively subject to determination by the applicable
Chinese regulatory authorities.
Our
operations may not develop in the same way or at the same rate as might
be
expected if the PRC economy were similar to the market-oriented economies
of
most developed countries.
The
economy of the PRC has historically been a nationalistic, “planned economy,”
meaning it functions and produces according to governmental plans and pre-set
targets or quotas. In certain aspects, the PRC’s economy has been making a
transition to a more market-oriented economy, although the government imposes
price controls on certain products and in certain industries. However,
we cannot
predict the future direction of these economic reforms or the effects these
measures may have. The economy of the PRC also differs from the economies
of
most developed countries including with respect to the amount of government
involvement, level of development, growth rate, control of foreign exchange
and
allocation of resources. As a result of these differences, our business
may not
develop in the same way or at the same rate as might be expected if the
economy
of the PRC were similar to those of other developed countries.
Because
our officers and directors reside outside of the United States, it may
be
difficult for you to enforce your rights against them or enforce United
States
court judgments against them in China.
Our
directors and our executive officers reside in the PRC and all of our assets
are
located in China. It may therefore be difficult for United States investors
to
enforce their legal rights, to effect service of process upon our directors
or
officers or to enforce judgments of United States courts predicated upon
civil
liabilities and criminal penalties of our directors and officers under
federal
securities laws. Further, it is unclear if extradition treaties now in
effect
between the United States and China would permit effective enforcement
of
criminal penalties of the federal securities laws.
We
may have limited legal recourse under Chinese law if disputes arise under
contracts with third parties.
All
of
our agreements, which are made by our Chinese subsidiaries, are governed
by the
laws of China. The Chinese legal system is a civil law system based on
written
statutes. Accordingly decided legal cases have little precedential value.
The
government of China has enacted some laws and regulations dealing with
matters
such as corporate organization and governance, foreign investment, commerce,
taxation and trade. However, these laws are relatively new and their experience
in implementing, interpreting and enforcing these laws and regulations
is
limited. Therefore, our ability to enforce commercial claims or to resolve
commercial disputes may be uncertain. The resolution of these matters may
be
subject to the exercise of considerable discretion by the parties charged
with
enforcement of the applicable laws. Any rights we may have to specific
performance or to seek an injunction under Chinese law may be limited,
and
without a means of recourse, we may be unable to prevent these situations
from
occurring. The occurrence of any such events could have a material adverse
effect on our business, financial condition and results of
operations.
Because
we may not be able to obtain business insurance in the PRC, we may not
be
protected from risks that are customarily covered by insurance in the United
States.
Business
insurance is not readily available in China. To the extent that we suffer
a loss
of a type which would normally be covered by insurance in the United States,
such as product liability and general liability insurance, we would incur
significant expenses in both defending any action and in paying any claims
that
result from a settlement or judgment.
12
Because
substantially all of our funds are held in bank accounts in the PRC which
do not
provide insurance, the failure of any such bank in which we deposit our
funds
could affect our ability to continue our business
operations.
Banks
and
other financial institutions in the PRC do not provide insurance for funds
held
on deposit. As a result, in the event of a bank failure, we may not have
access
to funds on deposit. Depending upon the amount of money we maintain in
a bank
that fails, our inability to have access to our cash could impair our
operations, and, if we are not able to access our funds to pay our suppliers,
employees and other creditors, we may be unable to continue our business
operations.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject
us
to penalties and other adverse consequences.
We
are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are
not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs,
theft
and other fraudulent practices occur from time-to-time in China. We can
make no
assurance, however, that our employees or other agents will not engage
in such
conduct for which we might be held responsible. If our employees or other
agents
are found to have engaged in such practices, we could suffer severe penalties
and other consequences that may have a material adverse effect on our business,
financial condition and results of operations.
Fluctuations
in the exchange rate could have a material adverse effect upon our
business.
We
conduct our business in the Renminbi. The value of the Renminbi against
the U.S.
dollar and other currencies may fluctuate and is affected by, among other
things, changes in political and economic conditions. On July 21, 2005,
the PRC
government changed its decade old policy of pegging its currency to the
U.S.
currency. Under the current policy, the Renminbi is permitted to fluctuate
within a narrow and managed band against a basket of certain foreign currencies.
This change in policy has resulted in an approximately 6.5% appreciation
of the
Renminbi against the U.S. dollar between July 21, 2005 and August 31, 2007.
However, there remains significant international pressure on the PRC government
to adopt an even more flexible currency policy, which could result in a
further
and more significant appreciation of the RMB against the U.S. dollar. To
the
extent our future revenues are denominated in currencies other the United
States
dollars, we would be subject to increased risks relating to foreign currency
exchange rate fluctuations which could have a material adverse affect on
our
financial condition and operating results since our operating results are
reported in United States dollars and significant changes in the exchange
rate
could materially impact our reported earnings.
Recent
recalls of Chinese products may affect the market for our
stock.
Although
we do not sell consumer products in the international market, the recent
recalls
of Chinese products in the United States and elsewhere could affect the
market
for our stock by causing investors to invest in companies that are not
based on
China.
One
of our stockholders controls a significant amount of our common
stock.
Approximately
59.01% of our outstanding common stock is owned by our Chief Executive
Officer,
Mr. Xiqun Yu. Mr. Yu presently has the voting power to elect all of our
directors and approve any transaction requiring stockholder
approval.
The
terms on which we may raise additional capital may result in significant
dilution and may impair our stock price.
The
terms
of our May 2007 private placement and the number of outstanding warrants
and
their exercise price and other terms on which we may issue common stock
upon
exercise of such warrants, may make it difficult for us to raise additional
capital if required for our present business and for any planned expansion.
We
are prohibited from (i) issuing convertible debt or preferred stock until
the
earlier of May 2012 or until the investors in our May 2007 private placement
have converted or exercised and sold the securities issued in such private
placement or (ii) having debt in an amount greater than twice our EBITDA
until
May 2010 or until 90% of the securities sold in the May 2007 private placement
have been converted or exercised and sold. The investors in such private
placement also have a right of first refusal on future financings. We cannot
assure you that we will be able to get additional financing on any terms,
and,
if we are able to raise funds, it may be necessary for us to sell our securities
at a price which is at a significant discount from the market price and
on other
terms which may be disadvantageous to us. In connection with any such financing,
we may be required to provide registration rights to the investors and
pay
damages to potential investor in the event that the registration statement
is
not filed or declared effective by specified dates. The price and terms
of any
financing which would be available to us could result in both the issuance
of a
significant number of shares and significant downward pressure on our stock
price and could result in a reduction of the conversion price of our Series
A
Convertible Preferred Stock (or Series A Preferred Stock) and exercise
price of
the warrants held by the investors in our May 2007 private
placement.
13
If
we issue securities at a price per share less then the exercise price of
certain
of our warrants or the conversion price of our Series A Preferred Stock,
we will
be required to adjust the conversion price of our Series A Preferred Stock
and
reduce the exercise price of certain of our warrants.
The
warrants and Series A Preferred Stock issued in the May 2007 private placement
contain anti-dilution provisions which will result in a reduction of the
exercise price of the warrants and the conversion price of the Series A
Preferred Stock if we issue certain securities at a price which is less
than the
exercise price of the warrants or the conversion price of the Series A
Preferred
Stock. Anti-dilution adjustments could result in an increase in the investors’
percentage interest in our common stock (as the number of shares of common
stock
into which the Series A Preferred Stock will be converted will increase)
and
reduction in the effective per share price paid by the investors. We cannot
assure you that there will not be such an adjustment.
We
have paid liquidated damages and we may be required to pay additional liquidated
damages if our board does not consist of a majority of independent directors
and
our audit committee does not consist of at least three independent
directors.
The
securities purchase agreement relating to the May 2007 private placement
requires us to appoint and maintain such number of independent directors
that
would result in a majority of our directors being independent directors,
that
the audit committee would be composed solely of at least three independent
directors and the compensation committee would have a majority of independent
directors by August 6, 2007. Liquidated damages are payable at the rate
of 12%
per annum, with a maximum of 12% of the purchase price, payable in cash
or
shares of Series A Preferred Stock, as the investors may request. The maximum
amount of liquidated damages which may be paid under this provision is
$408,000.
Our failure to comply with these requirements resulted in our payment of
liquidated damages through the payment of $77,128 or the issuance of 208,456
shares of Series A Preferred Stock as of October 15, 2007. The shares of
Series
A Preferred Stock are convertible into 69,484 shares of common stock. Pursuant
to the securities purchase agreement, as amended, the shares of Series
A
Preferred Stock are valued at the liquidation value, which is $0.37 per
share of
Series A Preferred Stock. Since the market price for our common stock on
October
15, 2007 was $4.00 per share, the market value of the shares issued to
the
investors was approximately $277,944. The investors waived the right to
receive
any further liquidated damages for the Company’s failure to comply with these
provisions from October 16, 2007 through December 31, 2007. Since January
1,
2008, we have not been in compliance and are currently not in compliance
with
these provisions. As of March 31, 2008, unless otherwise waived by the
investors, we are obligated to pay liquidated damages to the investors
in an
amount equal to approximately $101,720 or, issue approximately 274,920
shares of Series A Preferred Stock (which are convertible into 91,640 shares
of
our common stock) to the investors, at the option of the investors. Assuming
the
investors elect to take the liquidated damages in stock and not waive their
right to receive such damages, and based on the market price for one share
of
our common stock on March 28, 2008, which was $2.20 per share, the market
value of the shares which may be issued to the investors is approximately
$201,608. Thereafter, if we are required to issue any additional shares
of
Series A Preferred Stock pursuant to the securities purchase agreement,
we are
also to issue such additional shares at the $0.37 per share liquidation
value.
If we are required to issue additional shares pursuant to the liquidated
damages
provisions of the securities purchase agreement and the market price of
our
common stock at the time the determination is made is greater than $1.11,
which
is the common stock equivalent of the liquidation value of the Series A
Preferred Stock, the investors will receive more shares of Series A Preferred
Stock than they would receive if the number of shares were based on the
market
value at the time of issuance.
Risks
Relating to our Common Stock
The
rights of the holders of common stock may be impaired by the potential
issuance
of preferred stock.
Our
Board
of Directors has the right, without stockholder approval, to issue preferred
stock with voting, dividend, conversion, liquidation or other rights which
could
adversely affect the voting power and equity interest of the holders of
common
stock, which could be issued with the right to more than one vote per share,
could be utilized as a method of discouraging, delaying or preventing a
change
of control. The possible impact on takeover attempts could adversely affect
the
price of our common stock. Although we have no present intention to issue
any
additional shares of preferred stock or to create any new series of preferred
stock other than issuances required pursuant to liquidated damages provisions
arising for the agreements we signed in connection with the May 2007 private
placement, we may issue such shares in the future.
14
Failure
to achieve and maintain effective internal controls in accordance with
Section
404 of the Sarbanes-Oxley Act could have a material adverse effect on our
business and operating results and stockholders could lose confidence in
our
financial reporting.
Rules
adopted by the Securities and Exchange Commission, or SEC pursuant to Section
404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our
internal
control over financial reporting. Internal controls are necessary for us
to
provide reliable financial reports and effectively prevent fraud. The standards
that must be met for management to assess the internal control over financial
reporting as effective are complex, and require significant documentation,
testing and possible remediation to meet the detailed standards and impose
significant additional expenses on us. We may encounter problems or delays
in
completing activities necessary to make an assessment of our internal control
over financial reporting. If we cannot provide reliable financial reports
or
prevent fraud, our operating results could be harmed. In addition, under
the
current SEC regulations, we will be required to include an auditor’s attestation
report of our assessment of our internal control over financial reporting
for
the year ended December 31, 2008. Failure to achieve and maintain an effective
internal control environment, regardless of whether we are required to
maintain
such controls, could also cause investors to lose confidence in our reported
financial information, which could have a material adverse effect on our
stock
price. Although we are not aware of anything that would impact our ability
to
maintain effective internal controls, we have not obtained an independent
audit
of our internal controls, and, as a result, we are not aware of any deficiencies
which would result from such an audit.
Our
officers and directors have limited experience with the regulatory requirements
for U.S. public companies, which could impair our ability to satisfy public
company filing requirements and could increase our securities compliance
costs.
All
of
our officers and directors do not have any prior experience as officers
and
directors of a U.S. publicly traded company, or in complying with the regulatory
requirements applicable to a U.S. public company. As a result, we could
have
difficulty satisfying the regulatory requirements applicable to U.S. public
companies, which could adversely affect the market for our common stock.
At
present, we rely upon outside experts to advise us on matters relating
to
financial accounting and public company reporting. While we believe that
it will
be possible to satisfy our public company reporting requirements through
the use
of third party experts, our general and administrative costs will remain
higher
until we have developed or acquired internal expertise in these
matters.
Because
of our cash requirements and restrictions in a certain securities purchase
agreement as well as potential government restrictions, we may be unable
to pay
dividends.
We
are
prohibited from paying dividends on our common stock while our Series A
Preferred Stock is outstanding. In addition, payment of dividends to our
stockholders would require payment of dividends by our China subsidiaries
to us.
This, in turn, would require a conversion of Renminbi into US dollars and
repatriation of funds to the United States. Although our subsidiaries’
classification as wholly-owned foreign enterprises under Chinese law permits
them to declare dividends and repatriate their funds to us in the United
States,
any change in this status or the regulations permitting such repatriation
could
prevent them from doing so. Any inability to repatriate funds to us would
in
turn prevent payments of dividends to our stockholders.
Because
we may be subject to the “penny stock” rules, you may have difficulty in selling
our common stock.
Because
our stock price is less than $5.00 per share, our stock may be subject
to the
SEC’s penny stock rules, which impose additional sales practice requirements
and
restrictions on broker-dealers that sell our stock to persons other than
established customers and institutional accredited investors. The application
of
these rules may affect the ability of broker-dealers to sell our common
stock
and may affect your ability to sell any common stock you may own.
According
to the SEC, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include:
|
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·
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Control
of the market for the security by one or a few broker-dealers
that are
often related to the promoter or issuer;
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|
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|
·
|
Manipulation
of prices through prearranged matching of purchases and sales
and false
and misleading press releases;
|
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|
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|
|
·
|
“Boiler
room” practices involving high pressure sales tactics and unrealistic
price projections by inexperienced sales persons;
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·
|
Excessive
and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
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·
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The
wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along
with the
inevitable collapse of those prices with consequent investor
losses.
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15
As
an issuer of “penny stock,” the protection provided by the federal securities
laws relating to forward looking statements does not apply to
us.
Although
the federal securities law provide a safe harbor for forward-looking statements
made by a public company that files reports under the federal securities
laws,
this safe harbor is not available to issuers of penny stocks. As a result,
if we
are an issuer of penny stock, we will not have the benefit of this safe
harbor
protection in the event of any claim alleging that material provided by
us (i)
contained a material misstatement of fact or (ii) was misleading in any
material
respect because of our failure to include statements necessary to make
such
material not misleading.
Our
stock price may be affected by our failure to meet projections and estimates
of
earnings developed either by us or by independent securities
analysts.
Although
we do not make projections relating to our future operating results, our
operating results may fall below the expectations of securities analysts
and
investors. In this event, the market price of our common stock would likely
be
materially adversely affected.
The
volatility of and limited trading market in our common stock may make it
difficult for you to sell our common stock for a positive return on your
investment.
The
public market for our common stock has historically been very volatile.
Over the
past two fiscal years the market price for our common stock has ranged
from
$0.26 to $6.40. Any future market price for our shares is likely to continue
to
be very volatile. Further, our common stock is not actively traded, which
may
amplify the volatility of our stock. These factors may make it more difficult
for investors to sell our common stock.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock
in the
public marketplace could reduce the price of our common
stock.
From
time
to time, certain of our stockholders may be eligible to sell all or some
of
their shares of common stock by means of a certain resale prospectus filed
with
the SEC, ordinary brokerage transactions in the open market, pursuant to
Rule
144 promulgated under the Securities Act, subject to certain limitations
or
otherwise. In general, pursuant to Rule 144, a stockholder (or stockholders
whose shares are aggregated) who is an affiliate of our Company and who
has
satisfied a six-month holding period may, under certain circumstances,
sell
within any three-month period a number of securities which does not exceed
the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume of the class during the four calendar weeks prior
to such
sale. Rule 144 also permits, under certain circumstances, the sale of
securities, without any limitations, by a non-affiliate of our company
that has
satisfied a six-month holding period. Any substantial sale of common stock
pursuant to Rule 144 or pursuant to a resale prospectus may have an adverse
effect on the market price of our common stock.
Our
main
office is located at 58 Heng Shan Road, Kun Lun Shopping Mall Harbin,
Heilonjiang Province, China 150090, which has a total area of 4,177 square
feet.
This space is adequate for our present and our planned future operations.
No
other businesses operate from this office. We also have a 3,700 square
meter
(36,600 square foot) building in Harbin which we use for our educational
training center and our vocational training center. There is no private
ownership of land in China. All land ownership is held by the government
of
China, its agencies and collectives. Land use rights are obtained from
government for periods ranging from 50 to 70 years, and are typically renewable.
Land use rights can be transferred upon approval by the land administrative
authorities of China (State Land Administration Bureau) upon payment of
the
required transfer fee. We presently have land use rights for our real property
described above which expire in 50 years.
We
rent
approximately 15 classrooms located in Building 36, Zuanli Street, Nangang
District, Harbin. We also rent 327 square meters of office space located
at
Anleli Road A, 4th Floor, Building B, No. 69, Chongwen District, Beijing,
China.
One
of
our executive officers, rents, in the officer’s name and on our behalf,
356 square
meters of office space at No.188 Nansihuanxi Road, 4th Floor, No.10 Building,
No.1 District, Fengtai District, Beijing, China and dormitory space at
Yongwai
Boulevard, Tiantian House, Building No. 3, Unit 6, Room 801, Chongwen District,
Beijing, China.
16
ITEM
4.
Submission of Matters to a Vote of Security Holders
None
PART
II
ITEM
5.
Market for Common Equity, Related Security Holder Matters and Small Business
Issuer Purchases of Equity Securities
Market
for Common Equity and Related Stockholder Matters
Our
common stock is traded on the OTC Bulletin Board under the trading symbol
CEUA.OB. The table below presents the high and low sales prices for our
common
stock for each quarter from January 1, 2006 through December 31, 2007.
These
prices reflect inter-dealer prices, without retail markup, markdown, or
commission, and may not represent actual transactions. We obtained the
following
information from Yahoo Finance.com., adjusted for our one-for-three reverse
split.
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High
|
Low
|
|||||
|
Year
ended December 31, 2006
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|||||||
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1st
Quarter
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2.85
|
0.26
|
|||||
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2nd
Quarter
|
3.30
|
1.05
|
|||||
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3rd
Quarter
|
1.53
|
0.45
|
|||||
|
4th
Quarter
|
2.55
|
0.84
|
|||||
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|
|||||||
|
Year
ended December 31, 2007
|
|||||||
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1st
Quarter
|
2.49
|
1.35
|
|||||
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2nd
Quarter
|
1.95
|
0.78
|
|||||
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3rd
Quarter
|
3.00
|
1.38
|
|||||
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4th
Quarter
|
6.40
|
2.40
|
|||||
As
of
March 12, 2008, we had 21,492,631 shares
of
common stock outstanding and held of record by approximately 517 stockholders.
Within the holders of record of our common stock are depositories such
as Cede
& Co. that hold shares of stock for brokerage firms, which, in turn, hold
shares of stock for beneficial owners. On March 28, 2008, the closing price
of
our common stock on the OTC Bulletin Board was $2.20 per share.
We
have
not declared or paid any dividends on our common stock and presently do
not
expect to declare or pay any such dividends in the foreseeable future.
Our
securities purchase agreement relating to our May 2007 private placement
prohibits us from paying dividends while our Series A Preferred Stock is
outstanding.
Securities
Authorized for Issuance Under Equity Compensation Plans.
We
have
not adopted any equity compensation plans and have no securities authorized
for
issuance under any such plans.
Registrar
and Stock Transfer Agent
Our
stock
transfer agent is Florida Atlantic Stock Transfer, Inc., 7130 Nob Hill
Road,
Tamarac, FL 33321.
17
Dividends
We
have
not declared or paid any dividends on our common stock and presently do
not
expect to declare or pay any such dividends in the foreseeable future.
We have
not yet formulated a future dividend policy in the event restrictions on
our
ability to pay dividends are created. Payment of dividends to our stockholders
would require payment of dividends by our China subsidiaries to us. This,
in
turn, would require a conversion of Renminbi into US dollars and repatriation
of
funds to the United States. Under current Chinese law, the conversion of
Renminbi into foreign currency generally requires government consent. Government
authorities may impose restrictions that could have a negative impact in
the
future on the conversion process and upon our ability to meet our cash
needs,
and to pay dividends to our stockholders. Although, our subsidiaries’
classification as wholly-owned foreign enterprises under Chinese law permits
our
subsidiaries to declare dividends and repatriate their funds to us in the
United
States, any change in this status or the regulations permitting such
repatriation could prevent them from doing so. Any inability to repatriate
funds
to us would in turn prevent payments of dividends to our
stockholders.
On
March
7, 2007, we issued 10,000 shares of restricted common stock to Taylor Raferty
Associates Inc. for public relations services in reliance upon Section
4(2)
under the Securities Act.
On
May 8,
and May 31 2007, we sold, 3% convertible subordinated notes in the aggregate
principal amount of $3,400,000 to three investors, Barron Partners, LP,
Eos
Holdings LLC and Hua-Mei 21st Century Partners, LP. The following table
sets
forth the investment made by each investor, the principal amount of the
notes
issued to each investor, the number of shares of Series A Preferred Stock
which
the notes were automatically converted into in October 2007 upon the filing
of a
certificate of amendment to our Articles of Incorporation, and the number
of
shares of common stock issuable upon exercise of warrants that were also
issued
to the investors upon conversion of the notes. The issuance of the shares
of
Series A Preferred Stock and the warrants was exempt from registration
pursuant
to Section 3(a)(9) of the Securities Act.
|
Note
|
Series A
Preferred
Stock
|
Common
Stock Issuable
on Exercise of Warrants
|
||||||||
|
Barron
Partners, LP
|
$
|
3,175,000
|
8,581,081
|
4,208,335
|
||||||
|
Eos
Holdings LLC
|
$
|
125,000
|
337,838
|
170,020
|
||||||
|
Hua-Mei
21st
Century
Partners, LP
|
$
|
100,000
|
270,270
|
136,018
|
||||||
|
Total
|
$
|
3,400,000
|
9,189,189
|
4,514,373
|
||||||
In
connection with May 2007 private placement, we paid Brean Murray Carret
&
Co. a fee of $60,000 and issued to Brean Murray a three-year warrant to
purchase
83,334 shares of our common stock at $2.25 per share, and paid cash fees
of
$48,000 to Huang Jun and $24,000 to Liu Zongbo.
In
August
2007 we entered into a consulting agreement for investor relation services
with
CCG Elite. In connection with such arrangement we issued to CCG Elite a
three-year warrant to purchase 100,000 shares of our common stock at an
exercise
price of $1.89 per share in reliance upon Section 4(2) under the Securities
Act.
As
a
result of our failure to have a majority of our board of directors composed
of
independent directors as of October 15, 2007, we issued 208,456 shares
of Series
A Preferred Stock to our May 2007 private placement investors. The issuance
of
such shares was exempt from registration pursuant to Section 4(2) of the
Securities Act.
Repurchase
of Equity Securities
None
The
following discussion and analysis of our financial condition and results
of
operations are based upon our consolidated financial statements and the
notes
thereto included elsewhere in this Annual Report on Form 10-KSB, which have
been prepared in accordance with accounting principles generally accepted
in the
United States. The preparation of such financial statements requires us
to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. On an on-going basis, we evaluate these estimates,
including those related to useful lives of real estate assets, cost
reimbursement income, bad debts, impairment, net lease intangibles,
contingencies and litigation. We base our estimates on historical experience
and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. There can be no assurance that actual results will not differ
from those estimates. The
analysis set forth below is provided pursuant to applicable SEC regulations
and
is not intended to serve as a basis for projections of future events. See
“Cautionary Statement Regarding Forward Looking Statements” above.
18
Overview
Our
principal business is the distribution of educational resources in China
through
the Internet. Our website, www.edu-chn.com,
is a
comprehensive education network platform which is based on network video
technology and large data sources of education resources. We have a data
base
comprised of such resources as test papers for secondary education courses
as
well as video on demand. Our data base includes more than 300,000 exams
and test
papers and courseware for secondary and elementary schools. We also offer,
though our website, video on demand, which includes tutoring of past exam
papers
and exam techniques.
We
also
provide on-site teaching services in Harbin, where we have a 36,600 square
foot
training facility with 17 classrooms that can accommodate 1,200 students.
These
classes complement our on-line education services. The courses cover primarily
the compulsory education curriculum of junior, middle and high school.
We charge
tuition for these classes.
We
generate revenue through our website by selling prepaid debit cards to
our
subscribers. These debit cards permit the subscriber to download materials
from
our website over a specified period, usually one year. We recognize revenue
from
the debit cards when the students use the debit cards to purchase our products.
To the extent that the debit cards expire unused, we recognize the remaining
balance of the debit card at that time. We also recognize revenue from
our
on-line education business through the sale of advertising on our website.
We
recognize revenue from the classes conducted at our training centers ratably
over the term of the courses, and we recognize revenue from face-to-face
tutorials to students in our training center and face-to-face information
technology training courses.
The
laws
of China give the government broad power to fix and adjust prices. We need
to
obtain government approval in setting our prices for classroom coursework
and
tutorials, which affects our revenue in our training center business. Although
the sale of educational material over the Internet is not presently subject
to
price controls, we cannot give you any assurance that they will not be
subject
to controls in the future. To the extent that we are subject to price control,
our revenue, gross profit, gross margin and net income will be affected
since
the revenue we derive from our services will be limited and we may face
no
limitation on our costs. Further, if price controls affect both our revenue
and
our costs, our ability to be profitable and the extent of our profitability
will
be effectively subject to determination by the applicable Chinese regulatory
authorities.
Because
students who purchase our on-line programs purchase debit cards for the
programs
that they use and students who enroll in our training classes pay their
tuition
before starting classes, we do not have significant accounts receivable.
At
December 31, 2007, we had no accounts receivable.
Prepaid
expenses account for a significant portion of our current assets - approximately
$1,612,000, or 12% of our current assets at December 31, 2007. Prepaid
expenses
are primarily comprised of advance payments we make to teachers for their
services in preparing on-line materials and video and prepaid rent. At
December
31, 2007, prepayment of advertising for television advertising not yet
aired was
approximately $402,000,
prepayment to teachers for the development of educational materials was
approximately $144,000, prepayment of rent expense was approximately $285,000,
prepayment of software development was approximately $634,000, prepaid
consulting fees were approximately $110,000 and other prepaid expenses
were
approximately $39,000. We amortize the prepayments to teachers over three
months, which is the estimated life of the testing materials. The prepaid
rent
relates to our Beijing office and dormitory rental for our training center.
The
prepayment to teachers decreases as the materials are delivered and the
prepaid
rent decreases ratably during the terms of the leases.
As
a
result of both the manner in which we recognize revenue and the manner
in which
we expense the cost of our materials, there is a difference between our
cash
flow and our revenue and cost of revenue.
In
our
on-line education business, the principal components of cost of sales are
the
cost of obtaining new material to offer students as we increase the available
material as well as depreciation related to computer equipment and software
and
direct labor cost. Our on-line education business generates a relatively
high
gross margin, which was 82.4% for the year ended December 31, 2007. The
gross
margin is affected by the payments we have to make to the teachers for
the
materials. In our training center business, the principal components of
cost of
sales are costs of the faculty and the amortization of intangible assets.
This
business generates a lower gross margin than the on-line education business,
which was 69% for the year ended December 31, 2007. The tuition that we
charge
our students at our training center is subject to government approval.
As a
result, we may not be able to pass on to our students any increases in
costs we
incur, including increased costs of faculty. Our gross margin in the training
center is also affected by the size of our classes.
19
Our
on-line products and our training services are dependent upon the government’s
education policies. Any significant changes in curriculum or testing methods
could render all or a significant portion of our library of test papers
and our
training center obsolete and we may have to devote substantial resources
in
adapting to the changes.
We
have
recently added a platform for training agencies and schools to offer their
services, and we offer job search guidance and career planning courses
to
college students and graduates. This business is part of our on-line education
business, since it is presently largely an Internet-based activity.
Because
the purchase of both our on-line and our training center programs is made
from
discretionary funds, our business is dependent upon both the economy of
China
and the perception of students that they will benefit from improving their
ability to perform well on standardized tests which are given before middle
school, high school and university.
In
December 2006, we acquired, for approximately $1.0 million, all of the
fixed
assets and franchise rights of Harbin Nangang Compass Computer Training
School (“Compass Training School”), which was engaged in the business of
providing on-line education resources to computer vocational training school
students. As a result of this acquisition, we became the exclusive partner
of
Beida Qingniao APTEC Software Engineering within Heilongjiang Province
in China
for vocational training. The acquisition included materials and resources
to
provide on-site education classes and patented course materials. Compass
Training School currently has two principal education programs focused
on
network engineering and ACCP software engineering with 9 on-site classrooms
and
9 multimedia/computer classrooms at two centers.
We
own
70% of Beijing Hua Yu Hui Zhong Technology Development Co., Ltd, which
was
formed on September 30, 2006. At the time of its organization, we transferred
a
30% interest in this subsidiary to The Vocational Education Guidance Center
of
China, a non-profit, quasi-government entity, for no consideration in order
to
enable us to work with the Guidance Center’s network to expand our business. The
value of this 30% interest, which is based on our cost, is treated as
goodwill.
Results
of Operation
Comparison
of Years Ended December 31, 2007 and 2006
The
following table sets forth information from our statements of operations
for the
years ended December 31, 2007 and 2006.
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(Dollars)
|
||||||||||||
|
|
Years Ended December 31,
|
||||||||||||
|
|
2007
|
2006
|
|||||||||||
|
Revenues:
|
$
|
17,323,534
|
100
|
%
|
$
|
8,324,473
|
100
|
%
|
|||||
|
Cost
of sales
|
3,541,309
|
20.4
|
%
|
2,563,890
|
30.8
|
%
|
|||||||
|
Gross
profit
|
13,782,225
|
79.6
|
%
|
5,760,583
|
69.2
|
%
|
|||||||
|
Income
from operations
|
6,274,307
|
37.0
|
%
|
2,715,789
|
32.6
|
%
|
|||||||
|
Interest
Expense
|
(3,548,166
|
)
|
20.5
|
%
|
(134,825
|
)
|
1.6
|
%
|
|||||
|
Value-added
tax refund
|
860,037
|
5.0
|
%
|
-
|
-
|
||||||||
|
Income
before income taxes
|
3,586,178
|
21.5
|
%
|
2,580,964
|
31
|
%
|
|||||||
|
Provision
for income taxes
|
481,271
|
2.8
|
%
|
-
|
-
|
||||||||
|
Income
before minority interest
|
3,104,907
|
18.7
|
%
|
2,580,964
|
31
|
%
|
|||||||
|
Net
income
|
3,104,907
|
18.7
|
%
|
2,624,660
|
31.5
|
%
|
|||||||
Our
net cash provided by operating activities was $8.8 million for the year
ended
December 31, 2007 an increase of $7 million or 375% from $1.8 million
for the
same period in 2006. This increase was due to an increase in net income
of $0.5
million along with non-cash charges related to the issuance of notes
payable of
$3.5 million, increase of depreciation and amortization of $0.6 million,
issuance of equity instruments for services of $0.3 million and increase
in
deferred revenue of $0.9 million as compared to the year ended December
31,
2006.
20
We
operate in one business segment, that of education, in which we operate
in two
revenue areas of online education and education training centers. The following
table sets forth information as to the gross margin for our two revenue
areas
for the years ended December 31, 2007 and 2006.
|
|
(Dollars)
|
||||||
|
|
Years Ended December 31,
|
||||||
|
|
2007
|
2006
|
|||||
|
On-line
Education:
|
|
|
|||||
|
Revenue
|
$
|
13,623,707
|
$
|
6,620,519
|
|||
|
Cost
of sales
|
2,393,945
|
1,766,442
|
|||||
|
Gross
profit
|
11,229,762
|
4,854,077
|
|||||
|
Gross
margin
|
82.4
|
%
|
73.3
|
%
|
|||
|
Training
center
|
|||||||
|
Revenue
|
3,699,827
|
1,703,954
|
|||||
|
Cost
of sales
|
1,147,364
|
797,448
|
|||||
|
Gross
profit
|
2,552,463
|
906,506
|
|||||
|
Gross
margin
|
69.0
|
%
|
53.2
|
%
|
|||
Revenue.
Revenue
increased by $8,999,061 or 108% in 2007 to $17,323,534 as compared to $8,324,473
in 2006, resulting in gross profit of $13,782,225 for
2007
as compared to gross profit of $5,760,583 in 2006. The increase in revenue
reflected increases of approximately $7 million from our on-line education
area
and approximately $2 million for our training center area. Advertising
income is
included in our on-line education revenue. Advertising income increased
as the
result of the increased awareness of our website, which resulted in more
viewers coming to our website, thus enabling us to increase our advertising
income to $2.1 million, an increase of $400,000 from
the
year ended December 31, 2006. During 2006 and 2007, we added several new
programs for vocational studies and certification programs, which provided
new
sources of income for our on-line education area.
Cost
of sales. Our
overall cost of sales increased by approximately $977,419 to $3,541,309
in 2007
as compared to $2,563,890 in 2006. The increase in cost of sales reflects
a
$627,503 increase in our cost of sales for our on-line education area in
2007
while the remaining $349,916 of the increase was from our training center
segment. The on-line training area gross margin increased to 82.4% in 2007
from
73.3% from
2006
due to the fact that on-line education costs are somewhat fixed and margins
increase with volume. The on-line education area gross margin for 2007
also
reflects an increase in advertising revenue which has no substantial cost
associated with it. Our training center area gross margin increased to
69.0% in
2007
from 53.2% in
2007
due
to
decreased payments to lecturers.
Selling
expenses. Selling
expenses increased by approximately $3.8 million, or 270%, to approximately
$5.2
million in 2007 from approximately $1,404,000 in
2006.
Until the middle of 2006, we did not have a significant selling effort,
which is
reflected in the modest selling expenses in 2006. Our selling expenses
include
increased agency fees associated with increased sales of our debit
cards.
Administrative
expenses.
Administrative expenses increased by $308,399, or 20.0%, to $1,825,264
in 2007
as compared to $1,516,319 in
2006.
The increase in administrative expenses was due to an increase in professional
fees and office expenses offset by decreases in salaries and other
administrative expenses.
Depreciation
and amortization.
Depreciation and amortization increased by $361,033, or 292%, to $484,643
in
2007 as compared to $123,610 in 2006. This increase was due to depreciation
and
amortization associated with increases in fixed assets and amortization
of
intangible assets.
Interest
income (expense).
Interest expense increased by $3,455,742, or 2445% to $3,603,097 in
2007
as compared to $147,355 in 2006. Interest expense related to the sale of
$3,400,000 of convertible notes issued in May 2007 and a bridge loan and
associated warrants which was made in September 2006. Interest income in
2007
was $54,931 as compared to 2006 which was $12,530, which related to earnings
on
cash balances.
Income
Taxes. Under
current Chinese tax law, a wholly foreign owned enterprise has a 100% tax
exemption or “holiday” for the first two years after it so qualifies, and
thereafter, a 50% tax “holiday” for three years. Since Harbin Zhong He Li Da
became a wholly foreign owned enterprise in 2005, we benefited from a 100%
tax
holiday in 2006. Under the present law, we benefited from a 50% tax holiday
for
2007 and will benefit from a 50% tax holiday in 2008 and 2009. As a result,
we
paid no income tax in 2006, and our income tax for 2007 reflects income
tax at
50% of the tax rate of 15%, which is subject to changes in tax rates implemented
in 2007 that go into effect commencing January 1, 2008. These changes will
have the effect of increasing the enterprise tax rate by 2% per year until
it
reaches and effective tax rate of 25%.
21
Net
income.
As a
result of the foregoing, we had net income of $3,104,907, or $0.16 per
share
basic and $0.14 diluted, for the year ended December 31, 2007, as compared
with
net income of $2,624,660 or $0.14 per share (basic and diluted), for the
year
ended December 31, 2006.
As
of
December 31, 2007, we had no off-balance sheet arrangements.
Our
current assets primarily consist of cash and prepaid expenses. We do not
have
inventory or accounts receivable, and our other receivables are not significant.
Our prepaid expenses are primarily advance payments made to teachers for
on-line
materials and prepaid rent.
At
December 31, 2007, we had cash and cash equivalents of approximately $11.8
million, an increase of approximately $9.9 million, or 5,407%, from
approximately $1.8 million at December 31, 2006. This increase reflected
principally the net income generated by our business during 2007, as well
as an
increase in advances by customers of approximately $1 million. In May 2007,
we
sold convertible notes in the principal amount of $3.4 million, from which
we
generated net proceeds of approximately $3.2 million. As of December 31,
2007,
we used approximately $1.36 million to pay outstanding notes and increase
working capital.
Our
net
cash provided by operating activities was $8.8 million for the year ended
December 31, 2007, an increase of $7 million or 375% from $1.8 million
for the
same period in 2006. This increase was due to an increase in net income
of $0.5
million along with non-cash charges related to the issuance of notes payable
of
$3.5 million, increase of depreciation and amortization of $0.6 million,
issuance of equity instruments for services of $0.3 million and increase
in
deferred revenue of $0.9 million as compared to the year ended December
31,
2006.
At
December 31, 2007, we had working capital of approximately $11.7 million,
an
increase of approximately $10.7 million from working capital of approximately
$1.0 million at December 31, 2006. Our May 2007 private placement of convertible
notes provided us with additional working capital. We consider current
working
capital and borrowing capabilities adequate to cover our planned operating
and
capital requirements.
Accounts
payable and accrued expenses at December 31, 2007, were approximately $423,000,
an increase of approximately $212,000, or 100.4%, from approximately $211,000
at
December 31, 2006, resulting from the increased level of business during
the
year.
We
believe that our working capital, together with our cash flow from operations
will be sufficient to enable us to meet our cash requirements for the next
12
months. However, we may incur additional expenses as we seek to expand
our
business to offer services in other parts of China as well as to market
and
continue the development of our vocational training activities, and it
is
possible that we may require additional funding for that purpose. Although
we do
not have any current plans to make any acquisitions, it is possible that
we may
seek to acquire one or more businesses in the education field, and we may
require financing for that purpose. We cannot assure you that funding will
be
available if and when we require funding.
The
securities purchase agreement relating to our May 2007 private placement
prohibits us (i) from issuing convertible debt or preferred stock until
the
earlier of five years from the closing or until the investors have converted
or
exercised and sold the securities issued in the private placement or (ii)
from
having debt in an amount greater than twice our EBITDA until three years
from
the closing or until 90% of the securities have been converted or exercised
and
sold. The investors in the private placement also have a right of first
refusal
on future financings. These provisions may make it difficult for us to
raise
money for our operations or for acquisitions.
The
discussion and analysis of our financial condition and results of operations
is
based upon our financial statements which have been prepared in accordance
with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments
that
affect the reported amounts of assets and liabilities. On an on-going basis,
we
evaluate our estimates including the allowance for doubtful accounts, the
salability and recoverability of our products, income taxes and contingencies.
We base our estimates on historical experience and on other assumptions
that we
believe to be reasonable under the circumstances, the results of which
form our
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from
these estimates under different assumptions or conditions.
22
Property
and equipment are evaluated for impairment whenever indicators of impairment
exist. Accounting standards require that if an impairment indicator is
present,
we must assess whether the carrying amount of the asset is unrecoverable
by
estimating the sum of the future cash flows expected to result from the
asset,
undiscounted and without interest charges. If the recoverable amount is
less
than the carrying amount, an impairment charge must be recognized, based
on the
fair value of the asset.
Franchise
rights, which we acquired from third parties, are amortized over the lives
of
the rights agreements, which is five years. We evaluate the carrying value
of
the franchise rights during the fourth quarter of each year and between
annual
evaluations if events occur or circumstances change that would more likely
than
not reduce the fair value of the intangible asset below its carrying amount.
There were no impairments recorded during the year ended December 31,
2007.
As
part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes. This process involves estimating
our
current tax exposure together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities. We must then
assess
the likelihood that our deferred tax assets will be recovered from future
taxable income, and, to the extent we believe that recovery is not likely,
we
must establish a valuation allowance. To the extent that we establish a
valuation allowance or increase this allowance in a period, we must include
a
tax provision or reduce our tax benefit in the statements of operations.
We use
our judgment to determine our provision or benefit for income taxes, deferred
tax assets and liabilities and any valuation allowance recorded against
our net
deferred tax assets. We believe, based on a number of factors including
historical operating losses, that we will not realize the future benefits
of a
significant portion of our net deferred tax assets and we have accordingly
provided a full valuation allowance against our deferred tax assets. However,
various factors may cause those assumptions to change in the near
term.
We
cannot
predict what future laws and regulations might be passed that could have
a
material effect on our results of operations. We assess the impact of
significant changes in laws and regulations on a regular basis and update
the
assumptions and estimates used to prepare our financial statements when
we deem
it necessary.
We
have
determined the significant principles by considering accounting policies
that
involve the most complex or subjective decisions or assessments. Our most
significant accounting policies are those related to revenue recognition
and
deferred revenue.
Revenue
is recognized in accordance with Staff Accounting Bulletin No. 104, Revenue
Recognition, which states that revenue should be recognized when the following
criteria are met: (1) persuasive evidence of an arrangement exists;
(2) the service has been rendered; (3) the selling price is fixed or
determinable; and (4) collection of the resulting receivable is reasonably
assured. We believe that these criteria are satisfied upon customers’ download
of prepaid study materials. Prepaid debit cards allow our subscribers to
purchase a predetermined monetary amount of download materials posted on
our
website. Prepaid service contracts are amortized to income on a straight
line
basis over the length of the service contract. These service contracts
allow the
user to obtain materials for a designed period of time. At the time that
the
prepaid debit card is purchased, the receipt of cash is recorded as deferred
revenue. Revenues are recognized in the month when services are actually
rendered. Unused value relating to debit cards is recognized as revenues
when
the prepaid debit card has expired. Revenue from advertising on our website
is
recognized when the advertisement is run. Since advertising customers are
billed
monthly, there are no unearned advertising revenues.
Prepaid
expenses are primarily comprised of advance payments made for services
to
teachers for on-line materials and video and prepaid rent.
Deferred
revenue includes subscriber prepayments and education fee prepayments.
Subscriber prepayments represents deferred revenue for the purchase of
debit
cards used to pay for the on-line downloading of education materials, including
testing booklets, supplemental materials and teaching video clips. We value
the
sales based on the actual occurrence of customer download. Therefore, the
spare
time between the purchase of debit cards and actual download is recorded
under
advances on accounts as deferred or unearned revenues. Once the download
takes
place, the amount is then transferred from advances on accounts to sales.
Education fee prepayments represent tuition payments and payments for service
contracts which are amortized over their respective terms.
We
do not
have any stock option or other equity-based incentive plans for our officers,
directors or key employees. To the extent that we do adopt such plans in
the
future, such grants will be valued at the granting date and expensed over
the
applicable vesting period as required by Statement of Financial Accounting
Standard No. 123(revised 2004), “Share-Based Payments.”
23
New
Accounting Pronouncements
In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(“SFAS No.157”). SFAS No. 157 addresses how companies should measure fair value
when they are required to use a fair value measure for recognition or disclosure
purposes under GAAP. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15,
2007,
with earlier adoption permitted. We anticipate adopting this standard as
of
January 1, 2008. Management has not determined the effect, if any, the
adoption
of this statement will have on our financial condition or results of
operations.
In
September 2006, the FASB issued Statement No. 158, “Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”), an
amendment of FASB Statements No. 87, 88, 106 and132(R). SFAS No. 158 requires
(a) recognition of the funded status (measured as the difference between
the
fair value of the plan assets and the benefit obligation) of a benefit
plan as
an asset or liability in the employer's statement of financial position,
(b)
measurement of the funded status as of the employer's fiscal year-end with
limited exceptions, and (c) recognition of changes in the funded status
in the
year in which the changes occur through comprehensive income. The requirement
to
recognize the funded status of a benefit plan and the disclosure requirements
are effective as of the end of the fiscal year ending after December 15,
2006.
The requirement to measure the plan assets and benefit obligations as of
the
date of the employer's fiscal year-end statement of financial position
is
effective for fiscal years ending after December 15, 2008. This Statement
has no
current applicability to our financial statements. Management adopted this
Statement on January 1, 2007 and our adoption of SFAS No. 158 did not have
a
material impact on our financial position, results of operations, or cash
flows.
In
February 2007, the FASB issued Statement No. 159 “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS 159). This statement permits
companies to choose to measure many financial assets and liabilities at
fair
value. Unrealized gains and losses on items for which the fair value option
has
been elected are reported in earnings. SFAS159 is effective for fiscal
years
beginning after November 15, 2007. The Company is currently assessing the
impact
of SFAS 159 on its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) will change the accounting for
business combinations. Under SFAS No. 141(R), an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in
a
transaction at the acquisition-date fair value with limited exceptions.
SFAS
No. 141(R) will change the accounting treatment and disclosure for certain
specific items in a business combination. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is
on or
after the beginning of the first annual reporting period beginning on or
after
December 15, 2008. SFAS 141(R) will impact us in the event of any future
acquisition.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. We do not believe that SFAS 160
will have a material impact on our consolidated financial
statements.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement
No. 133” (“FAS 161”). FAS 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to
provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. The guidance
in FAS
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
encouraged. This Statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. We are currently assessing
the impact of FAS 161.
Item
7.
Financial Statements
Refer
to
pages F-1 through F-22
24
Item
8A(T). Controls and Procedures
Disclosure
Controls and Procedures
Our
management, with the participation of our Chief Executive Officer/President
and
our Chief Financial Officer/Principal Accounting Officer (collectively,
the
"Certifying Officers") are responsible for establishing and maintaining
our
disclosure controls and procedures. They have evaluated the effectiveness
of our
disclosure controls and procedures (as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) as of the end of the period covered by this report. Based on
such evaluation, the Certifying Officers have concluded that, as of the
end of
such period, our disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act. Our Certifying Officers have further concluded that, as of the end
of such
period, our controls and procedures are effective in ensuring that information
required to be disclosed by us in the reports that we file or submit under
the
Exchange Act is accumulated and communicated to our Chief Executive Officer
and
Chief Financial Officer, or persons performing similar functions, as appropriate
to allow timely decisions regarding required disclosure.
Internal
Control over Financial Reporting
Management’s
Annual Report on Internal Control Over Financial Reporting.
Our
management, with the participation of our Certifying Officers, is responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence
and
compliance and is subject to lapses in judgment and breakdowns resulting
from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented
or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, the risk. Also, projections
of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the
degree of compliance with the policies or procedures may deteriorate. Under
the
supervision and with the participation of our management, with the participation
of our Certifying Officers, we have conducted an evaluation of the effectiveness
of our internal control over financial reporting as of December 31, 2007,
based
upon the framework in Internal
Control―― Integrated Framework issued
by
the
Committee of Sponsoring Organizations of the Treadway Commission.
Based
on this evaluation, management has concluded that our internal control
over
financial reporting was effective as of December 31, 2007. This Annual
Report on
Form 10-KSB does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting. Our
management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this Annual
Report.
Changes
in Internal Control Over Financial Reporting.
No
change in our internal control over financial reporting occurred during
the
fiscal quarter ended December 31, 2007 that has materially affected, or
is
reasonably likely to materially affect, our internal control over financial
reporting.
Item
8.B.
Other Information
25
PART
III
Item
9.
Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with
Section
16(a) of the Exchange Act
Directors
and Executive Officers
The
following persons are our directors and executive officers:
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
|
Xiqun
Yu
|
|
40
|
|
Chairman
of the Board of Directors, Chief Executive Officer and President
|
|
Chunqing
Wang
|
|
48
|
|
Vice
Chairman of the Board of Directors and Chief Financial
Officer
|
|
James
Hsu 1,2
|
|
55
|
|
Director
|
|
Ansheng
Huang2
|
|
61
|
|
Director
|
|
Liansheng
Zhang 1,2
|
|
66
|
|
Director
|
1
Member of the audit committee.
2
Member of the compensation committee.
Mr.
Yu
has been our Chairman and Chief Executive Officer since the organization
of our
subsidiaries in 2001. He has more than 16 years of experience in senior
management with several Northern China based enterprises. He was responsible
for
marketing, strategic planning and designing for many of these corporations.
Mr.
Yu previously serves ad the chief executive officer of RETONG.COM, and
chairman
of Harbin Zhonghelida Technology Corporation, Heilongjiang Retong Advertising
Co., Ltd. and Heilongjiang Wantong Telecommunication Project Co., Ltd.
Mr. Yu is
a member of the Council of China Harbin Advertising Association and is
a
Director of the China Internet Network Association. Mr. Yu received a degree
in Business Administration from the Harbin University of Science and
Technology in 1989.
Mr.
Wang
has been our Vice C and Chief Financial Officer since 2004. Mr. Wang holds
a
certificate of Senior Accountant in China. He has extensive experience
in
financial management. Mr. Wang served as CFO of Harbin Tian Run Group from
1990
through 2004. From 1986 through 1990, Mr. Wang was a planning department
head at
the Harbin Bureau of Finance. Mr. Wang served as a financial director for
Harbin
Battery Manufacturing Company from 1981 through 1986. Mr. Wang is a graduate
in
industrial accounting from the Harbin College of Economic Carde
Management.
Mr.
Hsu
has been a Director since October 2007. Mr. Hsu has been the president
of Global
Education Initiatives, Inc., a company which develops higher education
collaboration programs between the U.S., Taiwan and China, since 1997.
He has
also been the chief executive officer of Greater New York Home Care Systems,
Inc., a company which provides infusion and other health care services
to
patients in their homes, since 1998. He is a founder of HeritageEast, a
company
which promotes cultural exchange between the U.S. and China, and YYnet
Communications, a company which specializes in information system services.
He
received B.A. in Economics from Taiwan University, M.A in Management Science
from Yale University and Ph.D. in Industrial and Operations Engineering
from the
University of Michigan.
Mr.
Huang
has been a Director since October 2007. Mr. Huang has been the training
director
of Vocational Education Equipment Commission at the Chinese Vocational
Education
Association since 1996. From 1991 through 2006, Mr. Huang was the division
director of technology development at the China Education Instruction and
Equipment Corporation of the Chinese Ministry of Education. Mr. Huang graduated
from the Department of Beijing Institute of Education with a Bachelor’s Degree
in Physics.
Mr.
Zhang
has been a Director since October 2007. Mr. Zhang currently serves as Pluralism
Director at the Heilongjiang provincial Base of Research and Experiment
in
Polymer Science & Technology since July 1990. Mr. Zhang has also been
appointed as a People’s Representative during the 9th
(1998)
and 10th
(2003)
National People’s Congress of China for his extraordinary achievement in Polymer
Science and Technology. Mr. Zhang received a Bachelor’s Degree in Organic
Chemistry from the Heilongjiang University and Master’s Degree in Polymer
Chemistry at the Jillin University. Mr. Zhang was also a visiting scholar
at the
University of Bradford.
26
Section
16(a) Beneficial Ownership Reporting Compliance
Under
Section 16(a) of the Exchange Act, all executive officers, directors, and
each
person who is the beneficial owner of more than 10% of the common stock
of a
company that files reports pursuant to Section 12 of the Exchange Act,
are
required to report the ownership of such common stock, options, and stock
appreciation rights (other than certain cash-only rights) and any changes
in
that ownership with the SEC. Our current officers, directors and former
10%
beneficial owner have each filed one late Form 3, with each report disclosing
such officer’s, director’s or former 10% beneficial owner’s shareholdings as of
the date such report should have initially been filed with the SEC and
a former
10% beneficial owner has filed one late Form 5, with such report relating
to
four gift transactions that took place in 2006.
Code
of Ethics
We
have
not adopted a code of business conduct and ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer
or
controller, or persons performing similar functions because we are a small
company in which management oversees or has contact with all employees.
As a
result, we believe we are able to communicate our ethical and business
expectations effectively on an informal and personal basis without a written
code of ethics. However, we expect to develop a written code of business
conduct
and ethics in fiscal 2008 in order to meet the requirements of listing
on the
NASDAQ Capital Markets.
Nominating
Committee
We
do not
have in place any formal procedures by which security holders may recommend
nominees to our Board of Directors.
Committees
of the Board of Directors
Our
Board
of Directors has two committees, which were formed in October 2007 - the
audit
committee and the compensation committee. Prior to October 2007, our entire
Board of Directors acted as the audit and compensation committee for the
purpose
of overseeing the accounting and financial reporting processes, and audits
of
the financial statements of our company.
The
members of the audit committee are James Hsu and Liansheng Zhang. We are
in the
process of searching for a third independent board member who will serve
on the
audit committee and who will meet the qualification of and serve as the
audit
committee’s “financial expert” as that term is defined in Item 407(d)(5) of
Regulation S-B. Although we do not presently have an audit committee charter,
we
intend to adopt a charter in fiscal year 2008.
The
members of the compensation committee are James Hsu, Ansheng Huang and
Liansheng
Zhang.
Item
10.
Executive Compensation
The
following table sets forth the aggregate compensation paid by us to our
Chief
Executive Officer and President. Except with respect to our Chief Executive
Officer and President, no other executive officers’ or employees’ total
compensation exceeded $100,000 during the year ended December 31, 2007.
Summary
Compensation Table*
|
Name and Principal Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
|
Nonqualified
Deferred
Compensation
Earnings
|
All other
Compensation
|
Total
|
|||||||||||||||||||
|
Xiqun Yu, Chief Executive
Officer and President
|
2007
|
$
|
15,000
|
$
|
-
|
-
|
|
-
|
|
-
|
|
-
|
-
|
$
|
15,000
|
|||||||||||||
|
|
2006
|
$
|
65,500
|
$
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
-
|
$
|
65,500
|
||||||||||||
*
Personal benefits received by our Chief Executive Officer and President
are
valued below the levels which would otherwise require disclosures under
the
rules of the SEC.
27
We
do not
currently provide any contingent or deferred forms of compensation arrangements,
annuities, or retirement benefits to our executive officers or
directors. We
have
entered into a five year employment agreement with each of our Chief Executive
Officer and our Chief Financial Officer, each of which terminate on August
9,
2009. Under the terms of the employment agreement, our Chief Executive
Officer
is paid $15,000 per annum and our Chief Financial Officer is paid $10,000
per
annum. Pursuant to the employment agreements, the executives are also entitled
to a working clothes subsidiary, insurance, medical benefits, unemployment
insurance and other benefits pursuant to our standard policies. A copy
of the
employment agreements are filed as exhibits to this Annual Report.
As
of
December 31, 2007, we have no standard arrangements under which we will
compensate our directors for their services provided to us. However, we
may
establish such arrangements in the future.
Benefit
Plans
We
do not
have any stock option plan, stock bonus plan, profit sharing plan, or similar
plans for the benefit of our executive officers, directors or employees.
However, we may establish such plans in the future.
Board
Compensation
Our
directors did not receive any compensation in their capacity as directors
during
the fiscal years ended December 31, 2007 and 2006.
Director
and Officer Indemnification and Limitations on Liability
Article
VIII of our Bylaws limits the liability of our directors, officers and
employees
to the fullest extent permitted by North Carolina law. Consequently, our
directors and officers may not be personally liable for monetary damages
regarding their duties as directors.
Section
16:21, et seq. of the North Carolina Business Corporation Act (the “Act”), as
amended, provides for broad indemnification of directors, officers and
employees
subject to certain exceptions. A North Carolina corporation may indemnify
an
individual who is made a party to a proceeding if he conducted himself
in good
faith, and he reasonably believed that his conduct was in its best interests
and
that his conduct was at least not opposed to its best interests. However,
a
corporation can not indemnify in connection with a proceeding by or in
the right
of the corporation in which a director was adjudged liable to the corporation
or
any other proceeding charging improper personal benefit to him. Section
17:12 of
the Act provides for mandatory indemnification of officers to be the same
extent
as a director, unless on account of his activities which were, at the time
taken, known or believed by him to be clearly in conflict with the best
interest
of the corporation.
ITEM
11.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
PRINCIPAL
STOCKHOLDERS
The
following tables set forth the ownership, as of March 13, 2008, of our
common
stock (a) by each person known by us to be the beneficial owner of more
than 5%
of our outstanding common stock, and (b) by each of our directors, executive
officers and our officers and directors as a group. To the best of our
knowledge, all persons named have sole voting and investment power with
respect
to such shares, except as otherwise noted.
28
|
Name and Address
|
Number of
Shares
|
Percentage of
Outstanding
Shares
|
|||||
|
5%
Stockholder
|
|||||||
|
Guilan
Feng
No.
5 Zy Zhao Yang Wei
Hong
Shan Street
Shang
Gan Ling Dist.
Yi
Chun City
Heilongjiang
150090 P. R. China
|
1,333,334
|
6.2
|
%
|
||||
|
Executive
Officers and Directors
|
|||||||
|
Xiqun
Yu (1)
58
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
P.R.
China 150090
|
12,683,335
|
(1)
|
59.01
|
%
|
|||
|
Chunqing
Wang
58
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
P.R.
China 150090
|
1,000
|
*
|
|||||
|
James
Hsu
58
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
P.R.
China 150090
|
0
|
0
|
%
|
||||
|
Ansheng
Huang
58
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
P.R.
China 150090
|
0
|
0
|
%
|
||||
|
Liansheng
Zhang
58
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
P.R.
China 150090
|
0
|
0
|
%
|
||||
|
Officers
and Directors as a group as a group (five individuals)
|
12,684,335
|
(1)
|
59.01
|
%
|
|||
*
Less than 1%.
|
(1)
|
Mr.
Yu has placed 944,445 shares of his common stock in escrow pursuant
to the
securities purchase agreement relating to our May 2007 private
placement,
subject to our meeting certain levels of pre-tax income for the
year ended
December 31, 2007. These shares are included in the number of
shares
beneficially owned by Mr. Yu. Since we have achieved the pre-tax
income
per share milestone set forth in the securities purchase agreement,
Mr.
Yu’s shares will be promptly released from escrow and returned to
him.
|
Except
as
otherwise indicated each person has the sole power to vote and dispose
of all
shares of common stock listed opposite his name. Each person is deemed
to own
beneficially shares of common stock which are issuable upon exercise of
warrants
or upon conversion of convertible securities if they are exercisable or
convertible within 60 days of February 15, 2008. None of the persons named
in
the table above own any options or convertible securities.
Barron
Partners, LP owns shares of Series A Preferred Stock and warrants to purchase
shares of our common stock which, if fully converted and exercised, would
result
in the ownership, by Barron Partners, LP, of more than 5% of our outstanding
common stock. However, the Series A Preferred Stock may not be converted
and the
warrants may not be exercised if such conversion or exercise would result
in
Barron Partners LP and its affiliates owning more than 4.9% of our outstanding
common stock. This limitation may not be waived.
We
have
not adopted any equity compensation plans and have no securities authorized
for
issuance under any such plans.
ITEM
12.
Certain Relationships and Related Transactions, and Director
Independence
Related
Transactions with between us and Xiqun Yu
In
December 2004, in connection with the consummation of the transactions
contemplated by the Plan of Exchange between us, Harbin Zhong He Li Da
and Duane
Bennett, our former Chairman of the Board and controlling stockholder,
Xiqun Yu,
our principal stockholder, Chief Executive Officer and Director, loaned
us
$100,000 at an interest rate of 9% per annum. The loan was made to enable
us to
pay our expenses in connection with the Plan of Exchange in United States
dollars. At December 31, 2007, the loan had been repaid in full.
29
On
September 29, 2006, we raised $1,530,000 from the issuance and sale of
secured
promissory notes and warrants to purchase 1,530,000 shares of our common
stock
for an exercise price per share of $1.50. Pursuant to a Guarantee Agreement,
dated as of September 29, 2006, Mr. Yu personally guaranteed the payment
of such
loans (along with any accrued interest) and, pursuant to a Stock Pledge
Agreement, dated as of September 29, 2006, pledged 2,619,866 shares of
common
stock of our Company owned by him as collateral for such loans. The notes,
which
bore interest at 6% per annum, had a maturity date of March 29, 2007 and
have
been paid in full in fiscal 2007. Upon payment in full of the notes by
us, Mr.
Yu’s obligations under the Guarantee Agreement and Stock Pledge Agreement
were
discharged.
Pursuant
to the securities purchase agreement relating to our May 2007 private placement,
Mr. Yu placed in escrow 944,445 shares of common stock pursuant to the
following
provisions. If our 2007 pre-tax income was less than $0.19941 per share,
on a
fully-diluted basis (the “Target Number”), a percentage shortfall was to be
determined by dividing the amount of the shortfall by the Target Number.
If the
percentage shortfall was equal to or greater than 33 1/3%, the shares of
common
stock Mr. Yu placed into escrow were to be cancelled by us. If the
percentage shortfall was less than 33 1/3%, the escrow agent was to deliver
to
us for cancellation such number of shares of common stock as would have
been
determined by multiplying the percentage shortfall by 944,445 shares and
deliver
to Mr. Yu the balance of such shares. Since we have achieved the pre-tax
income per share milestone set forth in the securities purchase agreement,
Mr.
Yu’s shares will be promptly released from escrow and returned to
him.
Other
Related Transactions
One
of
our executive officers, rents, in his name two properties in Beijing, China
on
our behalf. Our executive officer leases from Beijing Yi De Zhi Bang Technology
Limited office space located at Anleli Road A, 4th Floor, Building B, No.
69,
Chongwen District, Beijing, China. The lease has a one year term, commencing
on
October 1, 2007 and terminating on September 30, 2008. The rent for this
facility is RMB480,000 per year (approximately US$67,700). The executive
officer
also leases from Mr. Chen Xu a dormitory space located at Yongwai Boulevard,
Tiantian House, Building No. 3, Unit 6, Room 801, Chongwen District, Beijing,
China. The term of this lease is three years, commencing on February 1,
2006 and
terminating on January 31, 2009. The rent for this facility is RMB120,000
per
year (approximately US$16,925.25).
Independent
Directors
Our
Board
of Directors is currently comprised of a majority of independent directors,
as
such term is defined by the rules of the Nasdaq Stock Market, and such
independent directors are James Hsu, Ansheng Huang and Liansheng Zhang.
However,
our audit committee in comprised of only two independent directors - Messrs.
Hsu
and Zhang. We are currently looking for a third independent
director.
ITEM13.
Exhibits
|
3.1
|
Articles
of Incorporation filed December 2, 1996 in the State of North
Carolina are
incorporated herein by reference to Exhibit 3.1 to the Form SB-2
Registration Statement of the Company (File No. 333-101167) filed
on
November 13, 2002.
|
|
3.2
|
Articles
of Amendment Business Corporation dated May 23, 2002 are incorporated
herein by reference to Exhibit 3.2 to the Form SB-2 Registration
Statement
of the Company (File No. 333-101167) filed on November 13,
2002.
|
|
3.3
|
Articles
of Amendment Business Corporation filed November 17, 2004, changing
the
name of the Company from ABC Realty Co. to China Education Alliance,
Inc.
is incorporated herein by reference to Exhibit 3.3 filed with
the
Company’s Form 10-KSB annual report for its fiscal year ended December
31,
2005.
|
|
3.4
|
Articles
of Share Exchange of the Company filed with the Department of
The
Secretary of State of the State of North Carolina on December 30,
2004 are incorporated herein by reference to Exhibit 3.1 filed
with the
Company’s Form 10-QSB quarterly report for its quarter ended September
30,
2007 filed with the SEC on November 14, 2007.
|
|
|
|
|
3.5
|
Articles
of Amendment to Articles of Incorporation filed with the Department
of The
Secretary of State of the State of North Carolina on October 4, 2007
are incorporated herein by reference to Exhibit 3.2 filed with
the
Company’s Form 10-QSB quarterly report for its quarter ended September
30,
2007 filed with the SEC on November 14, 2007.
|
|
3.6
|
ByLaws
of the Company are incorporated herein by reference to Exhibit
3.3 to the
Form SB-2/A Registration Statement of the Company filed on February
7,
2003 (File No. 333-101167).
|
|
Stock
Transaction Agreement between and among the Company and the former
owners
of Harbin Zhonghelida Educational Technology Co., Ltd., a wholly
owned
subsidiary of the Company is incorporated herein by reference
to Exhibit
10.3 to the Company’s Form 10-KSB for the year ended December 31, 2005
filed with the SEC on April 17,
2006.
|
30
|
10.2
|
Organization
Constitution of Heilongjiang Zhonge Education Training Center
dated June
15, 2005, a wholly owned subsidiary of the Company is incorporated
herein
by reference to Exhibit 10.4 to the Company’s Form 10-KSB for the year
ended December 31, 2005 filed with the SEC on April 17,
2006.
|
|
Business
licenses of Harbin Zhonghelinda Educational Technology Company
Limited, a
wholly owned subsidiary of the Company is incorporated herein
by reference
to Exhibit 10.5 to the Company’s Form 10-KSB for the year ended
December 31, 2005 and filed with the SEC on April 17,
2006.
|
|
|
10.4
|
Product
Commission Process Contract dated March 2, 2006, with Tianjin
Huishi
Printing Products Co., Ltd. is incorporated herein by reference
to Exhibit
10.6 to the Company’s Form 10-KSB for the fiscal year ended December 31,
2005 filed with the SEC on April 17, 2006.
|
|
10.5
|
Consulting
Agreement with Conceptual Management Limited dated March 20,
2006 is
incorporated herein by reference to Exhibit 10.8 to the Company’s Form
10-KSB for the fiscal year ended December 31, 2005 filed with
the SEC on
April 17, 2006.
|
|
10.6
|
Form
of Secured Promissory Note dated September 29, 2006, by the Company
is
hereby incorporated herein by reference to Exhibit 10.1 to the
Form 8-K
current report of the Company filed with the SEC on November
1,
2006.
|
|
10.7
|
Stock
Pledge Agreement dated September 29, 2006, between Xiqun Yu and
SBI
Advisors, LLC, as Agent is hereby incorporated herein by reference
to
Exhibit 10.2 to the Form 8-K current report of the Company filed
with the
SEC on November 1, 2006.
|
|
10.8
|
Guarantee
Agreement dated as of September 29, 2006, among Harbin Zhong
He Li Da Jiao
Yu Ke Ji You Xian Gong Si, Heilongjiang Zhonghe Education Training
Center,
Harbin Zhonghelida Educational Technology Company Limited, Xinqun
Yu, and
SBI Advisors, LLC, as Agent is hereby incorporated herein by
reference to
Exhibit 10.3 to the Form 8-K current report of the Company filed
with the
SEC on November 1, 2006.
|
|
10.9
|
Investor
Relations Agreement dated November 1, 2006, between the Company
and Taylor
Rafferty Associates, Inc. is incorporated herein by reference
to Exhibit
10.3 to the Form 10-QSB quarterly report of the Company for the
period
ended June 30, 2006.
|
|
|
|
|
10.10
|
Purchase
Contract dated December 28, 2006, between Harbin Zhonghelida
Education
&Technology Co., Ltd. and Harbin Nangang Compass Computer Training
School is incorporated herein by reference to Exhibit 10.11 to
the
Company’s Form 10-KSB for the fiscal year ended December 31, 2006 filed
with the SEC on April 2, 2007.
|
|
10.11
|
Securities
Purchase Agreement dated as of May 8, 2007, among the Company,
Barron
Partners, LP and the other investors named therein is hereby
incorporated
herein by reference to Exhibit 99.1 to the Form 8-K of the Company
filed
with the SEC on May 15, 2007.
|
|
10.12
|
3%
Convertible Note issued to Barron Partners, LP is hereby incorporated
herein by reference to Exhibit 99.2 to the Form 8-K of the Company
filed
with the SEC on May 15, 2007
|
|
10.13
|
3%
Convertible Note issued to Eos Holdings is hereby incorporated
herein by
reference to Exhibit 99.3 to the Form 8-K of the Company filed
with the
SEC on May 15, 2007.
|
|
10.14
|
3%
Convertible Note issued to Hua-Mei 21st Century Partners, LP
is hereby
incorporated herein by reference to Exhibit 99.4 to the Form
8-K of the
Company filed with the SEC on May 15, 2007.
|
|
10.15
|
Registration
Rights Agreement, dated May 8, 2007, among the Company, Barron
Partners,
LP and the other investors named therein is hereby incorporated
herein by
reference to Exhibit 99.5 to the Form 8-K of the Company filed
with the
SEC on May 15, 2007.
|
|
10.16
|
Closing
Escrow Agreement, dated May 8, 2007, among the Company, Barron
Partners,
LP, the other investors named therein and the escrow agent named
therein
is hereby incorporated herein by reference to Exhibit 99.6 to
the Form 8-K
of the Company filed with the SEC on May 15,
2007.
|
31
|
10.17
|
Letter
agreement dated May 8, 2007 between the Company and SBI Advisors
LLC, and
related payment letter is hereby incorporated herein by reference
to
Exhibit 99.7 to the Form 8-K of the Company filed with the SEC
on
May 15, 2007.
|
|
10.18
|
Amendment
dated as of May 23, 2007 to the Securities Purchase Agreement
dated May 8,
2007, among the Company, Barron Partners, LP and the other investors
named
therein is hereby incorporated herein by reference to Exhibit
99.1 to the
Form 8-K of the Company filed with the SEC on June 7,
2007.
|
|
10.19
|
3%
Convertible Note issued to Barron Partners, LP is hereby incorporated
herein by reference to Exhibit 99.2 to the Form 8-K of the Company
filed
with the SEC on June 7, 2007.
|
|
|
|
|
10.20
|
Closing
Escrow Agreement, dated May, 2007, among the Company, Barron
Partners, LP,
the other investors named therein and the escrow agent named
therein is
hereby incorporated herein by reference to Exhibit 99.3 to the
Form 8-K of
the Company filed with the SEC on June 7, 2007.
|
|
10.21
|
Letter
Agreement dated November 30, 2007, among the Company, Barron
Partners, LP
and the other investors named therein is incorporated herein
by reference
to Exhibit 10.22 to the Form SB-2/A Registration Statement of
the Company
(File No. 333-146023) filed with the SEC on December 7,
2007.
|
|
10.22
|
Extracts
of Office Rental Agreement dated January 28, 2006 by and between
Vocational Education Organization Service Centre and Beijing
Hua Yu Hui
Zhong Technology Development Co., Limited.
|
|
10.23
|
Extracts
of Dormitory Rental Agreement dated January 29, 2006 by and between
Chen
Xu and Xiqun Yu.
|
|
|
|
|
10.24
|
House
Lease Contract dated January 29, 2006 by and between Beijing
Yi De Zhi
Bang Technology Limited and Beijing Huayuhuizhong Technology
Development
Co., Ltd.
|
|
|
|
|
10.25
|
Classroom
Lease Contract by and between Harbin Songdong OA Co., Ltd and
Heilongjiang
Zhonghe Education Training Center
|
|
10.26
|
Classroom
Lease Contract by and between Harbin Songdong OA Co., Ltd and
Heilongjiang
Zhonghe Education Training Center
|
|
10.27
|
Employment
Contract between Zhonghelida Education Technology Co., Ltd and
Xiqun Yu
dated August 9, 2004
|
|
10.28
|
Employment
Contract between Zhonghelida Education Technology Co., Ltd and
Chunqing
Wang dated August 9, 2004
|
|
16.1
|
Letter
dated December 19, 2007 from Murrell, Hall, McIntosh & Co. PLLP to the
SEC is incorporated herein by reference to Exhibit 16.1 to the
Form 8-K of
the Company filed with the SEC on December 19, 2007.
|
|
16.2
|
Letter
dated December 19, 2007 from the Company to Murrell, Hall, McIntosh
&
Co. PLLP is incorporated herein by reference to Exhibit 16.2
to the Form
8-K of the Company filed with the SEC on December 19,
2007.
|
|
21.
|
Subsidiaries
|
|
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm - Sherb & Co.,
LLP
|
|
23.2
|
Consent
of Independent Registered Public Accounting Firm - Murrell, Hall,
McIntosh
& Co., PLLP
|
|
31.1
|
Certification
of Xiqun Yu
|
|
31.2
|
Certification
of Chunqing Wang
|
|
|
|
|
32
|
Certification
of Xiqun Yu and Chunqing Wang
|
32
ITEM
14.
Principal Accountant Fees and Services
We
were
billed by Murrell, Hall, McIntosh & Co., PLLP, and Sherb & Co., LLP,
each independent public accounting firm, for the following professional
services
they performed for us during the fiscal years ended December 31, 2006 and
2007
as set forth in the table below.
|
Name
|
Audit
Fees
|
Audit-Related Fees
|
Tax
Fees
|
All
Other Fees
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Murrell,
Hall, McIntosh & Co., PLLP
|
|
|
|
|
|||||||||
|
December
31, 2006
|
$
|
20,000
|
-0-
|
-0-
|
-0-
|
||||||||
|
December
31, 2007
|
$
|
18,000
|
-0-
|
-0-
|
-0-
|
||||||||
|
|
|||||||||||||
|
Sherb
& Co., LLP
|
|||||||||||||
|
December
31, 2006
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||
|
December
31, 2007
|
$
|
60,000
|
|||||||||||
In
October 2007 we established a standing audit committee. Prior that that
time,
our full Board of Directors performed all functions of an audit committee,
including the pre-approval of the scope and cost of all audit and non-audit
services before our Board of Directors engaged an accountant. With respect
to
the fiscal year ended December 31, 2006 and 2007, all of the services rendered
to us by our independent registered public accountants prior to the
establishment of our audit committee, were pre-approved by our Board of
Directors, and after the establishment of our audit committee, were pre-approved
by our audit committee.
33
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders
and Directors
China
Education Alliance, Inc.
We
have
audited the accompanying consolidated balance sheets of China Education
Alliance, Inc. and its Subsidiaries as of December 31, 2007 and the related
consolidated statements of operations, stockholders’ equity and cash flows for
the year ended December 31, 2007. These consolidated financial statements
are
the responsibility of the company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with generally accepted auditing standards
as
established by the Auditing Standards Board (United States) and in accordance
with the auditing standards of the Public Company Accounting Oversight
Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether the financial statements are
free of
material misstatement. The Company is not required to have, nor were we
engaged
to perform, and audit of its internal control over financial reporting.
Our
audit included consideration of internal control over financial reporting
as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purposes of expressing an opinion on the effectiveness
of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes
assessing the accounting principles used and significant estimates made
by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of China Education Alliance,
Inc. as
of December 31, 2007 and the results of its operations and its cash flows
for
the year ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States.
|
/s/
Sherb & Co., LLP
|
||
|
Certified
Public Accountants
|
||
|
Boca
Raton, Florida
|
||
F-1
Report
of Independent Registered Public Accounting Firm
We
have
audited the accompanying consolidated balance sheet of China Education
Alliance,
Inc. as of December 31, 2006 and the related consolidated statement of
operations, stockholders’ equity, and cash flows for the year ended
December 31, 2006. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of China Education Alliance, Inc. as of December 31, 2005, were audited
by other
auditors whose report dated March 28, 2006, expressed an unqualified
opinion on
those statements.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement.
The Company
is not required to have, nor were we engaged to perform, an audit of
its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the
purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An
audit also
includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well
as
evaluating the overall financial statement presentation. We believe that
our
audit provides a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the consolidated financial position of China Education
Alliance, Inc. as of December 31, 2006 and the results of its consolidated
operations and its consolidated cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United
States of
America.
March
16,
2007
Oklahoma
City, Oklahoma
F-2
|
China
Education Alliance, Inc. and Subsidiaries
|
||||
|
Consolidated
Balance Sheet
|
||||
|
December
31, 2007
|
||||
|
ASSETS
|
||||
|
Current
Assets
|
||||
|
Cash
and cash equivalents
|
$
|
11,778,954
|
||
|
Advances
to related parties
|
108,536
|
|||
|
Prepaid
expenses
|
1,612,779
|
|||
|
Total
current assets
|
13,500,269
|
|||
|
Property
and equipment, net
|
6,186,824
|
|||
|
Franchise
rights
|
579,864
|
|||
|
Goodwill
|
43,696
|
|||
|
$
|
20,310,653
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||
|
Current
Liabilities
|
||||
|
Accounts
payable and accrued expenses
|
$
|
423,109
|
||
|
Deferred
revenues
|
1,245,507
|
|||
|
Total
current liabilities
|
1,668,616
|
|||
|
Minority
interest
|
-
|
|||
|
Commitments
and Contingency
|
-
|
|||
|
Stockholders'
Equity
|
||||
|
Preferred
stock ($0.001 par value, 20,000,000 shares authorized,
|
||||
|
9,397,645
issued and outstanding, aggregate liquidation preference
|
||||
|
of
$3,383,152)
|
3,677,944
|
|||
|
Common
stock ($0.001 par value, 150,000,000 shares authorized,
|
||||
|
19,409,830
issued and outstanding)
|
19,410
|
|||
|
Additional
paid-in capital
|
6,378,110
|
|||
|
Accumulated
other comprehensive income
|
1,243,541
|
|||
|
Retained
earnings
|
7,323,032
|
|||
|
Total
stockholders' equity before related parties
offset
|
18,642,037
|
|||
|
$
|
20,310,653
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-3
China
Education Alliance, Inc. and Subsidiaries
Consolidated
Statements of Operations
|
Year
Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Revenues
|
|||||||
|
Online
education revenues
|
$
|
13,623,707
|
$
|
6,620,519
|
|||
|
Training
center revenues
|
3,699,827
|
1,703,954
|
|||||
|
Total
revenue
|
17,323,534
|
8,324,473
|
|||||
|
Cost
of Goods Sold
|
|||||||
|
Online
education costs
|
2,393,945
|
1,766,442
|
|||||
|
Training
center costs
|
1,147,364
|
797,448
|
|||||
|
Total
cost of goods sold
|
3,541,309
|
2,563,890
|
|||||
|
Gross
Profit
|
|||||||
|
Online
education gross profit
|
11,229,762
|
4,854,077
|
|||||
|
Training
center gross profit
|
2,552,463
|
906,506
|
|||||
|
Total
gross profit
|
13,782,225
|
5,760,583
|
|||||
|
Operating
Expenses
|
|||||||
|
Selling
expenses
|
5,198,011
|
1,404,319
|
|||||
|
Administrative
|
1,825,264
|
1,516,865
|
|||||
|
Depreciation
and amortization
|
484,643
|
123,610
|
|||||
|
Total
operating expenses
|
7,507,918
|
3,044,794
|
|||||
|
Other
Income (Expense)
|
|||||||
|
Value-added
tax refund
|
860,037
|
-
|
|||||
|
Interest
income
|
54,931
|
12,530
|
|||||
|
Interest
expense
|
(3,603,097
|
)
|
(147,355
|
)
|
|||
|
Total
other income (expense)
|
(2,688,129
|
)
|
(134,825
|
)
|
|||
|
Net
Income Before Provision for Income Tax
|
3,586,178
|
2,580,964
|
|||||
|
Provision
for Income Taxes
|
481,271
|
||||||
|
Net
Income Before Minority Interest
|
3,104,907
|
2,580,964
|
|||||
|
Minority
Interest in loss of subsidiary
|
-
|
43,696
|
|||||
|
Net
Income
|
$
|
3,104,907
|
$
|
2,624,660
|
|||
|
Basic
Earnings Per Share
|
$
|
0.16
|
$
|
0.14
|
|||
|
Diluted
Earnings Per Share
|
$
|
0.14
|
$
|
0.14
|
|||
|
Basic
Weighted Average Shares Outstanding
|
19,325,872
|
19,307,119
|
|||||
|
Diluted
Weighted Average Shares Outstanding
|
22,549,837
|
19,307,119
|
|||||
|
The
Components of Other Comprehensive Income
|
|||||||
|
Net
Income
|
$
|
3,104,907
|
$
|
2,624,660
|
|||
|
Foreign
currency translation adjustment
|
965,708
|
258,766
|
|||||
|
Comprehensive
Income
|
$
|
4,070,615
|
$
|
2,883,426
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-4
China
Education Alliance, Inc. and Subsidiaries
Consolidated
Statements of Stockholders' Equity
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Additional
|
|
|
Other
|
Retained
|
Total
|
|||||
|
Preferred
|
of
|
Par
|
Paid-In
|
Comprehensive
|
Earnings
|
Stockholders' | ||||||||||||||||
|
Stock
|
Shares
|
Value
|
Capital
|
Income
|
|
(Deficit)
|
Equity
|
|||||||||||||||
|
Balance
at January 1, 2006
|
$
|
-
|
19,305,000
|
$
|
19,305
|
$
|
2,446,579
|
$
|
19,067
|
$
|
1,593,465
|
4,078,416
|
||||||||||
|
Common
stock issued for services
|
-
|
6,667
|
7
|
6,993
|
-
|
-
|
7,000
|
|||||||||||||||
|
Warrants
issued for loan discount
|
-
|
203,908
|
203,908
|
|||||||||||||||||||
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
258,766
|
-
|
258,766
|
|||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
2,624,660
|
2,624,660
|
|||||||||||||||
|
Balance
at December 31, 2006
|
-
|
19,311,667
|
19,312
|
2,657,480
|
277,833
|
4,218,125
|
7,172,750
|
|||||||||||||||
|
Common
stock issued for services
|
-
|
10,000
|
10
|
15,890
|
-
|
-
|
15,900
|
|||||||||||||||
|
Warrants
issued for services
|
-
|
-
|
-
|
264,401
|
-
|
-
|
264,401
|
|||||||||||||||
|
Issuance
of warrants with convertible debt
|
-
|
-
|
-
|
1,887,600
|
-
|
-
|
1,887,600
|
|||||||||||||||
|
Beneficial
conversion feature with
|
||||||||||||||||||||||
|
convertible
debt
|
-
|
-
|
-
|
1,512,400
|
1,512,400
|
|||||||||||||||||
|
Conversion
of notes payable to
|
||||||||||||||||||||||
|
preferred
stock
|
3,400,000
|
-
|
-
|
40,427
|
-
|
-
|
3,440,427
|
|||||||||||||||
|
Issuance
of preferred stock for
|
||||||||||||||||||||||
|
liquidated
damages
|
277,944
|
-
|
-
|
-
|
-
|
-
|
277,944
|
|||||||||||||||
|
Cashless
exercise of warrants
|
-
|
87,789
|
88
|
(88
|
)
|
-
|
-
|
-
|
||||||||||||||
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
965,708
|
-
|
965,708
|
|||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
3,104,907
|
3,104,907
|
|||||||||||||||
|
Balance
at December 31, 2006
|
$
|
3,677,944
|
19,409,456
|
$
|
19,410
|
$
|
6,378,110
|
$
|
1,243,541
|
$
|
7,323,032
|
$
|
18,642,037
|
|||||||||
The
accompanying notes are an integral part of these financial
statements.
F-5
China
Education Alliance, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
|
Years
Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Cash
flows from operating activities
|
|||||||
|
Net
Income
|
$
|
3,104,907
|
$
|
2,624,660
|
|||
|
Adjustments
to reconcile net cash provided by
|
|||||||
|
operating
activities
|
|||||||
|
Depreciation
and amortization
|
975,470
|
334,974
|
|||||
|
Amortization
of loan discount – warrants attached to loans
|
1,969,163
|
122,345
|
|||||
|
Beneficial
conversion feature
|
1,512,400
|
-
|
|||||
|
Warrants
issued for services
|
264,401
|
-
|
|||||
|
Preferred
stock issued for liquidation damages
|
277,944
|
-
|
|||||
|
Minority
interest in loss of subsidiary
|
-
|
(43,696
|
)
|
||||
|
Stock
issued for services
|
15,900
|
7,000
|
|||||
|
Interest
on convertible note accounted for as capital contribution
|
40,427
|
||||||
|
Net
change in assets and liabilities
|
|||||||
|
Other
receivables
|
54,723
|
(46,460
|
)
|
||||
|
Prepaid
expenses and other
|
(291,331
|
)
|
(1,252,749
|
)
|
|||
|
Advances
from related parties
|
(244,480
|
)
|
|||||
|
Accounts
payable and accrued liabilities
|
211,960
|
103,616
|
|||||
|
Deferred
revenue
|
936,141
|
12,241
|
|||||
|
Net
cash provided by operating activities
|
8,827,625
|
1,861,931
|
|||||
|
Cash
flows from investing activities
|
|||||||
|
Purchases
of fixed assets
|
(1,722,718
|
)
|
(1,738,159
|
)
|
|||
|
Acquisition
of franchise rights
|
-
|
(689,642
|
)
|
||||
|
Net
cash (used in) investing activities
|
(1,722,718
|
)
|
(2,427,801
|
)
|
|||
|
Cash
flows from financing activities
|
|||||||
|
Payments
on loans
|
(1,530,000
|
)
|
-
|
||||
|
Proceeds
from loans
|
3,400,000
|
1,530,000
|
|||||
|
Advances
from(payments to) related parties
|
-
|
17,999
|
|||||
|
Net
cash provided by financing activities
|
1,870,000
|
1,547,999
|
|||||
|
Effect
of exchange rate
|
965,708
|
258,766
|
|||||
|
Net
increase in cash
|
9,940,615
|
1,240,895
|
|||||
|
Cash
and cash equivalents at beginning of year
|
1,838,339
|
597,444
|
|||||
|
Cash
and cash equivalents at end of year
|
$
|
11,778,954
|
$
|
1,838,339
|
|||
|
Supplemental
disclosure of cash flow information
|
|||||||
|
Interest
paid
|
$
|
297,838
|
$
|
25,010
|
|||
|
Taxes
paid
|
$
|
408,749
|
$
|
-
|
|||
|
Value
of warrants issued for services
|
$
|
15,485
|
$
|
-
|
|||
|
Value
of preferred stock issued for liquidation damages
|
$
|
277,944
|
$
|
-
|
|||
|
Non-cash
investing and financing activities
|
|||||||
|
Conversion
of notes payable to preferred stock
|
$
|
3,400,000
|
$
|
-
|
|||
|
Cashless
exercise of warrants
|
$
|
88
|
$
|
-
|
|||
The
accompanying notes are an integral part of these financial
statements.
F-6
China
Education Alliance, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
Description
of Business
|
Nature
of organization - China
Education Alliance, Inc. (the “Company”), formerly known as ABC Realty Co., was
originally organized under the laws of the State of North Carolina on December
2, 1996. ABC Realty Co.’s primary purpose was to act as a broker or agent in
residential real estate transactions. On September 15, 2004, ABC Realty
Co. was
reorganized pursuant to the Plan of Exchange to acquire Harbin Zhong He
Li Da
Education Technology, Inc. (“ZHLD”), a corporation formed on August 9, 2004 in
the City of Harbin of Heilongjiang Province, People’s Republic of China, with an
authorized capital of $60,386 (RMB500,000).
On
September 15, 2004, ABC Realty Co. executed a Plan of Exchange with ZHLD
and
Duane C. Bennett, the former Chairman of ABC Realty Co., pursuant to which
the
shareholders of ZHLD exchanged all of their registered capital of $60,386
for
18,333,334 shares of common stock of the Company, or approximately 95%
of the
Company’s common stock. On November 17, 2004, ABC Realty Co. changed its name to
China Education Alliance, Inc. On December 13, 2004, China Education Alliance,
Inc. consummated the Plan of Exchange with ZHLD and ZHLD’s shareholders. As a
result of the Plan of Exchange, the transaction was treated for accounting
purposes as a recapitalization of ZHLD.
ZHLD
is a
technology company engaged in the online education industry in China. Its
mission is to promote distance learning development in China, to improve
the
efficiency and effectiveness of elementary education, higher education,
vocational education, skill education, continuing education, and professional
training programs, and to integrate with the international education
system.
ZHLD
subsidiary Heilongjiang Zhonghe Education Training Center (“ZHTC”) was
registered in the People’s Republic of China (the “PRC”) on July 8, 2005 with a
registered capital of $60,386 and is a wholly owned subsidiary of ZHLD.
ZHLD
owns 99% of ZHTC with 1% held in trust by Xiqun Yu for the benefit of China
Education Alliance, Inc.
ZHLD
also
owns 70% of Beijing Hua Yu Hui Zhong Technology Development Co., Ltd. (“BHYHZ”).
BHYHZ was formed on September 30, 2006 in the PRC. The remaining 30% interest
was given to The Vocational Education Guidance Center of China for no
consideration. The 30% interest in BHYHZ that the Company transferred to
The
Vocational Education Guidance Center of China for no consideration was
treated
as an intangible asset.
The
Company’s principal business is the distribution of educational resources
through the Internet. The Company’s website, www.edu-chn.com,
is a
comprehensive education network platform which is based on network video
technology and large data sources of elementary education resources. The
Company
has a data base comprised of such resources as test papers that were used
for
secondary education and university level courses as well as video on demand.
The
data base includes more than 300,000 exams and test papers and courseware
for
college, secondary and elementary schools. While some of these exams were
given
in previous years, new instructors are engaged to develop new exams and
methodologies for taking the exams. The Company markets this data base
under the
name “Famous Instructor Test Paper Store.” Also offered, though the website, is
video on demand, which includes tutoring of exam papers and exam techniques.
The
Company compliments the past exams and test papers by providing an interactive
platform for students to understand the key points from the papers and
exams.
Although a number of the resources are available through the website without
charge, our subscribers are charged for such services as the “Famous Instructor
Test Paper Store” and the video on demand. Subscribers can purchase debit cards
which can be used to download material from the website.
The
Company also provides on-site teaching services in Harbin, which are marketed
under the name “Classroom of Famed Instructors.” The Company has a 36,600 square
foot training facility in Harbin, Heilonjiang Province, China, which has
17
classrooms and can accommodate up to 1,200 students. These classes, which
complement our on-line education services, provide classroom and tutoring
to our
students. The courses primarily cover the compulsory education curriculum
of
junior, middle and high school. The Company charges tuition for these
classes.
The
Company operates in one business segment that of education, in which it
operates
in two revenue areas of online education and education training centers.
F-7
|
2.
|
Basis
of Preparation of Financial
Statements
|
The
accompanying financial statements differ from the financial statements
used for
statutory purposes in PRC in that they have been prepared in compliance
with
U.S. generally accepted accounting principles (“GAAP”) and reflect certain
adjustments, recorded on the entities’ books, which are appropriate to present
the financial position, results of operations and cash flows in accordance
with
GAAP. The principal adjustments are related to revenue recognition, foreign
currency translation, deferred taxation, consolidation, and depreciation
and
valuation of property and equipment and intangible assets.
These
notes and accompanying financial statements retroactively reflect a reverse
split that became effective October 4, 2007, see Note 18 below. Fractional
shares were rounded up resulting in the issuance of 216 shares in excess
of the
actual conversion rate of 1-to-3.
|
3.
|
Summary
of Significant Accounting
Policies
|
Principles
of Consolidation - The
consolidated financial statements include the accounts of the Company and
its
wholly subsidiaries (ZHLD and ZHTC) and its majority owned subsidiary (BHYHZ).
All inter-company transactions and balances were eliminated. Minority interest
in the net assets and earnings or losses of BHYHZ are reflected in the
caption
“Minority interest” in the Company’s Consolidated Balance Sheet and Statements
of Operations. Cumulative losses applicable to minority interest that exceed
the
minority’s interest in the subsidiary’s capital, the losses in excess of the
minority’s interest in the subsidiaries capital are charged against the majority
interest. Subsequent profits earned by a subsidiary under such circumstances
that are applicable to the minority interests should be allocated to the
majority interest to the extent minority losses have been previously absorbed.
Use
of estimates
- The
preparation of these financial statements in conformity with GAAP 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 dates of the financial statements and the reported amounts of net sales
and
expenses during the reported periods.
Significant
estimates include values and lives assigned to acquired intangible assets,
reserves for customer returns and allowances, uncollectible accounts receivable,
slow moving, obsolete and/or damaged inventory and stock warrant valuation.
Actual results may differ from these estimates.
Cash
and cash equivalents - The Company
considers all highly liquid debt instruments purchased with a maturity
period of
three months or less to be cash equivalents. The carrying amounts reported
in
the accompanying consolidated balance sheet for cash and cash equivalents
approximate their fair value. Substantially all of the Company’s cash is held in
bank accounts in the PRC and is not protected by FDIC insurance or any
other
similar insurance.
Property
and equipment
-
Property and equipment is stated at the historical cost, less accumulated
depreciation. Depreciation on property, plant and equipment is provided
using
the straight-line method over the estimated useful lives of the assets
after
taking into account a 5% residual value for both financial and income tax
reporting purposes as follows:
|
Buildings
|
20
years
|
|||
|
Communication
Equipment
|
10
years
|
|||
|
Motor
vehicles
|
5
years
|
|||
|
Furniture,
Fixtures, and Equipment
|
5
years
|
Expenditures
for renewals and betterments are capitalized while repairs and maintenance
costs
are normally charged to the statement of operations in the year in which
they
are incurred. In situations where it can be clearly demonstrated that the
expenditure has resulted in an increase in the future economic benefits
expected
to be obtained from the use of the asset, the expenditure is capitalized
as an
additional cost of the asset.
Upon
sale
or disposal of an asset, the historical cost and related accumulated
depreciation or amortization of such asset are removed from their respective
accounts and any gain or loss is recorded in the Statements of
Operations.
The
Company reviews the carrying value of property, plant, and equipment for
impairment whenever events and circumstances indicate that the carrying
value of
an asset may not be recoverable from the estimated future cash flows expected
to
result from its use and eventual disposition. In cases where undiscounted
expected future cash flows are less than the carrying value, an impairment
loss
is recognized equal to an amount by which the carrying value exceeds the
fair
value of assets. The factors considered by management in performing this
assessment include current operating results, trends and prospects, the
manner
in which the property is used, and the effects of obsolescence, demand,
competition, and other economic factors. Based on this assessment there
was no
impairment at December 31, 2007.
F-8
Intangible
Assets
-
Intangible assets consist of franchise rights acquired by the Company and
are
amortized over the lives of the rights agreements, which is five years.
The
Company evaluates the carrying value of intangible assets during the fourth
quarter of each year and between annual evaluations if events occur or
circumstances change that would more likely than not reduce the fair value
of
the intangible asset below its carrying amount. There were no impairments
recorded during the years ended December 31, 2007 and 2006.
Long-Lived
Assets -
The
Company reviews its long-lived assets for impairment when changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Long-lived assets under certain circumstances are reported
at the
lower of carrying amount or fair value. Assets to be disposed of and assets
not
expected to provide any future service potential to the company are recorded
at
the lower of carrying amount or fair value less cost to sell. To the extent
carrying values exceed fair values, an impairment loss is recognized in
operating results.
Foreign
Currency -
The
Company’s principal country of operations is the PRC. The financial position and
results of operations of the Company are recorded in Renminbi (“RMB”) as the
functional currency. The results of operations denominated in foreign currency
are translated at the average rate of exchange during the reporting period.
Assets
and liabilities denominated in foreign currencies at the balance sheet
date are
translated at the market rate of exchange ruling at that date. The registered
equity capital denominated in the functional currency is translated at
the
historical rate of exchange at the time of capital contribution. All translation
adjustments resulting from the translation of the financial statements
into the
reporting currency (“U.S. Dollars”) are dealt with as a separate component
within shareholders’ equity.
Income
recognition
-
Revenue is recognized in accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition, which states that revenue should be recognized when
the
following criteria are met: (1) persuasive evidence of an arrangement
exists; (2) the service has been rendered; (3) the selling price is
fixed or determinable; and (4) collection of the resulting receivable is
reasonably assured. The Company believes that these criteria are satisfied
when
customers download prepaid study materials.
Prepaid
debit cards allow the Company’s subscribers to purchase a predetermined monetary
amount of download materials posted on its website. The Company tracks
usage of
the debit card and records revenue when the debit card is used.
At
the
time that the prepaid debit card is purchased, the receipt of cash is recorded
as deferred revenue. Revenues are recognized in the month when card is
used.
Unused value relating to debit cards is recognized as revenues when the
prepaid
debit card has expired.
Interest
income is recognized when earned, taking into account the average principal
amounts outstanding and the applicable interest rates.
Prepayments
Account - Prepaid
expenses are primarily comprised of advance payments made for Software
development and prepaid advertising. At December 31, 2007, prepaid but
not yet
aired television advertising totaled $401,918, prepayments to teachers
for
online materials totaled $143,927, prepayment of rent expense totaled $285,269,
consulting fees totaled $109,589, software development totaled $633,562
and
other prepaid expenses were $38,514.
Intangible
Assets - In
connection with the organization of BHYHZ, the Company transferred to an
unrelated non-profit, quasi-governmental entity for no consideration a 30%
ownership interest in the contributed capital of BHYHZ. The value of the
transferred ownership is reflected as intangible assets on the consolidated
financial statements. At December 31, 2007, intangible asset relating to
this
transaction was $43,696. The minority ownership interest share of operating
losses of BHYHZ are being absorbed by the Company as the minority interest
holdings have no basis in their investment. The minority losses absorbed
by the
Company for the year ended December 31, 2007 was $148,377. The Company
will
commence amortization of this intangible in the year end December 31, 2008
over
an estimated useful life of four years.
Deferred
Revenue
-
Deferred revenue reflects the unearned portion of debit cards sold and
tuition
payments received. Deferred revenue as of December 31, 2007 was
$1,245,507.
Advertising
-
The
Company expenses advertising costs for television spots at the time they
are air
and for all other advertising the first time the respective advertising
takes
place. These costs are included in selling, general and administrative
expenses.
The total advertising expenses incurred for the years ended December 31,
2007
and 2006 were $1,181,817 and $468,825, respectively.
F-9
Taxation
- Taxation
on profits earned in the PRC are calculated on the estimated assessable
profits
for the year at the rates of taxation prevailing in the PRC after taking
into
effect the benefits from any special tax credits or “tax holidays” allowed in
the PRC.
The
Company does not accrue United States income tax on unremitted earnings
from
foreign operations as it is the Company’s intention to indefinitely invest these
earnings in foreign operations.
In
July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No
48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB
Statement No 109 (FIN 48). FIN 48 is intended to clarify the accounting
for
uncertainty in income taxes recognized in a company’s financial statements and
prescribes the recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.
Under
FIN
48, evaluation of a tax position is a two step process. The first step
is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals
or
litigation based on the technical merits of the position. The second step
is to
measure the tax position that meets the more-likely-than-not threshold
to
determine the amount of benefit to be recognized in the financial statements.
A
tax position is measured at the largest amount of benefit where there is
a
greater than 50% likelihood of being realized upon ultimate
settlement.
The
tax
position that previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent period in which
the
threshold is met. Previously recognized tax positions that no longer meet
the
more-likely-than-not criteria should be de-recognized in the first subsequent
reporting period in which the threshold is no longer met.
Based
on
all known facts and circumstances and current tax law, the Company believes
that
the total amount of unrecognized tax benefits as of December 31, 2007,
is not
material to its results of operations, financial condition or cash flows.
The
Company also believes that the total amount of unrecognized tax benefits
as of
December 31, 2007, if recognized, would not have a material effect on its
effective tax rate. The Company further believes that there are no tax
positions
for which it is reasonably possible, based on current Chinese tax law and
policy, that the unrecognized tax benefits will significantly increase
or
decrease over the next 12 months producing, individually or in the aggregate,
a
material effect on the Company’s results of operations, financial condition or
cash flows.
Enterprise
income tax
Under
the
Provisional Regulations of the People’s Republic of China Concerning Income Tax
on Enterprises promulgated by the State Council which came into effect
on
January 1, 1994, income tax is payable by Wholly Foreign Owned Enterprises
at a
rate of 15% of their taxable income. Preferential tax treatment may, however,
be
granted pursuant to any law or regulations from time to time promulgated
by the
State Council. ZHLD enjoyed a 100% exemption from enterprise income taxes
during
2006 do to its classification as a “Wholly Foreign Owned Enterprise.” This
exemption ended on December 31, 2006, at which time ZHLD qualified under
the
current tax structure for a 50% reduction in the statutory enterprise income
tax
rates for the three years ended and ending December 31, 2007, 2008 and
2009.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax basis. Deferred
tax
assets, including tax loss and credit carry forwards, and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the
years in which those temporary differences are expected to be recovered
or
settled. The effect of deferred tax assets and liabilities of a change
in tax
rates is recognized in income in the period that includes the enactment
date.
Deferred income tax expense represents the change during the period in
the
deferred tax assets and deferred tax liabilities. The components of the
deferred
tax assets and liabilities are individually classified as current and
non-current based on their characteristics. Deferred tax assets are reduced
by a
valuation allowance when, in the opinion of management, it is more likely
than
not that some portion or all of the deferred tax assets will not be
realized.
Value
added tax
The
Provisional Regulations of the People’s Republic of China Concerning Value Added
Tax promulgated by the State Council came into effect on January 1, 1994.
Under
these regulations and the Implementing Rules of the Provisional Regulations
of
the PRC Concerning Value Added Tax, value added tax is imposed on goods
sold in
or imported into the PRC and on processing, repair and replacement services
provided within the PRC.
F-10
Value
added tax payable in the PRC is charged on an aggregated basis at a rate
of 13%
or 17% (depending on the type of goods involved) on the full price collected
for
the goods sold or, in the case of taxable services provided, at a rate
of 17% on
the charges for the taxable services provided, but excluding, in respect
of both
goods and services, any amount paid in respect of value added tax included
in
the price or charges, and less any deductible value added tax already paid
by
the taxpayer on purchases of goods and services in the same financial
year.
Software
companies are eligible for a 14% VAT tax refund under PRC tax policy. The
Company applied for and received VAT refunds of $860,037 for the year ended
December 31, 2007.
Related
party -
A
related party is a company, or individual, in which a director or an officer
has
beneficial interests in and in which the Company has significant influence.
As
of the year ended December 31, 2007 the Company has advanced to their CEO
$108,536. These advances are for funds that the CEO needs to develop the
Company. It will be expended as these advances are expended by the
CEO.
Fair
value of financial instruments - The
carrying amounts of certain financial instruments, including cash, accounts
receivable, commercial notes receivable, other receivables, accounts payable,
commercial notes payable, accrued expenses, and other payables approximate
their
fair values as of December 31, 2007 because of the relatively short-term
maturity of these instruments.
Reclassifications
-
Certain
reclassifications have been made to the prior years’ financial statements to
conform to the current year presentation. These reclassifications had no
effect
on previously reported results of operations or retained earnings.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. This
statement does not require any new fair value measurements; rather, it
applies
under other accounting pronouncements that require or permit fair value
measurements. The provisions of this statement are to be applied prospectively
as of the beginning of the fiscal year in which this statement is initially
applied, with any transition adjustment recognized as a cumulative-effect
adjustment to the opening balance of retained earnings. The provisions
of SFAS
157 are effective for the fiscal years beginning after November 15, 2007.
Therefore, the Company anticipates adopting this standard as of January 1,
2008. Management has not determined the effect, if any, the adoption of
this
statement will have on the Company’s financial condition or results of
operations.
In
September 2006, the FASB issued Statement No. 158,“Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans”
(“SFAS No. 158”), an amendment of FASB Statements No. 87, 88, 106
and 132(R). SFAS No. 158 requires (a) recognition of the funded
status (measured as the difference between the fair value of the plan assets
and
the benefit obligation) of a benefit plan as an asset or liability in the
employer’s statement of financial position, (b) measurement of the funded
status as of the employer’s fiscal year-end with limited exceptions, and
(c) recognition of changes in the funded status in the year in which the
changes occur through comprehensive income. The requirement to recognize
the
funded status of a benefit plan and the disclosure requirements are effective
as
of the end of the fiscal year ending after December 15, 2006. The
requirement to measure the plan assets and benefit obligations as of the
date of
the employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. This Statement has no current
applicability to the Company’s financial statements. Management adopted this
Statement on January 1, 2007, and the adoption of SFAS No. 158 did not
have a material impact to the Company’s financial position, results of
operations, or cash flows.
In
February 2007, the FASB issued Statement No. 159 “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS 159). This statement permits
companies to choose to measure many financial assets and liabilities at
fair
value. Unrealized gains and losses on items for which the fair value option
has
been elected are reported in earnings. SFAS 159 is effective for fiscal
years
beginning after November 15, 2007. The Company is currently assessing the
impact
of SFAS 159 on its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) will change the accounting for
business combinations. Under SFAS No. 141(R), an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in
a
transaction at the acquisition-date fair value with limited exceptions.
SFAS
No. 141(R) will change the accounting treatment and disclosure for certain
specific items in a business combination. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is
on or
after the beginning of the first annual reporting period beginning on or
after
December 15, 2008. SFAS 141(R) will impact the Company in the event of any
future acquisition.
F-11
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. The Company does not believe that
SFAS 160 will have a material impact on its consolidated financial
statements.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement
No. 133” (“FAS 161”). FAS 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to
provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. The guidance
in FAS
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
encouraged. This Statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Company is currently
assessing the impact of FAS 161.
|
4.
|
Concentrations
of Business and Credit
Risk
|
Substantially
all of the Company’s bank accounts are in banks located in the PRC and are not
covered by any type of protection similar to that provided by the FDIC
on funds
held in U.S banks.
The
Company is operating in China, which may give rise to significant foreign
currency risks from fluctuations and the degree of volatility of foreign
exchange rates between the U.S. dollar and the RMB.
Financial
instruments that potentially subject the Company to concentration of credit
risk
consist principally of cash and trade receivables, the balances of which
are
stated on the balance sheet. The Company places its cash in high credit
quality
financial institutions; however, such funds are not insured. The Company
sells
its products to students who purchase debit cards which can be used to
download
the Company’s products. Since the Company is paid in advance, it has no
receivables and no significant credit risk.
For
the
years ended December 31, 2007 and 2006, no single customer accounted for
10% or
more of revenues.
As
of
December 31, 2007 the Company had no insurance coverage of any kind. Accrual
for
losses is not recognized until such time as an uninsured loss has occurred.
The
Company has not accrued for any losses as of December 31, 2007.
Payments
of dividends may be subject to some restrictions.
|
5.
|
Cash
and Cash Equivalents
|
As
of
December 31, 2007, Cash and cash equivalents consist of the
following:
|
Cash
on Hand
|
$
|
2,652
|
||
|
Bank
Deposits
|
11,776,302
|
|||
|
Total
Cash and Cash Equivalents
|
$
|
11,778,954
|
|
6.
|
Property
and Equipment
|
As
of
December 31, 2007, Property and Equipment consist of the following:
|
Buildings
|
|
$
|
3,434,247
|
|
|
Transportation
vehicles
|
|
|
179,737
|
|
|
Communication
equipment and software
|
|
|
2,613,573
|
|
|
Furniture
and fixtures
|
|
|
1,273,634
|
|
|
Total
Property and Equipment
|
|
|
7,501,191
|
|
|
Less:
Accumulated Depreciation
|
|
|
(1,314,367
|
)
|
|
Property
and Equipment, Net
|
|
$
|
6,186,823
|
|
F-12
For
the
years ended December 31, 2007 and 2006, depreciation expenses totaled $650,185
and $334,974 respectively. For the years ended December 31, 2007 and 2006
depreciation expenses totaling $215,507 and $211,364, respectively were
included
in cost of goods sold.
As
of
December 31, 2007 the Company does not have any land use rights agreements
with
the PRC for the office buildings owned by the Company.
|
7.
|
Franchise
Rights
|
As
of
December 31, 2007, Franchise Rights consist of the following:
|
ACCP
training course, net of accumulated amortization of
$187,237
|
$
|
542,466
|
||
|
BENET
training course, net of accumulated amortization of
$16,428
|
37,398
|
|||
|
Franchise
Rights, Net
|
$
|
579,864
|
For
the
years ended December 31, 2007 and 2006, amortization expenses totaled $152,430
and $51,235 respectively.
Amortization
of franchise rights for each of the next five years is as follows:
|
Year
Ended December 31,
|
|
|||
|
2008
|
$
|
152,430
|
||
|
2009
|
152,430
|
|||
|
2010
|
152,430
|
|||
|
2011
|
122,574
|
|||
|
2012
|
-
|
|||
|
$
|
579,864
|
|||
|
8.
|
Deferred
revenue
|
Deferred
revenue includes subscriber prepayments and education fee prepayments.
Subscriber prepayments represent deferred revenue for the purchase of debit
cards used to pay for the online downloading of education materials. The
Company
recognizes revenue when the card is used to download material. Therefore,
during
the period between the purchase and use of debit cards, the unused portion
of
the debit card is treated as deferred revenue to the Company. Education
fee
prepayments represent payments for tuition for the Company’s training schools,
which are amortized over the term of the course. As of December 31, 2007,
the
Company had deferred revenue of $1,245,507.
|
9.
|
Stockholders’
Equity
|
Year
ended December 31, 2006:
|
-
|
On
September 29, 2006 the Company raised gross proceeds of $1,530,000
from
the issuance and sale of $1,530,000 aggregate principal amount
of secured
promissory notes and warrants to purchase 510,003 shares of common
stock
of the Company at an exercise price per share of $1.50 (“September 2006
Note”). The notes, which bear interest at 6% per annum, had a maturity
date of March 29, 2007. The notes have been paid in full in the
year ended
December 31, 2007.
|
|
The
warrants granted with the September 2006 Note were valued at
$203,908
using a Black-Scholes valuation model and were treated as a loan
discount.
The following assumptions were used to calculate the fair value
of the
warrants: dividend yield of 0%; expected volatility of 53%; risk-free
interest rate of 4.5%; an expected life of two years; stock price
of $1.29
and exercise price of $1.50. The discount was amortized to interest
expense over the life of the notes payable with amortization
of $81,563
and $122,345 in the years ended December 31, 2007 and 2006,
respectively.
|
|
-
|
On
September 9, 2006 the Company issued 20,000 shares of the Company’s common
stock, valued at market, for $7,000 for
services.
|
F-13
Year
ended December 31, 2007:
|
-
|
On
October 4, 2007, following approval by the Company’s stockholders on
September 27, 2007, the Company’s Articles of Incorporation were amended
to:
|
|
•
|
Change
the Company’s authorized capital stock to 170,000,000 shares, of which
20,000,000 are shares of preferred stock, par value $.001 per
share, and
150,000,000 are shares of common stock, par value $.001 per
share.
|
|
•
|
Give
the board of directors broad authority to create one or more
series of
preferred stock and to set forth the designations, rights, preferences,
privileges and limitations of the holders of each such
series.
|
|
•
|
Grant
the board of directors the authority to grant rights, warrants
and options
which provide that such securities cannot be amended at all or
cannot be
amended without the consent a specified percentage of stockholders
or
classes or groups of stockholders, and such provisions would
be prohibit
the Company from amending the rights, warrants and options unless
the
requisite consents were obtained.
|
|
•
|
Affect
a one-for-three reverse split of the common stock so that each
three
shares of common stock prior to the reverse split became one
share of
common stock, with the Company issuing such fractional share
as may be
necessary to enable the stockholders to hold a full share. These
notes and
accompanying financial statements retroactively reflect this
reverse
split. Fractional shares were rounded up resulting in the issuance
of 216
shares in excess of the actual conversion rate of 1-to-3.
|
|
-
|
On
March 7, 2007, the Company issued 10,000 shares of the Company’s common
stock, valued at market, for $15,900 of
services.
|
|
-
|
On
May 8, 2007, the Company raised, in two installments, a total
of
$3,400,000 through the issuance of convertible debt in the aggregate
principal amount of $3,400,000 (the “May 2007 Notes”). A portion of these
proceeds was used to pay the September 2006 Note described above.
The
notes accrued interest at 3% per annum, and had a due date of
September
30, 2007. In connection with the issuance, the Company’s board of
directors approved an amendment to the Company’s Articles of Incorporation
to create a class of preferred stock. The board also approved
the terms of
a new series of preferred stock, designated as the Series A Convertible
Preferred Stock upon the filing of such amendment with the Secretary
of
State of North Carolina. Included in the May 2007 Notes were
automatic,
optional and default conversion features.
|
On
October 4, 2007, the shareholders approved the newly designated class of
Preferred Stock, and the May 2007 Notes were automatically converted into
an
aggregate of (i) 9,189,189 shares of Series A preferred stock, which are
convertible into an aggregate of 3,063,062 shares of common stock, subject
to
adjustment, and (ii) five-year common stock purchase warrants to purchase
735,634 shares of common stock at $1.50 per share, 2,833,335 shares of
common
stock at $2.07 per share, 681,035 shares of common stock at $2.40 per share,
and
264,369 shares of common stock at $3.00 per share.
With
regards to the Series A Preferred Convertible Stock, issued in the May
2007
Notes, the Certificate of Designation provides as follows:
|
•
|
Each
share of Series A Convertible Preferred Stock is convertible
into one
third of a share of common stock, subject to
adjustment.
|
|
•
|
If
the Company issues common stock at a price, or options, warrants
or other
convertible securities with a conversion or exercise price less
than the
conversion price (presently $1.11 per share), with certain specified
exceptions, the number of shares issuable upon conversion of
one share of
Series A Convertible Preferred Stock is adjusted to reflect a
conversion
price equal to the lower price.
|
|
•
|
No
dividends are payable with respect to the Series A Convertible
Preferred
Stock, and while the Series A Convertible Preferred Stock is
outstanding,
the Company may not pay dividends on or redeem shares of common
stock.
|
|
•
|
Upon
any voluntary or involuntary liquidation, dissolution or winding-up
of the
Company, the holders of the Series A Convertible Preferred Stock
are
entitled to a preference of $0.37 per share before any distributions
or
payments may be made with respect to the common stock or any
other class
or series of capital stock which is junior to the Series A Convertible
Preferred Stock upon such voluntary or involuntary liquidation,
dissolution or winding-up.
|
F-14
|
•
|
The
holders of the Series A Convertible Preferred Stock have no voting
rights.
However, so long as any shares of Series A Convertible Preferred
Stock are
outstanding, the Company shall not, without the affirmative approval
of
the holders of 75% of the outstanding shares of Series A Convertible
Preferred Stock then outstanding, (a) alter or change adversely
the
powers, preferences or rights given to the Series A Convertible
Preferred
Stock or alter or amend the Certificate of Designations, (b)
authorize or
create any class of stock ranking as to dividends or distribution
of
assets upon liquidation senior to or otherwise pari passu with
the Series
A Convertible Preferred Stock, or any of preferred stock possessing
greater voting rights or the right to convert at a more favorable
price
than the Series A Convertible Preferred Stock, (c) amend the
Company’s
Articles of Incorporation or other charter documents in breach
of any of
the provisions thereof, (d) increase the authorized number of
shares of
Series A Convertible Preferred Stock, or (e) enter into any agreement
with
respect to the foregoing.
|
|
With
regards to the warrants granted with the May 2007
Notes:
|
|
-
|
The
warrants have a term of five years, and expire in May 2012. The
warrants
provide a cashless exercise feature; however, the holders of
the warrants
may not make a cashless exercise during the twelve months following
the
date of issuance and thereafter only if the sale by the holder
of the
underlying shares is covered by an effective registration
statement.
|
|
-
|
The
warrants also give the Company the right to redeem the warrants
for $.01
per share of common stock issuable upon exercise of the warrants
if the
trading price per share of the common stock equals or exceeds
the greater
of (a) $4.14 or 200% of the exercise price for the $2.07 warrants,
(b)
$4.14 or 172.5% of the exercise price for the $1.50 warrants,
(d) $4.14 or
172.5% of the exercise price for the $2.40 warrants, and (d)
$5.25 or 175%
of the exercise price for the $3.00 warrants on each trading
day in the 20
trading days ending on the date prior to the date on which the
warrants
are called for redemption provided that the trading volume on
each day in
the computation period is at least 1,000
shares.
|
|
-
|
In
order for the Company to exercise the right of redemption, a
registration
statement covering the sale of the underlying shares must be
current and
effective. In the event that, at any time subsequent to the date
on which
the warrants are called for redemption, the shares of common
stock
underlying the warrants are not subject to a current and effective
registration statement, the Company’s right to call the warrants for
redemption shall terminate with respect to all warrants that
have not then
been exercised or converted prior to that
date.
|
|
-
|
Under
the securities purchase agreement and the Certificate of Designation,
relating to the Series A Convertible Preferred Stock, it is prohibited
for
warrants to be exercised ,or converted, if such exercise or exercise
should result in the holder and its affiliates having beneficial
ownership
of more than 4.9% of the Company’s outstanding common stock. Beneficial
ownership is determined in accordance with Section 13(d) of the
Securities
Exchange Act of 1934, as amended, and Rule 13d-3 thereunder.
This
limitation may not be waived.
|
|
Upon
entering into the May 2007 Notes, the Company valued the warrants
to their
maximum value in proportion to the entire of the May 2007 Notes.
The
warrants were valued at $1,887,600 using a Black-Scholes valuation
model
and were treated as loan discounts and amortized immediately
to interest
expense. The following assumptions were used to calculate the
fair value
of the warrants: dividend yield of 0%; expected volatility of
136.44%;
risk-free interest rate of 4.55%; an expected life of five years;
stock
price of $1.11. In addition to valuing the warrants that would
be granted
upon the conversion of the notes, the Company valued the beneficial
conversion feature of the notes, in connection with the Preferred
Stock to
be issued upon conversion of the notes, that is ultimately convertible
into shares of the Company common stock. This beneficial conversion
was
valued upon issuance of the May 2007 Notes, it is valued to its
maximum
proportional value factoring in the discount associated with
the warrant
grant. The Company valued the beneficial conversion feature at
$1,512,400,
the maximum value apportionable subsequent to the valuation of
the
warrants. This beneficial conversion feature was fully amortized
in the
year ended December 31, 2007.
|
|
Upon
the conversion of the May 2007 Notes notes, the Company issued
9,189,189
shares of Series A Convertible Preferred Stock and warrants based
on the
principal amount of the notes. There was accrued interest of
$40,427, as
per the agreement, terminated upon automatic converions of the
May 2007
Notes. The Series A Preferred Stock has a liquidation preference
of $0.37
per share.
|
Upon
entering into the May 2007 Notes, pursuant to the securities purchase agreement,
the Company placed in escrow 2,833,333 shares of Series A Convertible Preferred
Stock and Mr. Xiqun Yu, the Company’s chief executive officer and principal
shareholder, placed in escrow 944,445 shares of common stock. The securities
placed in escrow were to be released, as described below, based on the
formula
described below.
F-15
Under
the
terms of the May 2007 Note if the Company’s pre-tax income for 2007 was less
than $0.19941 per share, on a fully-diluted basis (the “Target Number”), the
percentage shortfall was to be determined by dividing the amount of the
shortfall by the Target Number. If the percentage shortfall was equal to
or
greater than 33 1/3%, then, with respect to the Company’s escrow shares, the
2,833,333 shares of Series A Convertible Preferred Stock was be delivered
to the
investors and, with respect to Mr. Yu’s escrow shares, the 944,445 shares of
common stock was be delivered to the Company for cancellation. If the percentage
shortfall was less than 33 1/3%, the escrow agent was to be instructed
to:
|
(i)
|
with
respect to the Company’s escrow shares, deliver to the investors such
number of shares of Series A Convertible Preferred Stock as would
have
been determined by multiplying the percentage shortfall by 2,833,333
and
(ii) deliver to the Company the balance of such shares for cancellation;
and
|
|
(ii)
|
with
respect to the shares placed in escrow by Mr. Yu, deliver to
the Company
such number of shares of common stock as would have been determined
by
multiplying the percentage shortfall by 944,445 shares, and the
Company
shall cancel such shares, and (ii) deliver to Mr. Yu the balance
of such
shares.
|
Since
the
Company has achieved the pre-tax income per share milestone set forth in
the
securities purchase agreement, the Company’s escrow shares will be promptly
returned to the Company for cancellation and Mr. Yu’s shares will be promptly
released from escrow and returned to him.
The
warrants provide that the exercise price of the warrants may be reduced
by up to
50% if the Company’s pre-tax income per share of common stock, on a
fully-diluted basis, is less than $0.19941. Pre tax-income is defined as
income
before income taxes determined in accordance with GAAP plus (a) any charges
relating to the transaction contemplated by the securities purchase agreement
and the registration rights agreement, minus (b) the amount, if any, by
which
all non-recurring losses or expenses exceed all non-recurring items or
income or
gain. Pre-tax income shall not be adjusted if all non-recurring items of
income
or gain exceed all non-recurring losses or expenses. Items shall be deemed
to be
non-recurring only if they qualify as non-recurring pursuant to GAAP. For
determining pre-tax income per share, all shares which are outstanding
or which
may be issuable upon exercise or conversion of options, warrants and other
convertible securities are deemed to be outstanding, regardless of whether
the
shares would be counted for purposes of computing diluted earnings per
shares
under GAAP. Since the Company has achieved the pre-tax income per share
milestone set forth in the securities purchase agreement, no adjustment
in the
warrant exercise price will be made.
The
securities purchase agreement relating to the May 2007 financing, obligated
the
Company to appoint by August 6, 2007 such number of independent directors
that
would result in a majority of its directors being independent directors
and to
establish an audit committee composed solely of independent directors and
a
compensation committee comprised of a majority of independent directors.
Thereafter, the Company’s failure to meet these requirements for a period of 60
days for an excused reason, as defined in the purchase agreement, or 75
days for
a reason which is not an excused reason, will result in the imposition
of
liquidated damages which are payable in cash or additional shares of Series
A
Convertible Preferred Stock, at the election of the investor. The liquidated
damages are computed in an amount equal to 12% per annum of the purchase
price
of the then outstanding shares of Series A Convertible Preferred Stock,
up to a
maximum of $408,000. The Company’s failure to comply with these requirements
resulted in liquidated damages of $77,128, which at a liquidation of $0.37
per
share resulted in the issuance of 208,456 shares of Series A Convertible
Preferred stock as of October 15, 2007. The investors elected to take payment
in
stock, and the Company issued the shares in October 2007. As the Series
A
Convertible Preferred stock are convertible at 3 for 1 share of common
stock,
the liquidated damages of 208,456 Series A shares is 69,486 common shares
with a
market value at $4 per share, or $277,944, as of October 15, 2007. The
investors
waived the right to receive any further liquidated damages for the Company’s
failure to comply with these provisions from October 16, 2007 through December
31, 2007. The liquidation damages commence accruing subsequent to December
31,
2007.
In
connection with the May 2007 Notes the Company and the investors entered
into a
registration rights agreement pursuant to which the Company initially agreed
to
file by July 7, 2007, a registration statement covering the common stock
issuable upon conversion of the Series A Convertible Preferred Stock and
the
exercise of the warrants. The Company was also initially required to have
the
registration statement declared effective by the SEC not later than
November 5, 2007. If these conditions were not met, the agreement initially
provided for the payment of liquidated damages to the investors, at a rate
of
2,130 of shares of Series A Convertible Preferred Stock per day (which
was
subject to adjustment based on the number of shares the Company was able
to
register under the SEC’s rules relating to secondary offerings), with a maximum
of 900,000 shares of Series A Convertible Preferred Stock. The registration
rights agreement was amended to eliminate liquidated damages for failure
to file
the registration statement when required and to waive any liquidated damages
due
as a result of the Company’s failure to have the registration statement declared
effective through December 31, 2007. Since the Company’s registration statement
was declared effective on December 28, 2007, the Company was not obligated
to
pay any liquidated damages pursuant to the registration rights agreement.
The
registration rights agreement also provides for additional demand registration
rights in the event that the investors are not able to register all of
the
shares in the initial registration statement. The
investors have a right of first refusal on future financings.
F-16
Except
as
expressly provided in the Certificate of Designation or the warrants, included
in the May 2007 Notes, no investor may convert the shares of Series A
Convertible Preferred Stock into shares of common stock or exercise the
warrants
to the extent that such conversion or exercise would result in beneficial
ownership by such investor and its affiliates of more than 4.9% of the
then
outstanding number of shares of common stock on such date. Beneficial ownership
is determined in accordance with Section 13(d) of the Securities Exchange
Act of
1934, as amended, and Regulation 13d-3 thereunder. This provision cannot
be
modified.
|
On
December 6, 2007, the Company issued 87,789 shares of the Company’s common
stock in connection with cashless exercises of warrants to purchase
127,500 shares of common stock with an exercise price of
$1.50.
|
|
10.
|
Income
Taxes
|
On
September 15, 2004, the Company executed a Plan of Exchange with ZHLD,
subsequently ZHLD applied to be as a foreign invested company immediately
after
the merger, and a business license was approved for such qualification
on April
8, 2005. According to Chinese taxation policy, there is a 100% income tax
exemption or holiday for 2 years and a 50% tax exemption or holiday for
3 years
applicable to a foreign invested company, advanced technology company or
software development company. Because
ZHLD falls within these categories, it enjoys this income tax exemption
or
holiday from April 8, 2005, the date it obtained approval as a foreign
wholly
owned enterprise. The Company received a 100% tax holiday for the year
ended
December 31, 2006. As of January 1, 2007, the Company’s tax exemption was
reduced to 50% of the prevailing 15% tax rate and will continue at this
reduced
rate until the fiscal year ending December 31, 2009, subject to changes
in tax
rates implemented in 2007 that go into effect commencing January 1, 2008
which
will have the effect of increasing the enterprise tax rate by 2% per year
until
it reaches and effective tax rate of 25%.
A
reconciliation of the provision for income taxes with amounts determined
by the
U.S. federal income tax rate to income before income taxes is as
follows.
The
components of income (loss) before income tax consist of approximately
following:
|
Year Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
U.S.
Operations
|
$
|
(4,694,000
|
)
|
$
|
(321,000
|
)
|
|
|
Chinese
Operations
|
7,799,000
|
2,902,000
|
|||||
|
$
|
3,105,000
|
$
|
2,581,000
|
||||
The
components of the (benefit) provision for income taxes are approximately
as
follows:
|
Year Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Federal,
State and Local
|
$
|
-
|
$
|
-
|
|||
|
Peoples
Republic of China –Federal and Local
|
481,000
|
-
|
|||||
|
$
|
481,000
|
$
|
-
|
||||
The
table
below approximately summarizes the reconciliation of the Company’s income tax
provision (benefit) computed at the statutory U.S. Federal rate and the
actual
tax provision:
|
Year Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Income
tax (benefit) provision at Federal statutory rate
|
$
|
1,087,000
|
904,000
|
||||
|
State
income taxes, net of Federal benefit
|
143,000
|
118,000
|
|||||
|
Permanent
differences
|
1,594,000
|
48,000
|
|||||
|
U.S.
tax rate in excess of foreign tax rate
|
(1,139,000
|
)
|
(424,000
|
)
|
|||
|
Abatement
of foreign income taxes
|
(1,469,000
|
)
|
(725,000
|
)
|
|||
|
Increase
in valuation allowance
|
265,000
|
79,000
|
|||||
|
Tax
(benefit) provision
|
$
|
481,000
|
$
|
-
|
|||
F-17
The
Company has a U.S net operating loss carryforward of approximately $1,042,000
as of
December 31, 2007 which will begin to expire in 2025. Certain of these
loss
carryforward amounts may be limited due to the more than 50% change in
ownership
which took place during 2005. The deferred tax asset associated with these
net
operating loss carryforwards was fully reserved as of December 31,
2007.
Had
the
tax exemption not been in place for the partial year ended December 31,
2007 and
full exemptions for the year ended December 31, 2006 the Company estimates
the
following proforma financial statement impact.
|
Year
Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Net
income before tax provision
|
$
|
3,586,000
|
$
|
2,581,000
|
|||
|
Less
Tax provision not exempted
|
481,000
|
-
|
|||||
|
Less
Tax provision exempted
|
1,469,000
|
726,000
|
|||||
|
Net
income before minority interest
|
1,636,000
|
1,855,000
|
|||||
|
Less
Minority interest in loss of subsidiary
|
-
|
44,000
|
|||||
|
Net
income
|
$
|
1,636,000
|
$
|
1,811,000
|
|||
|
11.
|
Earnings
Per Share
|
SFAS
128
requires a reconciliation of the numerator and denominator of the basic
and
diluted earnings per share (EPS) computations.
For
the
year ended December 31, 2007, dilutive shares include 3,132,547 shares
attributable to convertible preferred stock, outstanding warrants to purchase
1,118,137 shares of common stock at an exercise price of $1.50, warrants
to
purchase 83,334 shares of common stock at an exercise price of $2.25 and
warrants to purchase 2,833,335 shares of common stock at an exercise price
of
$2.07. Warrants to purchase 681,035 shares of common stock at $2.40 and
warrants
to purchase 264,369 shares of common stock at $3.00 were not included as
their
effect would have been anti-dilutive.
The
There
were no dilutive options and warrants outstanding for the year ended December
31, 2006.
The
following reconciles the components of the EPS computation
|
Year
Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Net
income available to common shareholders
|
$
|
3,104,907
|
$
|
2,580,964
|
|||
|
Weighted
average shares outstanding – basic
|
19,325,872
|
19,307,119
|
|||||
|
Effect
of dilutive securities
|
3,223,965
|
-
|
|||||
|
Weighted
average shares outstanding – diluted
|
22,549,837
|
19,307,119
|
|||||
|
Earnings
per share – basic
|
$
|
0.16
|
$
|
0.14
|
|||
|
Earnings
per share – diluted
|
$
|
0.14
|
$
|
0.14
|
|||
|
12.
|
Commitments
and Contingencies
|
The
Company and its subsidiaries are self-insured, and they do not carry any
property insurance, general liability insurance, or any other insurance
that
covers the risks of their business operations. As a result any material
loss or
damage to its properties or other assets, or personal injuries arising
from its
business operations would have a material adverse affect on the Company’s
financial condition and operations.
F-18
|
13.
|
Warrants
|
On
November 22, 2006 the Company granted warrants, to non-employee consultants,
to
purchase 50,000 shares of the Company’s common stock at an exercise price of
$1.29 expiring in three years from the date of grant for services to be
rendered. These warrants were valued at $60,900 using a Black-Scholes model
with
the following assumptions: dividend
yield of 0%; expected volatility of 217.29%; risk-free interest rate of
4.63%;
an expected life of 3 years; stock trading price of $1.29 on the date of
grant
and exercise price of $1.29. The services for these warrants were rendered
in
2007 and the expense was record in 2007.
On
May 4,
2007 the Company granted warrants, to non-employee consultants, to purchase
83,334 shares of the Company’s common stock at an exercise price of $2.25
expiring in three years from the date of grant for services rendered. These
warrants were valued at $63,900 using a Black-Scholes model with
the
following assumptions: dividend
yield of 0%; expected volatility of 136.66%; risk-free interest rate of
4.59%;
an expected life of 3 years; stock trading price of $1.11 on the date of
grant
and exercise price of $2.25.
In
August
2007 the Company entered into a consulting agreement for investor relation
services. This contract is for one year at $6,000 for the first four months
of
the contract during the year ended December 31, 2007, and then $8,000 per
month
for the remaining eight months to be performed in the year ended December
31,
2008. In addition to cash payments, the agreement granted warrants to purchase
100,000 shares of the Company common stock at an exercise price of $1.89
per
share, with a life of three years from the date of grant. On the date of
grant
the market was $1.65 per share. These warrants vest quarterly, at 25,000
shares
per each vest, on each of the grant date, November 1, 2007, February 1,
2008 and
May 1, 2008. The initial batch of 25,000 warrants was vested on the grant
date.
The Company has expensed $139,600 with regard to the warrants granted,
as it
relates to the proportional share of expense for services performed in
the year
ended December 31, 2007. These warrants were valued using a Black-Scholes
option
pricing model with
the
following weighted assumptions: dividend
yield of 0%; expected volatility of 119.05%; risk-free interest rate of
3.409%;
an expected life of 2.62 years.
|
Shares
underlying
warrants
|
Weighted
average
Exercise Price
|
||||||
|
Outstanding
as of January 1, 2006
|
-
|
$
|
-
|
||||
|
Granted
|
510,003
|
1.50
|
|||||
|
Exercised
|
-
|
-
|
|||||
|
Expired
or cancelled
|
-
|
-
|
|||||
|
Outstanding
as of December 31, 2006
|
510,003
|
1.50
|
|||||
|
Granted
|
4,747,707
|
1.99
|
|||||
|
Exercised
|
(127,500
|
)
|
1.50
|
||||
|
Expired
or cancelled
|
-
|
-
|
|||||
|
Outstanding
as of December 31, 2007
|
5,130,210
|
$
|
1.95
|
||||
The
following table summarizes information about stock warrants outstanding
and
exercisable as of December 31, 2007.
|
Exercise
Price
|
Outstanding
December
31,
2007
|
Weighted
Average
Remaining
Life
in
Years
|
Number
exercisable
|
||||||||
|
$
|
1.29
|
50,000
|
1.90
|
50,000
|
|||||||
|
$
|
1.50
|
|
1,118,137
|
3.12
|
1,118,137
|
||||||
|
$
|
1.89
|
100,000
|
2.59
|
50,000
|
|||||||
|
$
|
2.07
|
2,833,335
|
4.36
|
2,833,335
|
|||||||
|
$
|
2.25
|
83,334
|
2.34
|
83,334
|
|||||||
|
$
|
2.40
|
681,035
|
4.36
|
681,035
|
|||||||
|
$
|
3.00
|
|
264,369
|
4.36
|
264,369
|
||||||
|
|
5,130,210
|
4.07
|
5,080,210
|
||||||||
F-19
14.
Operating Risk
(a)
Country risk
Currently,
the Company’s revenues are mainly derived from sale of educational products and
services in the PRC. The Company hopes to expand its operations in the
PRC,
however, there are no assurances that the Company will be able to achieve
such
an expansion successfully. Therefore, a downturn or stagnation in the economic
environment of the PRC could have a material adverse effect on the Company’s
financial condition.
(b)
Products risk
The
Company competes with larger companies, who have greater funds available
for
expansion, marketing, research and development and the ability to attract
more
qualified personnel. There can be no assurance that the Company will remain
competitive with larger competitors.
(c)
Exchange risk
The
Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount
of
profit for two comparable periods and because of a fluctuating exchange
rate
actually post higher or lower profit depending on exchange rate of Chinese
Renminbi (RMB) converted to U.S. dollars on that date. The exchange rate
could
fluctuate depending on changes in the political and economic environments
without notice.
(d)
Political risk
Currently,
the PRC is in a period of growth and is openly promoting business development
in
order to bring more business into the PRC. Additionally, the PRC allows
a
Chinese corporation to be owned by a United States corporation. If the
laws or
regulations are changed by the PRC government, the Company’s ability to operate
in the PRC could be affected.
(e)
Key
personnel risk
The
Company’s future success depends on the continued services of executive
management in China. The loss of any of their services would be detrimental
to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key-man insurance on their lives. Future
success is also dependent on the ability to identify, hire, train and retain
other qualified managerial and other employees. Competition for these
individuals is intense and increasing.
(f)
Non-compliance with financing requirements
The
Company might need to obtain future financing that require timely filing
of
registration statements, and have declared effective those registration
statements, to register the shares being offered by the selling stockholders
in
future financing. The Company might be subject to liquidated damages and
other
penalties if they continue to obtain future financing requiring registration
statements, and not having those registration statements filed and declared
effective in a prompt manner.
15.
Subsequent Events
On
March
17, 2008, the Company’s board of directors approved the repurchase of up to
1,000,000 shares of the Company’s common stock from time to time in the open
market at prevailing market prices.
F-20
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
|
|
CHINA
EDUCATION ALLIANCE, INC.
|
|
|
|
|
|
|
Date: March
31, 2008
|
By:
|
/s/ Yu
Xiqun
|
|
|
Yu
Xiqun
President
and Chief Executive Officer
|
|
|
|
|
|
|
Date: March
31, 2008
|
By:
|
/s/ Chunqing
Wang
|
|
|
Chief
Financial Officer
(Principal
Financial Officer)
|
|
POWER
OF ATTORNEY
KNOW
ALL
PERSONS BY THESE PRESENTS, that each of the persons whose signature appears
below hereby constitutes and appoints Yu
Xiqun,
acting
individually, as his attorney-in-fact, each with the full power of substitution,
for him in any and all capacities, to sign any and all amendments to this
Annual
Report on Form 10-KSB, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact, and each of them, full
power
and authority to do and perform each and every act and thing requisite
and
necessary to be done in and about the premises as fully to all intents
and
purposes as he or she might or could do in person, hereby ratifying and
confirming our signatures as they may be signed by our said attorney-in-fact
and
any and all amendments to this Annual Report on Form 10-KSB.
In
accordance with the Securities Exchange Act of 1934, this report has been
signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
|
Signature
|
Title
|
Date
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||
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||
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/s/
Xiqun Yu
|
President,
Chief Executive Officer
|
March
31, 2008
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||
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Xiqun
Yu
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Chairman
of the Board of Directors
and
Director
(Principal
Executive Officer)
|
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||
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|
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||
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/s/
Chunqing Wang
|
Chief
Financial Officer
|
March
31, 2008
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||
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Chunqing
Wang
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Vice
Chairman of the Board of Directors(Principal
Financial
and Accounting Officer)
|
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||
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||
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/s/
James Hsu
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Director
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March
31, 2008
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||
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James
Hsu
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||
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||
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/s/
Ansheng Huang
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Director
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March
31, 2008
|
||
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Ansheng
Huang
|
|
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||
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||
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/s/
Liansheng Zhang
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Director
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March
31, 2008
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||
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Liansheng
Zhang
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34
EXHBIT
INDEX
|
3.1
|
Articles
of Incorporation filed December 2, 1996 in the State of North
Carolina are
incorporated herein by reference to Exhibit 3.1 to the Form SB-2
Registration Statement of the Company (File No. 333-101167) filed
on
November 13, 2002.
|
|
3.2
|
Articles
of Amendment Business Corporation dated May 23, 2002 are incorporated
herein by reference to Exhibit 3.2 to the Form SB-2 Registration
Statement
of the Company (File No. 333-101167) filed on November 13,
2002.
|
|
3.3
|
Articles
of Amendment Business Corporation filed November 17, 2004, changing
the
name of the Company from ABC Realty Co. to China Education Alliance,
Inc.
is incorporated herein by reference to Exhibit 3.3 filed with
the
Company’s Form 10-KSB annual report for its fiscal year ended December
31,
2005.
|
|
3.4
|
Articles
of Share Exchange of the Company filed with the Department of
The
Secretary of State of the State of North Carolina on December 30,
2004 are incorporated herein by reference to Exhibit 3.1 filed
with the
Company’s Form 10-QSB quarterly report for its quarter ended September
30,
2007 filed with the SEC on November 14, 2007.
|
|
3.5
|
Articles
of Amendment to Articles of Incorporation filed with the Department
of The
Secretary of State of the State of North Carolina on October 4, 2007
are incorporated herein by reference to Exhibit 3.2 filed with
the
Company’s Form 10-QSB quarterly report for its quarter ended September
30,
2007 filed with the SEC on November 14, 2007.
|
|
3.6
|
ByLaws
of the Company are incorporated herein by reference to Exhibit
3.3 to the
Form SB-2/A Registration Statement of the Company filed on February
7,
2003 (File No. 333-101167).
|
|
10.1
|
Stock
Transaction Agreement between and among the Company and the former
owners
of Harbin Zhonghelida Educational Technology Co., Ltd., a wholly
owned
subsidiary of the Company is incorporated herein by reference
to Exhibit
10.3 to the Company’s Form 10-KSB for the year ended December 31, 2005
filed with the SEC on April 17, 2006.
|
|
10.2
|
Organization
Constitution of Heilongjiang Zhonge Education Training Center
dated June
15, 2005, a wholly owned subsidiary of the Company is incorporated
herein
by reference to Exhibit 10.4 to the Company’s Form 10-KSB for the year
ended December 31, 2005 filed with the SEC on April 17,
2006.
|
|
10.3
|
Business
licenses of Harbin Zhonghelinda Educational Technology Company
Limited, a
wholly owned subsidiary of the Company is incorporated herein
by reference
to Exhibit 10.5 to the Company’s Form 10-KSB for the year ended
December 31, 2005 and filed with the SEC on April 17,
2006.
|
|
10.4
|
Product
Commission Process Contract dated March 2, 2006, with Tianjin
Huishi
Printing Products Co., Ltd. is incorporated herein by reference
to Exhibit
10.6 to the Company’s Form 10-KSB for the fiscal year ended December 31,
2005 filed with the SEC on April 17, 2006.
|
|
10.5
|
Consulting
Agreement with Conceptual Management Limited dated March 20,
2006 is
incorporated herein by reference to Exhibit 10.8 to the Company’s Form
10-KSB for the fiscal year ended December 31, 2005 filed with
the SEC on
April 17, 2006.
|
|
10.6
|
Form
of Secured Promissory Note dated September 29, 2006, by the Company
is
hereby incorporated herein by reference to Exhibit 10.1 to the
Form 8-K
current report of the Company filed with the SEC on November
1,
2006.
|
|
10.7
|
Stock
Pledge Agreement dated September 29, 2006, between Xinqun Yu
and SBI
Advisors, LLC, as Agent is hereby incorporated herein by reference
to
Exhibit 10.2 to the Form 8-K current report of the Company filed
with the
SEC on November 1, 2006.
|
|
10.8
|
Guarantee
Agreement dated as of September 29, 2006, among Harbin Zhong
He Li Da Jiao
Yu Ke Ji You Xian Gong Si, Heilongjiang Zhonghe Education Training
Center,
Harbin Zhonghelida Educational Technology Company Limited, Xinqun
Yu, and
SBI Advisors, LLC, as Agent is hereby incorporated herein by
reference to
Exhibit 10.3 to the Form 8-K current report of the Company filed
with the
SEC on November 1, 2006.
|
35
| 10.9 |
Investor
Relations Agreement dated November 1, 2006, between the Company
and Taylor
Rafferty Associates, Inc. is incorporated herein by reference
to Exhibit
10.3 to the Form 10-QSB quarterly report of the Company for the
period
ended June 30, 2006.
|
|
|
|
|
10.10
|
Purchase
Contract dated December 28, 2006, between Harbin Zhonghelida
Education
&Technology Co., Ltd. and Harbin Nangang Compass Computer Training
School is incorporated herein by reference to Exhibit 10.11 to
the
Company’s Form 10-KSB for the fiscal year ended December 31, 2006 filed
with the SEC on April 2, 2007.
|
|
10.11
|
Securities
Purchase Agreement dated as of May 8, 2007, among the Company,
Barron
Partners, LP and the other investors named therein is hereby
incorporated
herein by reference to Exhibit 99.1 to the Form 8-K of the Company
filed
with the SEC on May 15, 2007.
|
|
10.12
|
3%
Convertible Note issued to Barron Partners, LP is hereby incorporated
herein by reference to Exhibit 99.2 to the Form 8-K of the Company
filed
with the SEC on May 15, 2007
|
|
10.13
|
3%
Convertible Note issued to Eos Holdings is hereby incorporated
herein by
reference to Exhibit 99.3 to the Form 8-K of the Company filed
with the
SEC on May 15, 2007.
|
|
10.14
|
3%
Convertible Note issued to Hua-Mei 21st Century Partners, LP
is hereby
incorporated herein by reference to Exhibit 99.4 to the Form
8-K of the
Company filed with the SEC on May 15, 2007.
|
|
10.15
|
Registration
Rights Agreement, dated May 8, 2007, among the Company, Barron
Partners,
LP and the other investors named therein is hereby incorporated
herein by
reference to Exhibit 99.5 to the Form 8-K of the Company filed
with the
SEC on May 15, 2007.
|
|
10.16
|
Closing
Escrow Agreement, dated May 8, 2007, among the Company, Barron
Partners,
LP, the other investors named therein and the escrow agent named
therein
is hereby incorporated herein by reference to Exhibit 99.6 to
the Form 8-K
of the Company filed with the SEC on May 15, 2007.
|
|
10.17
|
Letter
agreement dated May 8, 2007 between the Company and SBI Advisors
LLC, and
related payment letter is hereby incorporated herein by reference
to
Exhibit 99.7 to the Form 8-K of the Company filed with the SEC
on
May 15, 2007.
|
|
10.18
|
Amendment
dated as of May 23, 2007 to the Securities Purchase Agreement
dated May 8,
2007, among the Company, Barron Partners, LP and the other investors
named
therein is hereby incorporated herein by reference to Exhibit
99.1 to the
Form 8-K of the Company filed with the SEC on June 7,
2007.
|
|
10.19
|
3%
Convertible Note issued to Barron Partners, LP is hereby incorporated
herein by reference to Exhibit 99.2 to the Form 8-K of the Company
filed
with the SEC on June 7, 2007.
|
|
10.20
|
Closing
Escrow Agreement, dated May, 2007, among the Company, Barron
Partners, LP,
the other investors named therein and the escrow agent named
therein is
hereby incorporated herein by reference to Exhibit 99.3 to the
Form 8-K of
the Company filed with the SEC on June 7, 2007.
|
|
10.21
|
Letter
Agreement dated November 30, 2007, among the Company, Barron
Partners, LP
and the other investors named therein is incorporated herein
by reference
to Exhibit 10.22 to the Form SB-2/A Registration Statement of
the Company
(File No. 333-101167) filed with the SEC on December 7,
2007.
|
|
10.22
|
Extracts
of Office Rental Agreement dated January 28, 2006 by and between
Vocational Education Organization Service Centre and Beijing
Hua Yu Hui
Zhong Technology Development Co., Limited.
|
|
10.23
|
Extracts
of Dormitory Rental Agreement dated January 29, 2006 by and between
Chen
Xu and Xiqun Yu.
|
|
10.24
|
House
Lease Contract dated January 29, 2006 by and between Beijing
Yi De Zhi
Bang Technology Limited and Beijing Huayuhuizhong Technology
Development
Co., Ltd.
|
|
10.25
|
Classroom
Lease Contract by and between Harbin Songdong OA Co., Ltd and
Heilongjiang
Zhonghe Education Training Center
|
36
|
10.26
|
Classroom
Lease Contract by and between Harbin Songdong OA Co., Ltd and
Heilongjiang
Zhonghe Education Training Center
|
|
10.27
|
Employment
Contract between Zhonghelida Education Technology Co., Ltd and
Xiqun Yu
dated August 9, 2004
|
|
10.28
|
Employment
Contract between Zhonghelida Education Technology Co., Ltd and
Chunqing
Wang dated August 9, 2004
|
|
16.1
|
Letter
dated December 19, 2007 from Murrell, Hall, McIntosh & Co. PLLP to the
SEC is incorporated herein by reference to Exhibit 16.1 to the
Form 8-K of
the Company filed with the SEC on December 19, 2007.
|
|
16.2
|
Letter
dated December 19, 2007from the Company to Murrell, Hall, McIntosh
&
Co. PLLP is incorporated herein by reference to Exhibit 16.2
to the Form
8-K of the Company filed with the SEC on December 19,
2007.
|
|
21.
|
Subsidiaries
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm - Sherb & Co.,
LLP
|
|
23.2
|
Consent
of Independent Registered Public Accounting Firm - Murrell, Hall,
McIntosh
& Co., PLLP
|
|
31.1
|
Certification
of Xiqun Yu
|
|
31.2
|
Certification
of Chunqing Wang
|
|
32
|
Certification
of Xiqun Yu and Chunqing Wang
|
37
SUBSIDIARIES
China
Education Alliance, Inc. has the following subsidiaries:
|
Name
|
|
Jurisdiction
|
Percentage of Ownership
|
|
|
|
|
|
|
|
|
1.
Harbin Zhong He Li Da Education Technology, Inc.
|
|
The
People’s Republic of China
|
100%
|
|
|
|
|
|
|
|
|
2.
Zhonghe Education Training Center
|
|
The
People’s Republic of China
|
100%
|
|
|
|
|
|
|
|
|
3.
Beijing Hua Yu Hui Zhong Technology Development Co.,
Limited.
|
|
The
People’s Republic of China
|
70%
|
Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
hereby
consent to the incorporation by reference in the Form 10-KSB of
China Education
Alliance Inc. of our report dated March 25, 2008 related to the
consolidated
financial statements which appear in China Education Alliance Inc.’s Form 10-KSB
annual report for the year ended December 31, 2007.
|
Dated: March
31, 2008
|
By: |
/s/ Sherb
& Co., LLP
|
|
Sherb
& Co., LLP
|
||
Exhibit
23.2
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINTG FIRM
We
hereby
consent to the incorporation by reference in the Form 10-KSB
of China Education
Alliance Inc. of our report dated March 16, 2007 related to the consolidated
financial statements which appear in China Education Alliance
Inc.’s Form 10-KSB
annual report for the year ended December 31, 2006.
| MURRELL, HALL, MCINTOSH & CO., PLLP | ||
| |
|
|
|
Dated: March
31, 2008
|
By: |
/s/ Murrell,
Hall, McIntosh & Co., PLLP
|
|
Murrell,
Hall, McIntosh & Co., PLLP
|
||
CERTIFICATIONS
I,
Xiqun
Yu, certify that:
1.
I have reviewed this annual report on Form 10-KSB of
China Education Alliance, Inc.;
2.
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary
to make the statements made, in light of the circumstances
under which such
statements were made, not misleading with respect to the
period covered by this
report;
3.
Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all
material respects the financial condition, results of operations
and cash flows
of the small business issuer as of, and for, the periods
presented in this
report;
4.
The small business issuer’s other certifying officer(s)
and I are responsible for establishing and maintaining
disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and
internal control over financial reporting (as defined in
Exchange Act Rules
13a-15(f) and 15d-15(f)) for the small business issuer
and have:
(a)
Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our
supervision, to ensure that material information relating
to the small business
issuer, including its consolidates subsidiaries, is made
known to us by others
within those entities, particularly during the period in
which this report is
being prepared;
(b)
Designed such internal control over financial
reporting, or caused such internal control over financial
reporting to be
designed under our supervision, to provide reasonable assurance
regarding the
reliability of financial reporting and the preparation
of financial statements
for external purposes in accordance with generally accepted
accounting
principles;
(c)
Evaluated the effectiveness of the small business
issuer’s disclosure controls and procedures and presented in this
report our
conclusions about the effectiveness of the disclosure controls
and procedures,
as of the end of the period covered by this report based
on such evaluation;
and
(d)
Disclosed in this report any change in the small
business issuer’s internal control over financial reporting that occurred
during
the small business issuer’s most recent fiscal quarter (the small business
issuer’s fourth fiscal quarter in the case of an annual report)
that has
materially affected, or is reasonably likely to materially
affect, the small
business issuer’s internal control over financial reporting; and
5.
The small business issuer’s other certifying officer(s)
and I have disclosed, based on our most recent evaluation
of internal control
over financial reporting, to the small business issuer’s auditors and the audit
committee of small business issuer’s board of directors (or persons performing
the equivalent functions):
(a)
All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are
reasonably likely to adversely affect the small business
issuer’s ability to
record, process, summarize and report financial information;
and
(b)
Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the small business
issuer’s internal control over financial reporting.
|
|
|
|
|
Date: March
31, 2008
|
|
/s/
Xiqun Yu
|
|
|
Xiqun
Yu
Chief
Executive Officer and President
|
|
EXHIBIT
31.2
CERTIFICATIONS
I,
Chunqing Wang, certify that:
1.
I have reviewed this annual report on Form 10-KSB of
China Education Alliance, Inc.;
2.
Based on my knowledge, this report does not contain
any
untrue statement of a material fact or omit to state
a material fact necessary
to make the statements made, in light of the circumstances
under which such
statements were made, not misleading with respect to
the period covered by this
report;
3.
Based on my knowledge, the financial statements, and
other financial information included in this report,
fairly present in all
material respects the financial condition, results
of operations and cash flows
of the small business issuer as of, and for, the periods
presented in this
report;
4.
The small business issuer’s other certifying officer(s)
and I are responsible for establishing and maintaining
disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and
internal control over financial reporting (as defined
in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the small business issuer
and have:
(a)
Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our
supervision, to ensure that material information relating
to the small business
issuer, including its consolidates subsidiaries, is
made known to us by others
within those entities, particularly during the period
in which this report is
being prepared;
(b)
Designed such internal control over financial
reporting, or caused such internal control over financial
reporting to be
designed under our supervision, to provide reasonable
assurance regarding the
reliability of financial reporting and the preparation
of financial statements
for external purposes in accordance with generally
accepted accounting
principles;
(c)
Evaluated the effectiveness of the small business
issuer’s disclosure controls and procedures and presented
in this report our
conclusions about the effectiveness of the disclosure
controls and procedures,
as of the end of the period covered by this report
based on such evaluation;
and
(d)
Disclosed in this report any change in the small
business issuer’s internal control over financial reporting that occurred
during
the small business issuer’s most recent fiscal quarter (the small business
issuer’s fourth fiscal quarter in the case of an annual report)
that has
materially affected, or is reasonably likely to materially
affect, the small
business issuer’s internal control over financial reporting; and
5.
The small business issuer’s other certifying officer(s)
and I have disclosed, based on our most recent evaluation
of internal control
over financial reporting, to the small business issuer’s auditors and the audit
committee of small business issuer’s board of directors (or persons performing
the equivalent functions):
(a)
All significant deficiencies and material weaknesses
in
the design or operation of internal control over financial
reporting which are
reasonably likely to adversely affect the small business
issuer’s ability to
record, process, summarize and report financial information;
and
(b)
Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the small business
issuer’s internal control over financial reporting.
|
|
|
|
|
Date: March
31, 2008
|
|
/s/
Chunqing Wang
|
|
|
Chunqing
Wang
Chief
Financial Officer
|
|
EXHIBIT
32
STATEMENT
FURNISHED PURSUANT TO
SECTION
906 OF THE
SARBANES-OXLEY
ACT OF 2002,
18
U.S.C. SECTION 1350
The
undersigned, Xiqun Yu, is President and Chief Executive
Officer and Chunqing
Wang is Chief Financial Officer of China Education
Alliance, Inc. (the
“Company”). This statement is being furnished in connection
with the filing by
the Company of the Company’s Annual Report on Form 10-KSB for the year ended
December 31, 2007 (the “Report”).
By
execution of this statement, we certify that:
|
|
The
Report fully complies with the requirements
of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (15
U.S.C. 78m(a) or 78o(d));
and
|
|
|
The
information contained in the Report fairly
presents, in all material
respects, the financial condition and result
of operations of the Company
as of the dates and for the periods covered
by the
Report.
|
This
statement is authorized to be attached as an exhibit
to the Report so that this
statement will accompany the Report at such time
as the Report is filed with the
Securities and Exchange Commission, pursuant to Section
906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
It
is not
intended that this statement be deemed to be filed
for purposes of the
Securities Exchange Act of 1934, as amended.
A
signed
original of this written statement required by Section
906 has been provided to
the Company and will be retained by the Company and
furnished to the Securities
and Exchange Commission or its staff upon request.
|
Date:
March 31, 2008
|
/s/
Xiqun Yu
|
|
|
Xiqun
Yu
Chief
Executive Officer and President
|
|
|
/s/
Chunqing Wang
|
|
|
Chunqing
Wang
Chief
Financial Officer
|
APPENDIX
A
Consent
of Independent Registered Public Accounting Firm
As
independent registered public accountants, we hereby consent to the use of
our
report dated March 25, 2008, and to all references to our Firm, in
Prospectus Supplement No. 3 to Form SB-2 (Registration
No. 333-146023), and prospectus, as amended, of China Education Alliance,
Inc.
/s/
Sherb
& Co., LLP.
Boca
Raton, Florida
March
31,
2008
APPENDIX
B
Consent
of Independent Registered Public Accounting Firm
As
independent registered public accountants, we hereby consent to the use of
our
report dated March 16, 2007, and to all references to our Firm, in
Prospectus Supplement No. 3 to Form SB-2 (Registration
No. 333-146023), and prospectus, as amended, of China Education Alliance,
Inc.
/s/
Murrell, Hall, McIntosh & Co., PLLP
Oklahoma
City, Oklahoma
March
31,
2008