UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
Amendment
No. 1 to
FORM
10-K
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x
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ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2009
or
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from _____________to ______________
Commission
file number 001-34386
CHINA
EDUCATION ALLIANCE, INC.
(Exact
name of registrant as specified in its charter)
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North
Carolina
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56-2012361
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State
or other jurisdiction of
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(I.R.S.
Employer
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Incorporation
or organization
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Identification
No.)
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58
Heng Shan Road, Kun Lun Shopping Mall, Harbin, The People’s Republic of China
150090
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code 011-86-451-8233-5794
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, $0.001 par value
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New
York Stock Exchange, LLC
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Securities
registered pursuant to section 12(g) of the Act:
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
¨
Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. x
Yes ¨ No
Note – Checking the box above
will not relieve any registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those
Sections.
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x
Yes ¨
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes ¨ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
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-K
or any amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer ¨ (Do not check if
a smaller reporting company)
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
¨ Yes x No
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
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.
Note. —If a determination as
to whether a particular person or entity is an affiliate cannot be made without
involving unreasonable effort and expense, the aggregate market value of the
common stock held by non-affiliates may be calculated on the basis of
assumptions reasonable under the circumstances, provided that the assumptions
are set forth in this Form.
The
aggregate market value of the voting and non-voting common stock of the issuer
held by non-affiliates as of June 30, 2009 was approximately
$48,961,218(9,272,958 shares of common stock held by
non-affiliates) based upon the closing price of the common stock as
quoted by OTC Bulletin Board on such date.
APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. ¨ Yes
¨ No
(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
As of
March 8, 2010, there are 31,651,251 shares of common stock, par value $0.001
issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
List
hereunder the following documents if incorporated by reference and the Part of
the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
This
Annual Report on Form 10-K is being filed as Amendment No. 1 to our Annual
Report on Form 10-K (the “Report”), which was originally filed on March 15, 2010
with the Securities and Exchange Commission ("SEC"). We are amending this
Report in response to certain comments from the SEC. In particular, we
have:
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revised
our Management’s Discussion and Analysis of Financial Condition and
Results of Operations to provide a more detailed and quantitative analysis
of known material trends and uncertainties in accordance with the SEC’s
Interpretive Release No. 34-48960, “Commission Guidance Regarding
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and enhanced discussion on our costs of sales for our online
education division and training
center;
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revised
our “Liquidity and Capital Resources” section to address in more detail
the anticipated costs associated with our development of a nation-wide
advertising campaign as well as the additional funding we will need for
the expansion of our business through the sale of equity, if
necessary;
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revised
our disclosure on Directors, Executive Officers and Corporate Governance
to disclose, with respect to each director, the specific experience,
qualifications, attributes or skills that led the board of directors to
conclude that the person should serve as a director for the Company in
accordance with Item 401€ of Regulation
S-K;
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included footnote disclosure to
our summary compensation table to explain the material terms of each grant
of options, including but not limited to the date of exercisability, any
conditions to exercisability, any tandem feature, any reload feature, any
tax-reimbursement feature, and any provision that could cause the exercise
price to be lowered in accordance with Item 402(o)(4) of Regulation
S-K;
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stated that the dollar amount set
forth in the summary compensation table with respect to the option awards
reflects the aggregate grant date fair value of the option awards computed
in accordance with FASB ASC Topic 718 and included a footnote disclosing
that for all assumptions made in the valuation, to refer to footnote 16
“Warrants and Options” in the Company’s footnotes to the financial
statements;
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included the tabular disclosure
required by Item 402(p)(1) of Regulation SK with respect to any
outstanding equity awards
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included
discussion on how our ownership structure complies with PRC legal
restrictions on foreign ownership and investment in internet and education
businesses and disclosed each of the education and business licenses and
permits we have; and
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expanded
our risk factor disclosure on the uncertainties with respect to the
application of certain PRC rules and
regulations.
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All other
information contained in the Report remains unchanged.
This
Amendment No. 1 to the Report continues to speak as of the date of the Report,
and except as expressly set forth herein we have not updated the disclosures
contained in this Amendment No. 1 to the Report to reflect any events that
occurred at a date subsequent to the filing of the Report. The filing of
this Amendment No. 1 to the Report is not a representation that any statements
contained in items of the Report other than that information being amended is
true or complete as of any date subsequent to the date of the
Report.
Table
of Contents
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Page
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PART
I
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Item
1.
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Description
of Business
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4
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Item
1A.
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Risk
Factors
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14
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Item
1B.
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Unresolved
Staff Comments
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20
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Item
2.
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Description
of Property
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20
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Item
3.
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Legal
Proceedings
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21
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Item
4.
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(Removed
and Reserved)
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21
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PART
II
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Item
5.
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Market
for Common Equity and Related Stockholder Matters
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21
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Item
6.
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Selected
Financial Data
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23
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition or Plan of
Operation
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23
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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34
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Item
8
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Financial
Statements and supplementary Data.
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F-1
– F-28
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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35
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Item
9A.
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Controls
and Procedures
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35
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Item
9A(T)
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Controls
and Procedures
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36
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Item
9B.
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Other
Information
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37
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PART
III
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Item
10.
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Directors,
Executive Officers, and Corporate Governance.
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37
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Item
11.
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Executive
Compensation
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45
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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48
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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50
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Item
14.
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Principal
Accountant Fees and Services
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50
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PART
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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51
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Cautionary
Statement Regarding Forward Looking Statements
The
discussion contained in this Annual Report on Form 10-K/A 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-K/A. 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-K/A 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-K/A 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-K/A or the date of documents incorporated by reference
herein that include forward-looking statements.
3
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Item 1.
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Business.
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History
of our Organization
We were
incorporated in 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 an agreement pursuant to which:
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the stockholders of Harbin Zhong
He Li Da, a PRC corporation, transferred all of the stock of Harbin Zhong
He Li Da to us and we issued to those stockholders a total of 18,333,333
share of common stock, representing 95% of our outstanding common stock
after giving effect to the
transaction.
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Duane Bennett, who was then our
chairman of the board and controlling shareholder, 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.
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We
changed our corporate name to China Education Alliance, Inc. on November 17,
2004.
General
We are an
education service company that provides on-line education and on-site training
in the People’s Republic of China (“PRC”). We were organized to meet what our
founders believe is an unmet need for educational resources throughout the PRC.
Based on the PRC 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 the
PRC, there is an uneven allocation of educational resources in the PRC. 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
database 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 350,000 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 a methodology 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.
4
We have
also introduced a program of on-line vocational training services. We
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 called 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 PRC 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.
On April
18, 2008, our wholly owned subsidiary, Harbin Zhong He Li Da Education
Technology, Inc. (ZHLD) entered into an agreement and supplementary agreement
with Harbin Daily Newspaper Group to invest in a joint venture company, Harbin
New Discovery Media Co., ZHLD contributed RMB 3,000 000 (approximately,
$430,000) and Harbin Daily Newspaper Group contributed RMB 3,120,000
(approximately, $445,000) towards the registered capital of Harbin New Discovery
Media Co. In return for their respective contributions, ZHLD will own 49.02%
equity interest and Harbin Daily Newspaper Group will own 50.98% equity interest
in Harbin New Discovery Media Co., Ltd. This joint venture will create new
educational material distribution channels in readable newspaper format in the
future. Pursuant to the terms of the supplementary agreement, Harbin Daily
Newspaper Group assigned all its rights in the “Scientific Discovery” newspaper
exclusively to the joint venture company. The transaction closed on July 7, 2008
and as a result, Harbin New Discovery Media Co. Ltd. is now a 49.02% owned
subsidiary of ZHLD and we are now in the publication and distribution of a
scientific newspaper business.
On April
27, 2008, we entered into a Share Transfer Agreement with Mr. Yuli Guo (“Guo”)
and World Exchanges, Inc. (“WEI”) to purchase from Guo seventy (70) issued and
outstanding common shares in WEI, representing 70% of the entire issued share
capital of WEI. In consideration for the said shares, we issued to Guo 400,000
shares of our common stock. Guo retains the remaining 30% of the issued share
capital of WEI. As a result of the transaction, WEI is now a 70% owned
subsidiary of China Education Alliance.
The
acquisition of WEI has not been fully completed as of December 31, 2009 due to
the non-resolution of ongoing administrative and legal matters of WEI’s five
entities in the People’s Republic of China. The Company currently is attempting
to fully resolve all outstanding issues related to this acquisition.
Accordingly the operations and financial position of WEI are not consolidated or
presented in our consolidated financial statements as of December 31, 2009 and
2008 and for the years then ended.
On
January 4, 2009, our subsidiary, ZHLD entered into an agreement with Mr. Guang
Li to jointly incorporate and invest in a joint venture company, Zhong He Li Da
(Beijing) Management Consultant Co., Ltd. (“ZHLDBJ”).ZHLD contributed RMB
425,000 (approximately, $62,107), and Mr. Guang Li contributed RMB 75,000
(approximately, $10,960) towards the registered capital of ZHLDBJ, amounting to
a total registered capital interest, and Mr. Guang Li will own 15% equity
interest in ZHLDBJ. ZHLD has authorized Mr. Xiqun Yu to hold 20% of its equity
interest of ZHLDBJ on its behalf.
5
In
February 2010, the Company, through its wholly owned subsidiary, ZHLD,
incorporated a new company in the PRC, Beijing New Shifan Education &
Technology ("New Shifan"). Further, New Shifan has acquired all the assets and
operations of Beijing Shifan Culture Communication Co., Ltd. ("Beijing Shifan")
for RMB 6 million. Focused on the advancement of science and mathematics
education, Beijing Shifan publishes the "Senior High School Students Mathematic,
Physics, and Chemistry" magazine, which has been endorsed by the PRC Ministry of
Education. The magazine was founded in 1993. Beijing Shifan is also the sponsor
and organizer of a nationwide contest for middle school and high school
students. This national competition tests the students' academic abilities in
mathematics, physics and chemistry. There are currently 23 provinces and cities
and more than 100,000 students participating in the contest, which emphasizes
students' abilities, technology awareness, and innovative thinking. The winners
of the contest qualify for enrollment in some of the top universities in the
PRC, thus it has very significant impact on the secondary education market in
China.
Corporate
Structure
Our
present corporate structure is as follows:
Education
Systems in the PRC
Since
1949 when the PRC was founded, the government in the PRC 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 the PRC.
According
to the National Bureau of Statistics of the PRC 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 PRC 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
the PRC is under pressure to reform and develop. On March 14, 2004, the
second session of the 10th National People’s Congress concluded that the PRC
advocates “putting people first” as its development model. The PRC government
sets education as a strategic priority in the China Agenda for
Education.
The
central government in the PRC, through the Ministry of Education, manages
education in the PRC 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 the PRC has promulgated a number of administrative
regulations relating to education.
6
In the
PRC, 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, the PRC passed the Compulsory
Education Law, which dictates that nine years of compulsory education (grades 1
through 9) is to become mandatory 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 PRC 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 the
PRC’s population since its inception. In 2002, the PRC 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 the PRC
competitive in the world economy and provides a blueprint to speed up
educational reform and development in the PRC. 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 the PRC. 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 PRC 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 to purchase our products. The
learners can have materials downloaded for off-line education or study the
material on-line.
We
believe that through our website, we can help to 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 PRC primary, middle and high school exams which are used by students who
are primarily in age range of six to eighteen.
7
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Build up 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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Open branch offices in key
cities. Even though our website is accessible from anywhere in the PRC,
course materials are not standardized throughout the PRC, and there are
many differences in both the course materials and the resources among the
different regions in the PRC. 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 materials 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, of which
junior, middle and high school as the key part. Our courses are complimentary
type with 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, Chinese, etc. 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 have
introduced a program of on-line vocational training services. We have
collaborated with the National Association of Vocation Education of
China 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 called 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 PRC 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 recruiting
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 career
needs.
8
The
National Association of Vocation Education of China has a large number of
institutional members, including provincial education bureaus and more than
1,000 vocational training schools across the PRC. 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 agencies
facilities.
In this
program we work with the National Association of Vocation Education of China,
which certifies vocational certification, and coordinate our programs with the
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 the PRC 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 9
multimedia/computer classrooms at two centers.
Harbin
New Discovery Media Co.
On April
18, 2008, our wholly-owned subsidiary, Harbin Zhong He Li Da Education
Technology, Inc. entered into an agreement and supplementary agreement with
Harbin Daily Newspaper Group to invest in a joint venture company, Harbin New
Discovery Media Co., Harbin Zhong He Li Da Education Technology, Inc.
contributed RMB 3,000 000 (approximately, $430,000) and Harbin Daily Newspaper
Group contributed RMB 3,120,000 (approximately, $445,000) towards the registered
capital of Harbin New Discovery Media Co. In return for their respective
contributions, Harbin Zhong He Li Da Education Technology, Inc. will own 49.02%
equity interest and Harbin Daily Newspaper Group will own 50.98% equity interest
in Harbin New Discovery Media Co., Ltd. Pursuant to the terms of the
supplementary agreement, Harbin Daily Newspaper Group shall assign all its
rights in the “Scientific Discovery” newspaper exclusively to the joint venture
company, Harbin New Discovery Media Co. “Scientific Discovery” was established
in October 2001 to popularize scientific information and knowledge with PRC
citizens, and it has won strong brand recognition and a loyal readership in
Heilongjiang province. In 2007, the “Scientific Discovery” circulation per week
rose to approximately 60,000 sets, which generated total revenues of $1.1
million during the year. Harbin New Discovery Media Co., Ltd. plans to publish
this newspaper twice per week, and expand distribution of the publication on a
national basis. The first publication will target primary and middle school
students by providing pertinent and authoritative after-school tutorship
materials, which will be synchronized with students’ syllabi. The educational
materials will be prepared by top-ranked educational experts and professors. The
second publication will target the general population by providing scientific
information and guidance in daily life.
9
China
Education Alliance, along with The National Association of Vocational Education
of China and Beijing Huayu Education Foundation is dedicated to building PRC’s
first management training program, Million Managers Training Program, with the
goal of improving management skills and designing a complete solution for the
management, clients and suppliers. The topics are aimed at improving management
skills, increasing corporate profitability and sustaining development. The
program comprises 9 education modules:
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Enterprise surviving environment
and operation
strategies
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Marketing
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General
management
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Enterprisers management
thought
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Human recourses
management
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Enterprise’s
culture
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Financial management and capital
management
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Purchasing and production
management
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Enterprisers’ self-management and
improvements
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The
program takes 60 days with tuition of RMB 10,000 (approximately $1,437) to
RMB80,000 (approximately $11,491) based on different learning components.
Some top experts from several industries are instructors in the program in
Beijing.
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 products, we need to obtain their approval of the use of our
programs in connection with the curriculums in the schools under their
jurisdiction. We also use these marketing calls 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 our products.
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 but
charges users for download of our products.
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 or coupons
handed out to students in front of high schools and other major education
institutions. We are also able to attract users by reputation and referrals from
current students or users.
“Scientific
Discovery,” a scientific information newspaper with a focus on introducing
scientific knowledge to elementary and secondary students exclusively, will be
marketed by the joint venture company, New Discovery. This joint
venture will create new educational material distribution channels in readable
newspaper format and promote our core businesses in the future. New Discovery
plans to publish this newspaper twice per week, and expand distribution of the
publication on a national basis. The first publication will target primary and
middle school students by providing pertinent and authoritative after-school
tutorship materials, which will be synchronized with students’ syllabi. The
educational materials will be prepared by top-ranked educational experts and
professors. The second publication will target the general population by
providing scientific information and guidance in daily life.
10
We
expense advertising costs for outdoor spots at the time they are aired 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, 2009 and
2008 were $1,093,535 and $892,724 , respectively.
Competition
We
compete with a number of PRC and international companies that sell educational
materials in the PRC 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 the PRC and may offer products and services at lower costs
to build up market share.
Government Regulations
The
education industry in the PRC is heavily regulated at all levels - national,
provincial and local. PRC practices and policies have limited contract with
non-PRC entities in the education industry. In addition, our business is
subject to numerous PRC 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
PRC companies in the industry of education. As a result, all of our PRC
subsidiaries are staffed with PRC nationals. All of our revenue is derived
from our PRC subsidiaries, and our success is dependent on the skill and
experience of the employees of our subsidiaries.
Foreign
Ownership Restrictions on Internet Content Provision Businesses
The State
Council promulgated the Administrative Rules on Foreign-Invested
Telecommunications Enterprises in December 2001, as amended on September 10,
2008, or the FITE Rules. The FITE Rules set forth detailed requirements with
respect to capitalization, investor qualifications and application procedures in
connection with the establishment of a foreign-invested telecommunications
enterprise. Pursuant to the FITE Rules, the ultimate capital contribution ratio
of the foreign investor or investors in a foreign-funded telecommunications
enterprise that provides value-added telecommunications services shall not
exceed 50%. In addition, pursuant to the FITE Rules permitted foreign investment
ratio of value-added telecommunications services is no more than
50%.
In
addition, for a foreign investor to acquire any equity interest in a value-added
telecommunications business in China, it must satisfy a number of stringent
performance and operational experience requirements, including demonstrating a
track record and experience in operating value-added telecommunications business
overseas. Moreover, foreign investors that meet these requirements must obtain
approvals from China’s Ministry of Industry and Information (“MII”) and the
Ministry of Commerce or their authorized local counterparts, which retain
considerable discretion in granting approvals.
On July
26, 2006, MII publicly released the Notice on Strengthening the Administration
of Foreign Investment in Operating Value-added Telecommunications Business,
dated July 13, 2006, or the MII Notice, which reiterates certain provisions
under the FITE Rules. According to the MII Notice, if any foreign investor
intends to invest in a Chinese telecommunications business, a foreign-invested
telecommunications enterprise shall be established and such enterprise shall
apply for the relevant telecommunications business licenses. The MII Notice
prohibits domestic telecommunication services providers from leasing,
transferring or selling telecommunications business operating licenses to any
foreign investor in any form, or providing any resources, sites or facilities to
any foreign investor for their illegal operation of a telecommunications
business in China. According to the MII Notice, either the holder of a
value-added telecommunication service license or its shareholders must directly
own the domain names and trademarks used by such license holders in their
provision of value-added telecommunication services. The MII Notice also
requires each license holder to have the necessary facilities, including
servers, for its approved business operations and to maintain such facilities in
the regions covered its license.
11
We
completed our reverse merger and our corporate structure was established in
September 2004, before the implementation of the FITE Rules and the MII Notice.
Accordingly, we do not believe that the FITE Rules and the MII Notice apply to
us. Further, even if they did, we do not believe that we are in the
telecommunications business. We do not provide connectivity and internet
services. We are primarily in the education business and only a portion of our
education resources is disseminated to our paying customers as opposed to the
general public via internet download. Finally, our vocational training services
are provided in collaboration with and through a PRC company, China Vocation
Education Society. We do not own or have any equity stake in China Vocation
Education Society.
In the
opinion of Heilongjiang Min Qiang Law Firm, our PRC legal counsel, the ownership
structures of China Education Alliance, Inc.’s subsidiaries in China are in
compliance with existing published PRC laws and regulations.
However,
there are substantial uncertainties regarding the interpretation and application
of PRC laws and regulations, including the laws and regulations governing the
enforcement and performance of our contractual arrangements in the event of
imposition of statutory liens, bankruptcy and criminal proceedings. Accordingly,
we cannot assure you that the PRC regulatory authorities will not ultimately
take a contrary view.
If the
PRC government finds that the agreements that establish the structure of our
operations in China do not comply with PRC government restrictions on foreign
investment in our industry, we could be subject to severe
penalties.
Under our
current corporate structure, only Harbin Zhong He Li Da Education Technology,
Inc. and Beijing Wei Shi Yi Tong Education Technology Co., Inc. are Wholly
Foreign Owned Entities (WFOEs).
Regulation
of Online and Distance Education
Pursuant
to the Administrative Regulations on Educational Websites and Online and
Distance Education Schools issued by the Ministry of Education (MOE) in 2000, or
the Online Education Regulation, educational websites and online education
schools may provide education services in relation to higher education,
elementary education, pre-school education, teacher education, occupational
education, adult education and other educational services. Under the Online
Education Regulations, “Educational websites” refers to education websites
providing education or education-related information services to website
visitors by means of a database or an online education platform connected via
the Internet or an educational television station through an Internet service
provider, or ISP. Under the Online Education Regulations, “Online education
schools” refer to organizations providing academic education services or
training services with the issuance of various certificates.
Under the
Online Education Regulations, setting up educational websites and online
education schools is subject to approval from relevant education authorities,
depending on the specific types of education provided. Under the Online
Education Regulations, any educational website and online education school
shall, upon receipt of approval, indicate on its website such approval
information as well as the approval date and file number.
According
to the Administrative License Law promulgated by the National People’s Congress
on August 27, 2003 and effective as of July 1, 2004, only laws promulgated by
the National People’s Congress and regulations and decisions promulgated by the
State Council may establish administrative license requirements. On June 29,
2004, the State Council promulgated the Decision on Cutting Down Administrative
Licenses for the Administrative Examination and Approval Items Really Necessary
to be Retained, in which the administrative license for “online education
schools” was retained, while the administrative license for “educational
websites” was not retained.
We
believe we are not required to obtain a license to operate “education websites”
or “online education schools” from the MOE under the current PRC laws and
regulation because we do not offer through our website education services or
training programs that directly offer government accredited academic degrees or
other government accreditation certifications. For the same reason, we do not
believe that we need to obtain a license to operate our onsite tutoring
services. Finally, there appears to be no restriction against foreign ownership
and it is unclear whether foreign ownership is restricted for businesses
providing such “education websites” or “online education
schools”.
12
Business
Scope of our PRC Operating Entities
All our
PRC operating subsidiaries, including Harbin Zhong He Li Da Education
Technology, Inc. are in the business of providing education services.
Particularly, Harbin Zhong He Li Da Education Technology, Inc. is a holding
company of all other subsidiaries and also provides online exam preparation
services, Heilongjiang Zhonghe Education Training Center provides onsite
vocational training and after school tutoring services, Beijing Hua Yu Hui Zhong
Technology Development Co., Ltd provides onsite vocational training and online
college graduates electronic database and pre-employment training , Zhonghelida
(Beijing) Management Consultant Co. Ltd. provides onsite vocational training
services, Harbin New Discovery Media Co. is in the educational newspaper
publishing business and Beijing New Shifan Education & Technology Co., Ltd
publishes high school education magazine and organizes high school students
contests.
Intellectual
Property
The exams
and other materials on our websites include material that is generally
available, such as exams that were previously given, and exams and other
material that was developed for us. We engage authors, who are teachers,
university professors or experts in their fields, to develop materials for our
websites. Under the terms of our contracts, we own the copyright on all
materials produced for us by these authors. We pay each author a fixed fee and
certain percentage of sales as royalty. We also enter into agreements to use and
publish educational materials developed by others, for which we pay for the use
right.
Employees
As
of March 5, 2010, we have approximately 466 employees, consisting of
5 executives, 45 administrative and finance employees, 194 marketing and sales
personnel, 21 research and development staff, 25 information technicians, 16
designers, 152 teaching and education administrative staff, and 8 other
employees engaged in security, planning, human resources and other activities.
We have no collective bargaining agreements, and we believe that we have good
relations with our employees.
Education
and Business Licenses
Below is
a list of our education and business licenses and permits of us and our
operating subsidiaries:
Harbin
Zhong He Li Da Education Technology, Inc.
1.
Certificate of Approval
2.
Business License
3. Tax
Registration Certificate
4.
Organization Code Certificate
5. State
Administration of Foreign Exchange Registration Card
Heilongjiang
Zhonghe Education Training Center
1.
Certificate of Approval
Beijing
Hua Yu HuiZhong Technology Development Co., Ltd
1.
Business License
2. Tax
Registration Certificate
3.
Organization Code Certificate
Harbin
New Discovery Media Co.
1.
Business License
2. Tax
Registration Certificate
3.
Organization Code Certificate
Zhong He
Li Da (Beijing) Management Consultant Co. Ltd
1.
Business License
2. Tax
Registration Certificate
3.
Organization Code Certificate
Beijing
New Shifan Education & Technology Co.Ltd.
1.
Business License
2. Tax
Registration Certificate
3.
Organization Code Certificate
Beijing
Wei Shi Yi Tong Education Technology Co., Inc.
1.
Certificate of Approval
2.
Business License
3. Tax
Registration Certificate
4.
Organization Code Certificate
13
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Item 1A.
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Risk
Factors.
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The
reader should carefully consider each of the risks described below. If any of
the following risks described below should occur, our business, financial
condition or results of operations could be materially adversely affected andthe
trading price of our common stock could decline significantly.
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this prospectus before deciding to invest in our common stock.
Risks
Associated with our Business
Our business is dependent
upon the PRC government’s educational policies and programs
..
As a
provider of educational services, we are dependent upon governmental 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 materials used in the PRC educational
system, our products could become obsolete, which would affect our ability to
generate revenue and operate profitably. We cannot assure you that the PRC
government agencies would not adopt such changes.
We are subject to numerous
PRC rules and regulations that restrict the scope of our business and could have
a material adverse impact on us.
We may be
subjected to numerous rules and regulations in the PRC, 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.
In
particular, we do not believe that Administrative Rules on Foreign-Invested
Telecommunications Enterprises and the Notice on Strengthening the
Administration of Foreign Investment in Operating Value-added Telecommunications
Business apply to us because our corporate structure was established before
these rules came into effect. Further, we do not provide connectivity and
internet services. We are primarily in the education business and only a portion
of our education resources is disseminated to our paying customers as opposed to
the general public via internet download. Finally, our vocational training
services are provided in collaboration with and through a PRC company, China
Vocation Education Society. We do not own or have any equity stake in China
Vocation Education Society. With regard to our education services, we do not
believe that the Administrative Regulations on Educational Websites and Online
and Distance Education Schools and the Decision on Cutting Down Administrative
Licenses for the Administrative Examination and Approval Items Really Necessary
to be Retained apply to us, because we do not offer through our website
education services or training programs that directly offer government
accredited academic degrees or other government accreditation certifications.
Even if these rules applied to us, there appears to be no restriction against
foreign ownership and it is unclear whether foreign ownership is restricted for
businesses providing such “education websites” or “online education schools”.
For more discussion on these issues, please refer to “Foreign Ownership
Restrictions on Internet Content Provision Businesses” and “Regulation of Online
and Distance Education”.
However,
there can be no assurance that we are in compliance now, or will be in the
future. Moreover, operating in the PRC 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. With any change
in administration, more scrutiny, emphasis or regulation may be levied our type
of business or organizational structure. The determination that our structure or
agreements are in violation of governmental rules or regulations in the PRC
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 the PRC,
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.
Our business is subject to
the health of the PRC economy .
The
purchase of educational materials not provided by the state educational system
is discretionary and dependent upon the ability and willingness of families or
students to spend available funds on extra educational products to prepare for
national examinations. A general economic downturn either in our market or a
general economic downturn in the PRC could have a material adverse effect on our
revenue, earnings, cash flow and working capital.
14
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 the PRC. 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. Except for Mr
Zibing Pan, our Chief Financial Officer, we do not have employment contracts
with Mr. Yu or any other officers or employees. 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 PRC 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
materials 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 the
PRC.
In order
to conduct business in the PRC, 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 the PRC, 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 the PRC may inhibit our growth and our
ability to operate profitably.
Changes in the policies of
the government in the PRC could significant impact our ability to operate
profitably.
The
economy of the PRC 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 the PRC generally and the educational system in particular.
Although the government in the PRC 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.
15
While the
economy in the PRC 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 purchase, and
restrictions on state bank lending. Such an austerity policy can lead to a
slowing 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 personnel and operations
of the acquired companies 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 which 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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the difficulty of integrating
acquired products, services or
operations;
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the potential disruption of the
ongoing businesses and distraction of our management and the management of
acquired companies;
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the difficulty of incorporating
acquired rights or products into our existing
business;
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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 to the extent that we are unable to succeed
in addressing any of these risks or other problems encountered in connection
with these acquisitions, many of which cannot be presently identified, these
risks and problems could disrupt our ongoing business, distract our management
and employees, increase our expenses and adversely affect our results of
operations.
16
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
the PRC will not significantly alter its policies from time to time without
notice in a manner which reduces or eliminates any benefits from its present
policies of economic reform. In addition, a substantial portion of productive
assets in the PRC 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 the PRC also exercises significant control over its
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 the PRC, could have a material
adverse effect on our business, results of operations and financial
condition.
Price controls may affect
both our revenues and net income.
The laws
of the PRC provide 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 materials 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 PRC 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 most of 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 the PRC .
Most of
our directors and our executive officers reside in the PRC and all of our assets
are located in the PRC. 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 the PRC would permit effective
enforcement of criminal penalties of the federal securities
laws.
17
All of
our agreements, which are made by our PRC subsidiaries, are governed by the laws
of the PRC. The PRC legal system is a civil law system based on written
statutes. Accordingly decided legal cases have little precedential value. The
government of the PRC 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 PRC 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 the PRC. 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.
Because our funds are held
in banks which do not provide insurance, the failure of any bank in which we
deposit our funds could affect our ability to continue in
business.
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 funds to pay our suppliers,
employees and other creditors, we may be unable to continue in
business.
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 the PRC. 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.
18
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 17% appreciation of the
Renminbi against the U.S. dollar between July 21, 2005 and March 23, 2009.
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 PRC
products may affect the market for our stock .
Although
we do not sell consumer products in the international market, the recent recalls
of PRC 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 the
PRC.
Certain of our stockholders
control a significant amount of our common stock .
Approximately
40% of our outstanding common stock is owned by our chief executive officer, Mr.
Xiqun Yu. Depending on the circumstances, Mr. Yu presently may have the voting
power from the common stock he owns to elect all of the directors and approve
any transaction requiring stockholder approval.
Risks
Associated with Investing in 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, we may issue such shares in the future.
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.
Internal
controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial reports or
prevent fraud, our operating results could be harmed. Under the current SEC
regulations, we will be required to include a management report on internal
controls over financial reporting in our Form 10-K annual report for the year
ended December 31, 2008, and we will be required to include an auditor’s report
on internal controls over financial reporting for the year ended December 31,
2010. 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. Further, at such time as we are required to comply with the
internal controls requirements of Sarbanes Oxley, we may incur significant
expenses in having our internal controls audited and in implementing any changes
which are required.
19
Payment
of dividends to our shareholders would require payment of dividends by our PRC
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 PRC 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 shareholders.
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 registration and
potential sale, either pursuant to a prospectus or pursuant to Rule 144, by
certain of our selling stockholders of a significant number of shares could
encourage short sales by third parties.
There may
be significant downward pressure on our stock price caused by the sale or
potential sale of a significant number of shares by certain of our selling
stockholders pursuant to a prospectus or pursuant to Rule 144, which could allow
short sellers of our stock an opportunity to take advantage of any decrease in
the value of our stock. The presence of short sellers in our common stock may
further depress the price of our common stock.
If the
selling stockholders sell a significant number of shares of common stock, the
market price of our common stock may decline. Furthermore, the sale or potential
sale of the offered shares pursuant to a prospectus and the depressive effect of
such sales or potential sales could make it difficult for us to raise funds from
other sources.
|
Item 1B.
|
Unresolved Staff
Comments.
|
Not
applicable.
|
Item 2.
|
Properties.
|
All land
in the PRC is owned by the government and cannot be sold to any individual or
entity. Instead, the government grants landholders a "land use right" after a
purchase price for such "land use right" is paid to the government. The "land
use right" allows the holder the right to use the land for a specified long-term
period of time and enjoys all the incidents of ownership of the land. The
following are the details regarding our land use rights with regard
to the land that we use in our business.
Our main
office is located at 58 Heng Shan Road, Kun Lun Shopping Mall Harbin,
Heilongjiang Province, PRC150090, 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 have no current plans to occupy
other or additional office space.
We also
have a 3,700 square meter (36,600 square foot) building in the Harbin which we
use for our educational training center and our vocational training
center.
Harbin
New Discovery Media Co. is located at 399 You Yi Road, Dao Li District, Harbin,
Heilongjiang Province, PRC, which has a total area of 120 square meters.
The annual rent is RMB140, 000 (approximately US$20,108).
20
Zhong He
Li Da (Beijing) Management Consultant Co. Ltd. is located at 17-A6-1, 4 th Floor,
Daofeng Technology Business Zone, Qiaonan Technology Zone, Chongwen District,
Beijing, PRC, which has a total area of 356 square meters with annual rental of
RMB 480,000 (approximately US$70,314).
Beijing
New Shifan Education & Technology Co. Ltd. is located at Beijing
Normal University, which has a total area of 100 square meters with annual
rental of RMB 100,000 (approximately US$14,500).
|
Item 3.
|
Legal
Proceedings.
|
We know
of no material, active, pending or threatened proceeding against us or our
subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or
defendant in any material proceeding or pending litigation.
|
Item 4.
|
(Removed and
Reserved)
|
PART
II
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Market
for Common Equity and Related Stockholder Matters
Our
common stock is traded on the NYSE since January 27, 2010 under the symbol CEU.
From July 20, 2009 to January 26, 2010, our common stock was traded on the NYSE
Amex under the symbol CEU. Prior to July 20, 2009, our common stock was traded
on the OTC Bulletin Board under the trading symbol CEUA.OB. The table below
presents the high and low bid for our common stock for each quarter from January
1, 2008 through December 31, 2009. These prices reflect inter-dealer prices,
without retail markup, markdown, or commission, and may not represent actual
transactions.
|
High
|
Low
|
|||||||
|
Year ended December 31,
2008
|
||||||||
|
1
st
Quarter
|
5.15 | 1.85 | ||||||
|
2
nd
Quarter
|
3.35 | 1.99 | ||||||
|
3
rd
Quarter
|
2.95 | 1.85 | ||||||
|
4
th
Quarter
|
1.85 | 1.08 | ||||||
|
Year ended December 31,
2009
|
||||||||
|
1
st
Quarter
|
1.73 | 0.80 | ||||||
|
2
nd
Quarter
|
5.29 | 1.55 | ||||||
|
3
rd
Quarter
|
6.50 | 4.25 | ||||||
|
4
th
Quarter
|
6.63 | 5.00 | ||||||
As of
March 8, 2010, we had 31,651,251shares of common stock outstanding and held of
record by 211 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 8,
2010, the closing price of our common stock on NYSE was $6.33 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.
Securities
Authorized for Issuance Under Equity Compensation Plans.
On June
18 2009, we adopted the China Education Alliance, Inc. 2009 Incentive Stock Plan
(the “Plan”). We registered 1,000,000 shares of our common stock under the Plan
on a Form S-8, effective June 18, 2009. On the same date, we issued 16,334
shares of our common stock to our employees and consultants, options to purchase
300,000 shares of common stock to our Chief Executive Officer, Xiqun Yu, at an
exercise price of $3.19 per share, and options to purchase 116,000 shares of
common stock to other employees and consultants at an exercise price of $2.90
per share. On October 29, 2009 we issued 137,005 shares of our common stock
to our employees and consultants. 430,441 shares are still available under the
plan as of March 8, 2010.
Registrar
and Stock Transfer Agent
Our stock
transfer agent is StockTrans, Inc., 44 West Lancaster Avenue, Ardmore, PA
19003.
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 PRC 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 PRC 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 PRC 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.
Purchases
of Equity Securities by China Education Alliance and Affiliated
Purchasers
During
the fourth quarter of our fiscal year ended December 31, 2009, neither we nor
any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Exchange
Act) purchased any shares of our common stock.
Recent Sales of Unregistered
Securities
During
the fiscal year 2008, we did not issue any unregistered shares of our common
stock.
22
On May
25, 2009, we entered into a Joint Marketing Agreement with our
investor relations firm, RedChip Companies, Inc. (“RedChip”) for the provision
of certain investor relations services. In partial consideration of such
services, we had agreed to pay RedChip in restricted
shares of the Company’s common stock upon the Company achieving monthly
milestones. Because we had achieved such these milestones, the board of
directors of the Company issued to RedChip a total of 53,000 restricted shares
of common stock in accordance with the provisions of the Joint Marketing
Agreement on October 26, 2009.
Repurchase
of Equity Securities
None.
Item 6.
Selected
Financial Data.
Our net
cash provided by operating activities was $18,553,167 for the year ended
December 31, 2009, an increase of $8,799,852 or 90.2% from $9,753,315 for the
same period in 2008. This increase was due to an increase in net income of
$5,197,273 along with non-cash charges related to an increase of stock based
compensation $1,530,919, and depreciation and amortization of $1,586,417, a
decrease of prepaid expense of $745,196, as compared to the year ended December
31, 2008.
As a
result of the foregoing, we had net income of $15,430,632, or $0.64 per share
basic and $0.60 diluted, for the year ended December 31, 2009, compared with net
income of $10,009,499 or $0.46 per share basic and $0.41 diluted, for the year
ended December 31, 2008.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
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 Amendment No. 1 to our Annual Report on
Form 10-K, 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.
Overview
Our
principal business is the distribution of educational resources in the PRC
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 350,000 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.
23
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 People Republic 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
PRC 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. As of
December 31, 2009, we have $1,274,727 of accounts receivable , comprised of
$966,308 from on-line advertising and $308,420 from the sale of prepaid debit
cards sold to re-sellers.
Our
prepaid expenses at $2,692,310 account for of our current assets 3.9% of current assets as
of December 31, 2009. Prepaid expenses are primarily comprised of
advance payments made for services to teachers, online materials and video,
outdoor advertising and prepaid rent. As of December 31, 2009, prepayments to
teachers for online materials totaled $294,622, prepayment of rent expense
totaled $305,853, prepayments for outdoor advertising totaled $1,812,973,
prepaid services and professional fees totaled $81,441, and other prepaid
expenses were $197,421. We amortize the prepayments to teachers over three
months, which is the estimated life of the testing materials. The prepaid rent
related to our Beijing office and dormitory rental for our training center and
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 gross margin of
79.4% for the year ended December 31, 2009. 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
gross margin close to on-line education business, which was 78.8% for the year
ended December 31, 2009. 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.
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.
24
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 PRC economy and the
perception of students that they will benefit from improving their ability to
perform well on standardized entrance exams for 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 the
PRC 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 National Vocational Education Association
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.
We are in
the process of introducing new services aimed at students who want
to attend vocational school. These students include high school students
who do not continue their education at universities and university graduates who
are not able to find employment. The core business for our vocation education
will be in three main areas: vocation training, vocational certification, and
career development for college graduates. We have collaborated with the to the
National Vocational Education Association of China in setting up www.360ve.com , which
provides information regarding vocation training schools and vocation training
both on-line and on-site.
On April
18, 2008, ZHLD entered into an agreement and supplementary agreement with Harbin
Daily Newspaper Group (“Newspaper Group”) to invest in a joint venture company,
Harbin Harbin New Discovery Media Co., Ltd. Media Co., Ltd. ZHLD contributed RMB
3,000 000 (approximately, $430,000) and Newspaper Group contributed RMB
3,120,000 (approximately, $445,000) towards the registered capital of Harbin New
Discovery Media Co., Ltd.. In return for their respective contributions, ZHLD
will own 49.02% equity interest and Newspaper Group will own 50.98% equity
interest in Harbin New Discovery Media Co., Ltd.. The parties are prohibited,
for the duration of the joint venture from retiring or transferring their equity
interests. This joint venture will create new educational material distribution
channels in readable newspaper format in the future. The value of this
investment as of December 31, 2009 is $341,686.
Pursuant
to the terms of the supplementary agreement, Newspaper Group assigned all their
rights in the “Scientific Discovery” a scientific information newspaper with a
focus on education to introduce scientific knowledge to elementary and secondary
students
exclusively, to the joint venture company, Harbin New Discovery Media Co., Ltd..
In the event that the rights to “Scientific Discovery” expire because of reason
other than a change in government policies and an inability to defend against or
resist such changes, Newspaper Group is liable to ZHLD for twice the latter’s
registered contribution in the joint venture in liquidated damages. The
transaction closed on July 7, 2008 and as a result, Harbin New Discovery Media
Co., Ltd. is now a 49.02% owned equity investment of ZHLD, referred to as a long
term investment in the accompanying balance sheet.
25
On April
27, 2008, we entered into a Share Transfer Agreement with Mr. Yuli Guo (the
“Vendor”) and World Exchanges, Inc. (“WEI”) to purchase from the Vendor seventy
(70) issued and outstanding ordinary shares in WEI, representing 70% of the
entire issued share capital of WEI (the “WEI Acquisition”). WEI is incorporated
under the laws of Canada and was organized on December 19, 1991. WEI
has been registered at 30 Denton Avenue, Apartment 2216, Toronto, Canada. In
consideration for the said shares, we issued to the Vendor 400,000 shares of its
common stock, with a market value of $2.33 per share. The Vendor retained the
remaining 30% of the issued share capital of WEI. The Vendor has agreed not to
transfer the shares of China Education Alliance to a third party for fifteen
(15) years and to grant us a right of first refusal in the event the Vendor is
desirous of selling such shares.
The WEI
acquisition has not been fully completed as of December 31, 2009 due to the
non-resolution of ongoing administrative and legal matters in connection with
WEI’s five entities in the PRC. We are currently attempting to fully resolve all
outstanding issues related to this acquisition. As of December 31, 2009 we
decided to exclude WEI from the consolidated financial statements until such
time as the WEI acquisition is fully completed. As of December 31, 2009 and
December 31, 2008 the Company has outstanding advances made to WEI of $223,860
and $80,000, respectively. Management has fully reserved these advances as of
December 31, 2009, until such time as all administrative and legal matters
regarding the WEI acquisition are fully resolved. As of December 31, 2009, the
Company’s management has not reserved their advance on acquisition for WEI,
totaling 400,000 shares of the Company’s common stock valued at $932,000 as
these shares are held in trust by the Company. These shares will either be
returned to the Company or cancelled, if the WEI acquisition is not successfully
resolved or concluded.
Results
of Operation
Comparison of Years Ended
December 31, 2009 and 2008
The
following table sets forth information from our statements of operations for the
years ended December 31, 2009 and 2008.
|
(Dollars)
|
||||||||||||||||
|
Years Ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Revenue
|
$
|
36,967,483
|
100.0
|
%
|
$
|
24,851,017
|
100.0
|
%
|
||||||||
|
Cost
of sales
|
7,364,939
|
19.9
|
%
|
4,964,939
|
20.0
|
%
|
||||||||||
|
Gross
profit
|
29,602,544
|
80.1
|
%
|
19,886,078
|
80.0
|
%
|
||||||||||
|
Income
from operations
|
16,151,865
|
43.7
|
%
|
10,018,437
|
40.3
|
%
|
||||||||||
|
Other
income
|
260,731
|
0.7
|
%
|
664,627
|
2.7
|
%
|
||||||||||
|
Income
before income taxes
|
16,411,925
|
44.4
|
%
|
10,587,733
|
42.6
|
%
|
||||||||||
|
Provision
for income taxes
|
1,295,224
|
3.5
|
%
|
669,197
|
2.7
|
%
|
||||||||||
|
Income
net loss attributable to non-controlling interests
|
15,116,701
|
40.9
|
%
|
9,918,536
|
39.9
|
%
|
||||||||||
|
Net
income
|
15,206,772
|
41.1
|
%
|
10,009,499
|
39.9
|
%
|
||||||||||
Our net
cash provided by operating activities was $18,553,167 for the year ended
December 31, 2009, an increase of $8,799,852 or 90.2% from $9,753,315 for the
same period in 2008. This increase was due to an increase in net income of
$5,197,273 along with non-cash charges related to an increase of stock based
compensation $1,530,919, and depreciation and amortization of $1,586,417, a
decrease of prepaid expense of $745,196, as compared to the year ended December
31, 2008.
We
operate in one business segment, that of education, in which we operate in three
revenue areas of online education, education training centers and on-line
advertising. The following table sets forth information as to the gross margin
for our three revenue areas for the years ended December 31, 2009 and
2008.
26
|
(Dollars)
|
||||||||
|
Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Online Education:
|
||||||||
|
Revenue
|
$
|
22,238,325
|
$
|
16,706,917
|
||||
|
Cost
of sales
|
4,584,519
|
2,859,593
|
||||||
|
Gross
profit
|
17,653,806
|
13,847,324
|
||||||
|
Gross
margin
|
79.4
|
%
|
82.9
|
%
|
||||
|
Training center:
|
||||||||
|
Revenue
|
12,097,375
|
5,552,969
|
||||||
|
Cost
of sales
|
2,569,538
|
1,922,841
|
||||||
|
Gross
profit
|
9,527,837
|
3,630,128
|
||||||
|
Gross
margin
|
78.8
|
%
|
65.4
|
%
|
||||
|
Advertising:
|
||||||||
|
Revenue
|
2,631,783
|
2,591,131
|
||||||
|
Cost
of sales
|
210,882
|
182,505
|
||||||
|
Gross
profit
|
2,420,901
|
2,408,626
|
||||||
|
Gross
margin
|
92.0
|
%
|
93.0
|
%
|
||||
Revenue. Revenue increased by
$12,116,500 or 48.8% in fiscal year 2009 to $36,967,500, compared to $24,851,000
in 2008, resulting in gross profit of $29,602,500 for fiscal year 2009 as
compared to gross profit of $19,886,100 in fiscal year 2008. The increase in
revenue reflected increases of $5,531,000 from our on-line education area,
$6,544,000 for our training center area, and $41,000 from our advertising
income. Advertising income increased slightly between the two years. For both
fiscal years 2009 and 2008, the total gross margins were at around
80%.
We
believe the education market in China is quite large and significantly
fragmented. Our current activities are primarily in the Northeast four provinces
of China. China has about 150 million students aged 6 -18, which are the target
of our education services. In the Northeast four provinces, there are about 10
million students in the 6-18 age group, while the number of student we are
serving ranges from 500,000 – 600,000, only about 5% of the students in our
current market. Therefore, we believe that we have great potential to
grow. Our growth will depend on how we penetrate and
expand into the market. Our expansion may take the form of organic growth and
acquisitions and the key to our growth will be better penetration of our
existing market combined with expanding to new market areas.
Cost of sales. Our overall
cost of sales increased by $2,400,000 to $7,364,939 in fiscal year 2009 compared
to $4,964,939 in fiscal year 2008. The increase in cost of sales reflects a
$1,725,000 increase in our cost of sales for our on-line education segment,
$647,000 increase in cost of sales from our training center segment, and $28,000
from our advertising segment. The on-line training area gross margin dropped
slightly to 79.4% in fiscal year 2009 from 82.9% in fiscal year 2008.
Our training center segment’s gross margin increased to 78.8% in fiscal year 2009
from 65.4% in
fiscal year 2008 due to an increase in demand of training courses. Our
advertising segment’s gross margin was at 92.0% in fiscal year 2009, at about
the same level from 93.0% in fiscal year 2008 due to the fact that
advertising cost are somewhat fixed and margins increase with
volume.
Our cost
of sales is expected to grow in proportion to the revenue. However, with our
anticipated market expansion in the future years, we may incur additional costs
associated with the new market. The specific cost will depend on the geographic
location of the new market, and at this time we are not able to accurately
forecast the cost details of possible future expansion.
Selling expenses. Selling
expenses increased by $1,885,274, or 25.2%, to $9,352,392 in fiscal year 2009
from $7,467,118 in fiscal year 2008. The increase in selling expenses includes
increased agency fees associated with increased sales of our debit
cards.
The
selling expenses were about 25% of our total revenue in 2009. We anticipate the
selling expenses will keep at around 25% of the total revenue in the next year.
However, with our further penetration into national market in the future, we may
need to develop nation-wide advertising campaign to increase market awareness of
our products, and this may cause our selling expenses to increase. We estimate
the nation-wide advertisement would add marketing costs equal to approximately
5% of the total revenue.
27
Administrative expenses.
Administrative expenses increased by $1,639,683, or 108.8%, to $3,146,094 in
fiscal year 2009 compared to $1,506,411 in fiscal year 2008. The increase in
administrative expenses was due to the increase in professional fees and office
expenses, and stock based compensation related to the parent company, ZHLD, and
Beijing Hua Yu Hui Zhong Technology Development Co., Ltd.
Administrative
expenses were about 9% of our total revenue in 2009, compared to 6% in year
2008. We will attempt to keep our administrative expenses around
10% of total revenue in the future years.
Depreciation and amortization.
Depreciation and amortization increased by $58,000, to $952,193 in fiscal year
2009 compared to $894,112 in fiscal year 2008. This increase was due to
depreciation and amortization associated with increases in fixed assets and
amortization of intangible assets.
Interest income. Interest
income in 2009 was $130,675 compared to $127,751 in 2008, which related to
earnings on our cash balances.
Income Taxes. Under
previous PRC tax law, a wholly foreign owned enterprise had a 100%
tax exemption or “holiday” for the first two years after it so qualifies, and
thereafter, a 50% tax “holiday” for three years. The Company received a 100% tax
holiday for the year ended December 31, 2006, and then 50% reduction of the
prevailing tax rate until the fiscal year ending December 31, 2009, subject to
changes in tax rates implemented in 2007 that became effective on 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%. For the years ended
December 31, 2008, ZHLD’s effective income tax rate was at 7.5%, based on having
received a 50% exemption in the year ended December 31, 2007 when the prevailing
effective tax rate was 30%, and an additional 50% exemption as ZHLD was a
technology and software entity. During the year ended December 31, 2009, ZHLD
obtained similar exemptions to those of the year ended December 31, 2008;
however, the prevailing tax rate had a minimum threshold of 10% for the year
ended December 31, 2009. During the year ended December 31, 2009, the Company
was assessed an additional PRC enterprise income tax, above their effective
rate, due to tax regulations implemented by the PRC in the year ended December
31, 2009 relating to a prior period. ZHLD management, expects ZHLD to continue
being qualified as a technology and software entity, and expects to receive a
50% reduction in their statutory PRC enterprise income tax rates. If such status
is not achieved, ZHLD could be subject to increased tax expense in fiscal years
subsequent to December 31, 2009. Furthermore, additional taxes can be assessed,
beyond statutory rates enacted and approved tax abatements received by the
Company, or ZHLD. The Company’s ZETC subsidiary is currently exempt from PRC
taxation, as it operates a business enterprise engaged in educational
opportunities. The Company’s other subsidiaries; BHYHZ and
ZHLDBJ are taxed at the PRC statutory rate (25%), and have not accrued for taxes
since inception, due to recurring losses incurred since inception.
Net income. As a
result of the foregoing, we had net income of $15,206,772, or $0.63 per share
basic and $0.59 diluted, for the year ended December 31, 2009, compared with net
income of $10,009,499 or $0.46 per share basic and $0.41 diluted, for the year
ended December 31, 2008.
28
Off-Balance
Sheet Arrangements
As of
December 31, 2009, we had no off-balance sheet arrangements.
Liquidity
and Capital Resources
Our
current assets primarily consist of cash, account receivables, and prepaid
expenses. We do not have inventory. Our account receivables are primarily from
our advertising business on our websites. Our prepaid expenses are primarily
advance payments made to teachers for on-line materials, prepaid advertisement
fee and prepaid rent.
At
December 31, 2009, we had cash and cash equivalents of $65,035,332, an increase
of $41,617,234, or 177.7%, from $23,418,098 at December 31, 2008. This increase
reflected principally the net income generated by our business during 2009,
proceeds from issuance common stock $18.4 million, as well as exercises of
warrants for common stock of approximately $6.4 million during the year ended
December 31, 2009.
Our net
cash provided by operating activities was $18,553,167 for the year ended
December 31, 2009, an increase of $8,799,852 or 90.2% from $9,753,315 for the
same period in 2008. This increase was due to an increase in net income of
$5,197,273 along with non-cash charges related to an increase of stock based
compensation $1,530,919, and depreciation and amortization of $1,586,417, a
decrease of prepaid expense of $745,196, as compared to the year ended December
31, 2008.
At
December 31, 2009, we had working capital of $66,737,494, an increase of
$41,298,775 from working capital of $25,438,719at December 31, 2008. 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, 2009, were $1,255,991, an increase
of $455,299, or 57%, from $800,692 at December 31, 2008, 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, in the long term we may incur additional expenses as we seek to
expand our business to offer services in other parts of the PRC. During the next
five years, we may incur substantial expenditure for acquisitions and the setup
of new schools and training centers in new markets. During this five
year expansion period we may require additional funding for the expansion
purpose. At this time we are unable to accurately project the funding needs
beyond the next twelve months since long-term needs depend on the availability
and the scale of acquisitions we might make. The anticipated cost for
the future expansion may also associate with the development of a nation-wide
advertising campaign, which is estimated to be approximately additional 5% of
our total revenue. If additional funds are needed in the future we anticipate
obtaining such funds through the sale of equity. We cannot assure you that
funding will be available if and when we require funding.
29
Significant
Accounting Estimates and Policies
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.
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.
Intangible
assets and capitalized software, which we acquired from third parties, are
amortized over the lives of the rights agreements, which is two to eight 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, 2009 and 2008.
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. Our deferred tax
asset is from US corporate parent and has been fully reserved. Our US parent
provides corporate and administrative functions for the entire consolidated
Company. 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.
30
Revenue
is 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. Revenue is recognized in the month when services are actually rendered.
Unused value relating to debit cards is recognized as revenue 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 revenue.
The
Company engages an advertisement agency to manage its on-line advertisement
revenue. Per the contract with this agency, upon posting of an on-line
advertisement on the Company’s website, the Company is entitled to share with
the agency 50% of the amount charged to the on-line advertiser. The Company
recognizes revenue upon posting of an advertisement on their web-site. The
agency is responsible for collection of all ad revenue from advertisers. The
agency is required to make their remittance for on-line advertising six months
after on-line ads are posted on their website.
Prepaid
expenses are primarily comprised of advance payments made for services to
teachers for on-line materials and video, outdoor advertising 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 revenue. 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 have
granted a stock option ”D” to our officers, directors or key employees to
purchase a total of 456,000 shares of common stock of the company, such options
to vest yearly in equal installments. 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
Standards No. 123 (revised 2004), “Share-Based Payments.”
New
Accounting Pronouncements
Recent
accounting pronouncements applicable to the Company are summarized
below.
|
|
-
|
Effective for interim and
annual periods ending after September 15, 2009, the FASB Accounting
Standards Codification TM (the “Codification”
or “ASC”) is the single source of authoritative literature of U.S.
generally accepted accounting principles (“GAAP”). The Codification
consolidates all authoritative accounting literature into one
internet-based research tool, which supersedes all pre-existing accounting
and reporting standards, excluding separate rules and other interpretive
guidance released by the SEC. New accounting guidance is now issued in the
form of Accounting Standards Updates, which update the Codification. The
Company adopted the Codification in the period ending September 30, 2009.
The adoption of Codification did not result in any change the Company’s
significant accounting
policies.
|
|
|
-
|
In May 2009 the FASB issued
standards that establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. These
standards require the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date, that is, whether
the date represents the date the financial statements were issued or were
available to be issued. This standard was effective in the first interim
period ending after June 15, 2009. The Company expects this standard to
have an impact on disclosures in their consolidated financial statements,
but the nature and magnitude of the specific effects will depend upon the
nature, terms and value of the any subsequent events occurring after
adoption.
|
31
|
|
-
|
In June 2009, the FASB issued
authoritative guidance which eliminates the exemption for qualifying
special-purpose entities from consolidation requirements, contains new
criteria for determining the primary beneficiary of a variable interest
entity, and increases the frequency of required reassessments to determine
whether a company is the primary beneficiary of a variable interest
entity. The guidance is applicable for annual periods beginning after
November 15, 2009 and interim periods therein and thereafter. The Company
does not expect the adoption of this standard to have a material effect on
its financial position or results of
operations.
|
|
|
|
|
|
-
|
In June 2009, the FASB issued
authoritative guidance which eliminates the concept of a qualifying
special-purpose entity, creates more stringent conditions for reporting a
transfer of a portion of a financial asset as a sale, clarifies other
sale-accounting criteria, and changes the initial measurement of a
transferor’s interest in transferred financial assets. The guidance is
applicable for annual periods beginning after November 15, 2009 and
interim periods therein and thereafter. The Company does not expect the
adoption of this standard to have a material effect on its financial
position or results of
operations.
|
|
|
-
|
EITF Issue No. 07-5 (ASC 815),
“Determining Whether an Instrument (or embedded Feature) is Indexed to an
Entity’s Own Stock” (EITF 07-5) was issued in June 2008 to clarify how to
determine whether certain instruments or features were indexed to an
entity’s own stock under EITF Issue No. 01-6 (ASC 815), “The Meaning of
“Indexed to a Company’s Own Stock” (EITF 01-6) (ASC 815),. EITF 07-5(ASC
815), applies to any freestanding financial instrument (or embedded
feature) that has all of the characteristics of a derivative as defined in
FAS 133, for purposes of determining whether that instrument (or embedded
feature) qualifies for the first part of the paragraph 11(a) scope
exception. It is also applicable to any freestanding financial instrument
(e.g., gross physically settled warrants) that is potentially settled in
an entity’s own stock, regardless of whether it has all of the
characteristics of a derivative as defined in FAS 133 (ASC 815), for
purposes of determining whether to apply EITF 00-19 (ASC 815). EITF
07-5(ASC 815) does not apply to share-based payment awards within the
scope of FAS 123(R), Share-Based Payment (FAS 123(R) (ASC 718)). However,
an equity-linked financial instrument issued to investors to establish a
market-based measure of the fair value of employee stock options is not
within the scope of FAS 123(R) and therefore is subject to EITF 07-5(ASC
815).
|
|
|
-
|
In January 2009, the FASB
issued FSP EITF 99-20-1 (ASC 325), to amend the impairment guidance in
EITF Issue No. 99-20 (ASC 325) in order to achieve more consistent
determination of whether an other-than-temporary impairment
(“OTTI”) has occurred. This FSP amended EITF 99-20 (ASC 325) to more
closely align the OTTI guidance therein to the guidance in Statement
No. 115 (ASC 320, 10-35-31). Retrospective application to a prior
interim or annual period is prohibited. The guidance in this FSP was
considered in the assessment of OTTI for various securities at
December 31, 2008.
|
|
|
-
|
On June 5, 2003, the United
States Securities and Exchange Commission (“SEC”) adopted final rules
under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), as
amended by SEC Release No. 33-9072 on October 13, 2009. Commencing with
its annual report for the year ending March 31, 2011, the Company will be
required to include a report of management on its internal control over
financial reporting. The internal control report must include a statement
of:
|
◦ Management’s
responsibility for establishing and maintaining adequate internal control over
its financial reporting;
◦ Management’s
assessment of the effectiveness of its internal control over financial reporting
as of year- end; and
◦ The
framework used by management to evaluate the effectiveness of the Company’s
internal control over financial reporting.
32
Furthermore,
it is required to file the auditor’s attestation report separately on the
Company’s internal control over financial reporting on whether it believes that
the Company has maintained, in all material respects, effective internal control
over financial reporting.
|
|
-
|
In August 2009, the FASB
issued the FASB Accounting Standards Update No. 2009-04 “Accounting for
Redeemable Equity Instruments - Amendment to Section 480-10-S99” which
represents an update to section 480-10-S99, distinguishing liabilities
from equity, per EITF Topic D-98, Classification and Measurement of
Redeemable Securities. The Company does not expect the adoption of this
update to have a material impact on its consolidated financial position,
results of operations or cash
flows.
|
|
|
-
|
In August 2009, the FASB issued
the FASB Accounting Standards Update No. 2009-05 “Fair Value Measurement
and Disclosures Topic 820 – Measuring Liabilities at Fair Value”, which
provides amendments to subtopic 820-10, Fair Value Measurements and
Disclosures – Overall, for the fair value measurement of liabilities. This
update provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using one or more of
the following techniques: 1. A valuation technique that uses: a. The
quoted price of the identical liability when traded as an asset b. Quoted
prices for similar liabilities or similar liabilities when traded as
assets. 2. Another valuation technique that is consistent with the
principles of topic 820; two examples would be an income approach, such as
a present value technique, or a market approach, such as a technique that
is based on the amount at the measurement date that the reporting entity
would pay to transfer the identical liability or would receive to enter
into the identical liability. The amendments in this update also clarify
that when estimating the fair value of a liability, a reporting entity is
not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of
the liability. The amendments in this update also clarify that both a
quoted price in an active market for the identical liability when traded
as an asset in an active market when no adjustments to the quoted price of
the asset are required are Level 1 fair value measurements. The Company
does not expect the adoption of this update to have a material impact on
its consolidated financial position, results of operations or cash
flows.
|
|
|
-
|
In September 2009, the FASB
issued the FASB Accounting Standards Update No. 2009-08 “Earnings Per
Share – Amendments to Section 260-10-S99”,which represents technical
corrections to topic 260-10-S99, Earnings per share, based on EITF Topic
D-53, Computation of Earnings Per Share for a Period that includes a
Redemption or an Induced Conversion of a Portion of a Class of Preferred
Stock and EITF Topic D-42, The Effect of the Calculation of Earnings per
Share for the Redemption or Induced Conversion of Preferred Stock. The
Company does not expect the adoption of this update to have a material
impact on its consolidated financial position, results of operations or
cash flows.
|
|
|
-
|
In September 2009, the FASB
issued the FASB Accounting Standards Update No. 2009-09 “Accounting for
Investments-Equity Method and Joint Ventures and Accounting for
Equity-Based Payments to Non-Employees”. This update represents a
correction to Section 323-10-S99-4, Accounting by an Investor for
Stock-Based Compensation Granted to Employees of an Equity Method
Investee. Additionally, it adds observer comment Accounting Recognition
for Certain Transactions Involving Equity Instruments Granted to Other
Than Employees to the Codification. The Company does not expect the
adoption to have a material impact on its consolidated financial position,
results of operations or cash
flows.
|
33
|
|
-
|
In September 2009, the FASB
issued the FASB Accounting Standards Update No. 2009-12 “Fair Value
Measurements and Disclosures Topic 820 – Investment in Certain Entities
That Calculate Net Assets Value Per Share (or Its Equivalent)”, which
provides amendments to Subtopic 820-10, Fair Value Measurements and
Disclosures-Overall, for the fair value measurement of investments in
certain entities that calculate net asset value per share (or its
equivalent). The amendments in this update permit, as a practical
expedient, a reporting entity to measure the fair value of an investment
that is within the scope of the amendments in this update on the basis of
the net asset value per share of the investment (or its equivalent) if the
net asset value of the investment (or its equivalent) is calculated in a
manner consistent with the measurement principles of Topic 946 as of the
reporting entity’s measurement date, including measurement of all or
substantially all of the underlying investments of the investee in
accordance with Topic 820. The amendments in this update also require
disclosures by major category of investment about the attributes of
investments within the scope of the amendments in this update, such as the
nature of any restrictions on the investor’s ability to redeem its
investments at the measurement date, any unfunded commitments (for
example, a contractual commitment by the investor to invest a specified
amount of additional capital at a future date to fund investments that
will be made by the investee), and the investment strategies of the
investees. The major category of investment is required to be determined
on the basis of the nature and risks of the investment in a manner
consistent with the guidance for major security types in U.S. GAAP on
investments in debt and equity securities in paragraph 320-10-50-1B. The
disclosures are required for all investments within the scope of the
amendments in this update regardless of whether the fair value of the
investment is measured using the practical expedient. The Company does not
expect the adoption to have a material impact on its consolidated
financial position, results of operations or cash
flows.
|
|
|
-
|
In October 2009, the FASB issued
guidance for amendments to FASB Emerging Issues Task Force on EITF Issue
No. 09-1 “ Accounting
for Own-Share Lending Arrangements in Contemplation of a Convertible Debt
Issuance or Other Financing ” (Subtopic 470-20) “Subtopic”.
This accounting standards update establishes the accounting and reporting
guidance for arrangements under which own-share lending arrangements
issued in contemplation of convertible debt issuance. This Statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2009. Earlier adoption is not
permitted. The Company does not expect the adoption to have a material
impact on its consolidated financial position, results of operations or
cash flows.
|
A variety
of proposed or otherwise potential accounting standards are currently under
study by standard setting organizations and various regulatory agencies. Due to
the tentative and preliminary nature of those proposed standards, management has
not determined whether implementation of such proposed standards would be
material to the consolidated financial statements.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
Not
Applicable.
34
Item
8. Financial Statements and Supplementary Data.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Stockholders 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, 2009 and 2008, and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for the years ended December 31, 2009 and 2008. 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 audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 audits 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 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
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Education Alliance,
Inc. and its Subsidiaries as of December 31, 2009 and 2008 and the consolidated
results of its operations and its cash flows for the years ended December 31,
2009 and 2008 in conformity with accounting principles generally accepted in the
United States of America.
|
/s/ Sherb & Co., LLP
|
||
|
Certified
Public Accountants
|
New York,
New York
March 15,
2010
F-1
China
Education Alliance, Inc. and Subsidiaries
Consolidated
Balance Sheets
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$
|
65,035,332
|
$
|
23,418,098
|
||||
|
Advances
to related parties
|
–
|
142,006
|
||||||
|
Accounts
receivable
|
1,274,727
|
469,607
|
||||||
|
Prepaid
expenses
|
2,692,310
|
3,437,506
|
||||||
|
Total
current assets
|
69,002,369
|
27,467,217
|
||||||
|
Property
and equipment, net
|
6,589,982
|
5,761,269
|
||||||
|
Intangibles
and capitalized software, net
|
737,761
|
1,239,072
|
||||||
|
Advance
on acquisition
|
932,000
|
932,000
|
||||||
|
Long-term
investment
|
341,686
|
342,357
|
||||||
|
$
|
77,603,798
|
$
|
35,741,915
|
|||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts
payable and accrued expenses
|
$
|
1,255,991
|
$
|
800,692
|
||||
|
Deferred
revenues
|
1,008,884
|
1,227,806
|
||||||
|
Total
current liabilities
|
2,264,875
|
2,028,498
|
||||||
|
Stockholders'
Equity
|
||||||||
|
Preferred
stock ($0.001 par value, 20,000,000 shares authorized, 4,502,142 and
7,597,645 issued and outstanding, respectively,
aggregate liquidation preference of $1,665,793 and $2,811,129,
respectively)
|
1,867,644
|
3,010,144
|
||||||
|
Common
stock ($0.001 par value, 150,000,000 shares authorized, 30,040,954 and
21,892,631 issued and outstanding, respectively)
|
30,041
|
21,893
|
||||||
|
Additional
paid-in capital
|
38,231,623
|
10,751,732
|
||||||
|
Statutory
reserve
|
3,016,143
|
1,990,238
|
||||||
|
Accumulated
other comprehensive income
|
2,886,087
|
2,696,443
|
||||||
|
Retained
earnings
|
30,044,687
|
15,863,820
|
||||||
|
Stockholders'
equity - China Education Alliance, Inc. and Subsidiaries
|
76,076,225
|
34,334,270
|
||||||
|
Noncontrolling
interests in subsidiaries
|
(737,302
|
)
|
(620,853
|
)
|
||||
|
Total
stockholders' equity
|
75,338,923
|
33,713,417
|
||||||
|
$
|
77,603,798
|
$
|
35,741,915
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-2
China
Education Alliance, Inc. and Subsidiaries
Consolidated
Statements of Operations
|
Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Revenues
|
||||||||
|
Online
education revenues
|
$
|
22,238,325
|
$
|
16,706,917
|
||||
|
Training
center revenues
|
12,097,375
|
5,552,969
|
||||||
|
Advertising
revenues
|
2,631,783
|
2,591,131
|
||||||
|
Total
revenue
|
36,967,483
|
24,851,017
|
||||||
|
Cost
of Goods Sold
|
||||||||
|
Online
education costs
|
4,584,519
|
2,859,593
|
||||||
|
Training
center costs
|
2,569,538
|
1,922,841
|
||||||
|
Advertising
costs
|
210,882
|
182,505
|
||||||
|
Total
cost of goods sold
|
7,364,939
|
4,964,939
|
||||||
|
Gross
Profit
|
||||||||
|
Online
education gross profit
|
17,653,806
|
13,847,324
|
||||||
|
Training
center gross profit
|
9,527,837
|
3,630,128
|
||||||
|
Advertising
gross profit
|
2,420,901
|
2,408,626
|
||||||
|
Total
gross profit
|
29,602,544
|
19,886,078
|
||||||
|
Operating
Expenses
|
||||||||
|
Selling
expenses
|
9,352,392
|
7,467,118
|
||||||
|
Administrative
|
3,146,094
|
1,506,411
|
||||||
|
Depreciation
and amortization
|
952,193
|
894,112
|
||||||
|
Total
operating expenses
|
13,450,679
|
9,867,641
|
||||||
|
Other
Income (Expense)
|
||||||||
|
Other
income
|
130,056
|
536,876
|
||||||
|
Interest
income
|
130,675
|
127,751
|
||||||
|
Investment
loss
|
(671
|
)
|
(95,331
|
)
|
||||
|
Total
other income
|
260,060
|
569,296
|
||||||
|
Net
Income Before Provision for Income Tax
|
16,411,925
|
10,587,733
|
||||||
|
Provision
for Income Taxes
|
1,295,224
|
669,197
|
||||||
|
Net
Income
|
15,116,701
|
9,918,536
|
||||||
|
Less:
net loss attributable to the noncontrolling interests
|
(90,071
|
)
|
(90,963
|
)
|
||||
|
Net
Income - attributable to China Education Alliance, Inc. and
Subsidiaries
|
$
|
15,206,772
|
$
|
10,009,499
|
||||
|
Basic
Earnings Per Share
|
$
|
0.63
|
$
|
0.46
|
||||
|
Diluted
Earnings Per Share
|
$
|
0.59
|
$
|
0.41
|
||||
|
Basic
Weighted Average Shares Outstanding
|
24,081,002
|
21,549,381
|
||||||
|
Diluted
Weighted Average Shares Outstanding
|
25,622,606
|
24,662,830
|
||||||
|
The
Components of Other Comprehensive Income
|
||||||||
|
Net
income
|
$
|
15,206,772
|
$
|
10,009,499
|
||||
|
Foreign
currency translation adjustment
|
189,644
|
1,444,539
|
||||||
|
Comprehensive
Income
|
$
|
15,396,416
|
$
|
11,454,038
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
China
Education Alliance, Inc. and Subsidiaries
Consolidated
Statements of Stockholders' Equity
|
Preferred Stock
|
Common Stock
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||
|
Number
|
Number
|
Additional
|
Other
|
Total
|
||||||||||||||||||||||||||||||||||||
|
of
|
of
|
Par
|
Paid-In
|
Statutory
|
Comprehensive
|
Retained
|
Noncontrolling
|
Stockholders'
|
||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Value
|
Capital
|
Reserve
|
Income
|
Earnings
|
Interests
|
Equity
|
|||||||||||||||||||||||||||||||
|
Balance
at January 1, 2008
|
9,397,645
|
$
|
3,677,944
|
19,409,830
|
$
|
19,410
|
$
|
6,378,110
|
$
|
1,151,885
|
$
|
1,250,470
|
$
|
6,692,674
|
$
|
(528,456
|
)
|
$
|
18,642,037
|
|||||||||||||||||||||
|
Exercise
of warrants
|
1,482,801
|
1,483
|
2,666,076
|
2,667,559
|
||||||||||||||||||||||||||||||||||||
|
Conversion
of preferred stock
|
(1,800,000
|
)
|
(667,800
|
)
|
600,000
|
600
|
667,200
|
-
|
||||||||||||||||||||||||||||||||
|
Common
stock issued for World Exchange Inc
|
400,000
|
400
|
931,600
|
932,000
|
||||||||||||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
1,445,973
|
(1,434
|
)
|
1,444,539
|
||||||||||||||||||||||||||||||||||||
|
Stock
based compensation
|
5,326
|
5,326
|
||||||||||||||||||||||||||||||||||||||
|
Warrants
issued for CCG services
|
103,420
|
103,420
|
||||||||||||||||||||||||||||||||||||||
|
Appropriation
to Statutory reserve
|
838,353
|
(838,353
|
)
|
-
|
||||||||||||||||||||||||||||||||||||
|
Net
income
|
10,009,499
|
(90,963
|
)
|
9,918,536
|
||||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
7,597,645
|
3,010,144
|
21,892,631
|
21,893
|
10,751,732
|
1,990,238
|
2,696,443
|
15,863,820
|
(620,853
|
)
|
33,713,417
|
|||||||||||||||||||||||||||||
|
Exercise
of warrants
|
3,296,787
|
3,297
|
6,426,428
|
6,429,725
|
||||||||||||||||||||||||||||||||||||
|
Conversion
of preferred stock
|
(3,095,502
|
)
|
(1,142,500
|
)
|
1,031,834
|
1,032
|
1,141,468
|
-
|
||||||||||||||||||||||||||||||||
|
Common
stock issued for services
|
223,339
|
223
|
1,043,241
|
1,043,464
|
||||||||||||||||||||||||||||||||||||
|
Common
stock sold per underwriting agreement
|
3,596,363
|
3,596
|
18,381,299
|
18,384,895
|
||||||||||||||||||||||||||||||||||||
|
Stock
based compensation
|
487,455
|
487,455
|
||||||||||||||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
189,644
|
(26,378
|
)
|
163,266
|
||||||||||||||||||||||||||||||||||||
|
Appropriation
to Statutory reserve
|
1,025,905
|
(1,025,905
|
)
|
|||||||||||||||||||||||||||||||||||||
|
Net
Income
|
15,206,772
|
(90,071
|
)
|
15,116,701
|
||||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
4,502,143
|
$
|
1,867,644
|
30,040,954
|
$
|
30,041
|
$
|
38,231,623
|
$
|
3,016,143
|
$
|
2,886,087
|
$
|
30,044,687
|
$
|
(737,302
|
)
|
$
|
75,338,923
|
|||||||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
China
Education Alliance, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
|
Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
Income
|
$
|
15,206,772
|
$
|
10,009,499
|
||||
|
Adjustments
to reconcile net income to net cash provided by Operating
activities
|
||||||||
|
Depreciation
and amortization
|
1,586,417
|
1,598,624
|
||||||
|
Warrants
issued for services
|
-
|
103,420
|
||||||
|
Stock
based compensation
|
487,455
|
5,326
|
||||||
|
Common
stock issued for services
|
1,043,464
|
-
|
||||||
|
Loss
on equity investment
|
671
|
95,331
|
||||||
|
Loss
attributable to the noncontrolling interests
|
(90,071
|
)
|
(90,963
|
)
|
||||
|
Net
change in assets and liabilities
|
||||||||
|
Account
receivables
|
(805,120
|
)
|
(469,607
|
)
|
||||
|
Prepaid
expenses and other
|
745,196
|
(1,824,727
|
)
|
|||||
|
Advances
to related parties
|
142,006
|
(33,470
|
)
|
|||||
|
Accounts
payable and accrued liabilities
|
455,299
|
377,583
|
||||||
|
Deferred
revenue
|
(218,922
|
)
|
(17,701
|
)
|
||||
|
Net
cash provided by operating activities
|
18,553,167
|
9,753,315
|
||||||
|
Cash
flows from investing activities
|
||||||||
|
Purchases
of property and equipment
|
(1,840,377
|
)
|
(996,434
|
)
|
||||
|
Purchases
of intangible assets
|
(73,442
|
)
|
(792,147
|
)
|
||||
|
Long-term
investment
|
-
|
(437,688
|
)
|
|||||
|
Net
cash used in investing activities
|
(1,913,819
|
)
|
(2,226,269
|
)
|
||||
|
Cash
flows from financing activities
|
||||||||
|
Warrants
exercised
|
6,429,725
|
2,667,559
|
||||||
|
Proceeds
from issuance of common stock per underwriting agreement
|
18,384,895
|
-
|
||||||
|
Net
cash provided by financing activities
|
24,814,620
|
2,667,559
|
||||||
|
Effect
of exchange rate
|
163,266
|
1,444,539
|
||||||
|
Net
increase in cash
|
41,617,234
|
11,639,144
|
||||||
|
Cash
and cash equivalents at beginning of year
|
23,418,098
|
11,778,954
|
||||||
|
Cash
and cash equivalents at end of year
|
$
|
65,035,332
|
$
|
23,418,098
|
||||
|
Supplemental
disclosure of cash flow information
|
||||||||
|
Taxes
paid
|
$
|
1,199,414
|
$
|
669,197
|
||||
|
Non-cash
investing and financing activities
|
||||||||
|
Conversion
of preferred stock to common
|
$
|
1,142,500
|
$
|
667,800
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
China
Education Alliance, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
|
1.
|
Organization and 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, the People’s Republic of China (the
PRC), 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 (“ZETC”) was
registered in 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 ZETC with 1% held in
trust by Xiqun Yu for the benefit of China Education Alliance, Inc.
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 350,000 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 services such as the “Famous Instructor
Test Paper Store” and for videos 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.
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 National Vocational Education Association of China for no
consideration. The 30% interest in BHYHZ that the Company transferred to The
National Vocational Education Association of China for no
consideration was treated as an intangible asset. The minority ownership
interest of BHYHZ have no basis in their investment.
F-6
On April
18, 2008, ZHLD entered into an agreement and supplementary agreement with Harbin
Daily Newspaper Group (“Newspaper Group”) to invest in a joint venture company,
Harbin New Discovery Media Co., Ltd. (“New Discovery”). ZHLD contributed RMB
3,000, 000 (approximately, $430,000) and Newspaper Group contributed RMB
3,120,000 (approximately, $445,000) towards the registered capital of New
Discovery. In return for their respective contributions, ZHLD will own 49.02%
equity interest and Newspaper Group will own 50.98% equity interest in New
Discovery. The parties are prohibited, for the duration of the joint venture
from retiring or transferring their equity interests. This joint venture will
create new educational material distribution channels in readable newspaper
format in the future. The value of this investment as of December 31, 2009 and
2008 was $341,686 and $342,357, respectively.
Pursuant
to the terms of the supplementary agreement, Newspaper Group assigned all their
rights in the “Scientific Discovery” a scientific information newspaper, with a
focus on education to introduce scientific knowledge to elementary and secondary
students
exclusively to the joint venture company, New Discovery. In the event that the
rights to “Scientific Discovery” expire because of reason other than a change in
government policies and an inability to defend against or resist such changes,
Newspaper Group is liable to ZHLD for twice the latter’s registered contribution
in the joint venture in liquidated damages. The transaction closed on July 7,
2008 and as a result, New Discovery is now a 49.02% owned equity investment of
ZHLD, referred to as a long-term investment in the accompanying balance
sheet.
On
January 4, 2009, China Education Alliance’s subsidiary ZHLD entered into an
agreement with Mr. Guang Li to jointly incorporate and invest in a joint venture
company, Zhong He Li Da (Beijing) Management Consultant Co., Ltd. (“ZHLDBJ”).
ZHLD contributed RMB 425,000 (approximately, $62,107), and Mr. Guang Li
contributed RMB 75,000 (approximately, $10,960) towards the registered capital
of ZHLDBJ, amounting to a total registered capital of 500,000 RMB
(approximately, $73,067). In return for their respective contributions, ZHLD own
85% equity interest, and Mr. Guang Li own 15% equity interest in ZHLDBJ. ZHLD
has authorized Mr. Xiqun Yu, the Company CEO, to hold 20% of its equity interest
of ZHLDBJ on its behalf. ZHLDBJ will be involved in the vocational
training business which includes IT engineering and accounting training, in
particular, in running the “Million Managers Training Program”, with the goal of
improving participants’ management skills and designing a complete solution for
the management, clients and suppliers.
On April
27, 2008, the Company entered into a Share Transfer Agreement with Mr. Yuli Guo
(the “Vendor”) and World Exchanges, Inc. (“WEI”) to purchase from Vendor seventy
(70) issued and outstanding ordinary shares in WEI, representing 70% of the
entire issued share capital of WEI (the “WEI Acquisition”). WEI is incorporated
under the laws of Canada and was organized on December 19, 1991. WEI has been
registered at 30 Denton Avenue, Apartment 2216, Toronto, Canada. In
consideration for the said shares, the Company issued to the Vendor 400,000
shares of its common stock, with a market value of $2.33 per share or $932,000.
The Vendor retained the remaining 30% of the issued share capital of WEI. The
Vendor has agreed not to transfer the shares of the Company to a third party for
fifteen (15) years and to grant the Company a right of first refusal in the
event the Vendor is desirous of selling such shares.
WEI
provides English training programs, English test preparation courses and
overseas study and consulting services in the PRC. Included as part of the WEI
Acquisition, is the acquisition of five English language schools in various
parts of the PRC. The WEI acquisition has not been fully completed as of
December 31, 2009 due to the non-resolution of ongoing administrative and legal
matters in connection with the acquisition of WEI. The Company currently is
attempting to fully resolve all outstanding issues related to this acquisition.
As of December 31, 2009 the Company’s management decided to exclude completed
portions of its WEI acquisition from the consolidated financial statements until
such time as the WEI acquisition is fully completed. As of December 31, 2009 and
December 31, 2008 the Company has outstanding advances made to WEI of $223,860
and $80,000, respectively. Management has fully reserved these advances as of
December 31, 2009, until such time as all administrative and legal matters
regarding the WEI acquisition are fully resolved. The resolution of these WEI
acquisition matters will either result in the WEI acquisition being fully
completed, or the abandonment of the WEI acquisition. As of December 31, 2009,
Company management has not reserved their advance on acquisition for WEI,
totaling 400,000 shares of the Company's common stock valued at $932,000, as
these shares are held in trust by the Company. These shares will either be
returned to the Company or cancelled if the WEI acquisition is not successfully
resolved and concluded.
F-7
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. With the Company’s equity investment in New Discovery the Company is
invested in the business of publishing and circulating “Scientific Discovery”, a
scientific information newspaper, with a focus on education.
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2.
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Basis of Preparation of Financial
Statements
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The
accompanying consolidated financial statements differ from the financial
statements used for statutory purposes in the 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 consolidated financial statements retroactively reflect a
reverse split that became effective October 12, 2007. Fractional shares were
rounded up resulting in the issuance of 216 shares in excess of the actual
conversion rate of 3-to-1.
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3.
|
Summary of Significant Accounting
Policies
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Principles of Consolidation -
The consolidated financial statements include the accounts of the Company and
its wholly subsidiaries (ZHLD and ZETC) and its majority owned subsidiaries
(BHYHZ and ZHLDBJ). All inter-company transactions and balances were
eliminated.
Minority
interest in the net assets and earnings or losses of BHYHZ and ZHLDBJ have been
absorbed by the Company as minority interest holders in these subsidiaries have
no basis in their investment in these subsidiaries.
Use of estimates - The
preparation of these consolidated 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 consolidated 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 allowances, uncollectible accounts receivable 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 or cash equivalents. The carrying amounts
reported in the accompanying consolidated balance sheets 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. The cash that the Company maintains in US banks
are insured up to $250,000 at each bank as of December 31, 2009. The Company’s
cash at their US bank is in excess of statutorily insured limits as of December
31, 2009.
Property and equipment -
Property and equipment are 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:
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Buildings
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20 years
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Communication
Equipment
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10 years
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Motor
vehicles
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5 years
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Furniture,
Fixtures, and
Equipment
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5 years
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F-8
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 these
assessments 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 these assessments there was no
impairment at December 31, 2009.
Intangibles and Capitalized
Software - Intangibles and capitalized software consist of franchise
rights on educational products, software and the transfer of minority interest
in BHYHZ subsidiary for no consideration, that are amortized over the lives of
the rights agreements, or their respective useful lives, which is three to eight
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, 2009 and 2008.
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 recorded in accumulated other
comprehensive income, a separate component within stockholders’
equity.
Noncontrolling Interest -
Noncontrolling interests in the Company’s subsidiaries are recorded in
accordance with the provisions of FASB Accounting Standards Codification 810
Consolidation (“ASC 810”) and are reported as a component of equity,
separate from the parent’s equity. Purchase or sale of equity interests
that do not result in a change of control are accounted for as equity
transactions. Results of operations attributable to the noncontrolling
interest are included in our consolidated results of operations and, upon loss
of control, the interest sold, as well as interest retained, if any, will be
reported at fair value with any gain or loss recognized in
earnings.
F-9
Revenue recognition - Revenue
is 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.
Tuition
from courses is recognized ratably over the period fees are earned, typically
the life of the course. The Company offer credits to students if they should
withdraw, or be unable to complete their required courses. Historically the
issuances of credits have not been high with regards to tuition fees. The
Company offers cash refunds on a limited basis based on individual
circumstances.
The
Company engages an advertisement agency to manage its on-line advertisement
revenue. Per the contract with this agency, upon posting of an on-line
advertisement on the Company’s website, the Company is entitled to share with
the agency 50% of the amount charged to the on-line advertiser. The Company
recognizes revenue upon posting of an advertisement on their web-site. The
agency is responsible for collection of all ad revenue from advertisers. The
agency is required to make their remittance for on-line advertising six months
after on-line ads are posted on their website.
Deferred
revenue reflects the unearned portion of debit cards sold and tuition. Tuition
is recognized as revenue ratably over the periods in which it is earned,
generally the term of the program or as the debit card is used.
Accounts Receivables -
Included in accounts receivables are receivables from advertising on the
Company’s websites and from the sale of prepaid debit cards to resellers. The
sales of prepaid debit cards to resellers are recorded as deferred revenue until
such time as the cards are used to download material from the Company’s website.
Total accounts receivables as of December 31, 2009 and 2008 was $1,274,727
and $469,607, respectively.
The
Company reviews its accounts receivables on a periodic basis and makes general
and specific allowances when there is doubt as to the collectability of
individual balances. In evaluating the collectability of individual receivable
balances, the Company considers many factors, including the age of the balance,
customer’s historical payment history, its current credit-worthiness and current
economic trends. Accounts are written off after exhaustive efforts at
collection. If accounts receivable are to be provided for, or written off, they
would be recognized in the consolidated statement of operations within operating
expenses. At December 31, 2009 and 2008, the Company has not established an
allowance for doubtful accounts, in addition the Company has not provided for,
or written off, accounts receivable for the years ended December 31, 2009 and
2008.
Advertising - The Company
expenses advertising costs for outdoor spots at the time they are aired and for
all other advertising the first time the respective advertising takes place.
These costs are included in selling expenses. The total advertising expenses
incurred for the years ended December 31, 2009 and 2008 were $1,093,535 and
$892,724, respectively.
F-10
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 invest these earnings in
foreign operations for the foreseeable future. All Company revenues are
generated in the PRC. The Company’s US operations provide corporate and
administrative functions for the entire Company. The Company’s tax provisions
for the years ended December 31, 2009 and 2008 are related to the Company’s PRC
operations.
If the
Company should have an uncertainty in accounting for income taxes, the Company
evaluates a tax position in 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, 2009, 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, 2009, 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 PRC Concerning Income Tax on Enterprises
promulgated by the State Council which came into effect on January 1, 1994,
income tax is payable by Wholly Owned Foreign 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
due to its classification as a “Wholly Owned Foreign 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 December 31, 2007, 2008 and 2009. For the years
ended December 31, 2008, ZHLD’s effective income tax rate was at 7.5%, based on
having received a 50% exemption in the year ended December 31, 2007 when the
prevailing effective tax rate was 30%, and an additional 50% exemption as ZHLD
was a technology and software entity. During the year ended December 31, 2009,
ZHLD obtained similar exemptions to those of the year ended December 31, 2008;
however, the prevailing tax rate had a minimum threshold of 10% for the year
ended December 31, 2009. During the year ended December 31, 2009, the Company
was assessed an additional PRC enterprise income tax, above their effective
rate, due to tax regulations implemented by the PRC in the year ended December
31, 2009 relating to a prior period. ZHLD management, expects ZHLD to continue
being qualified as a technology and software entity, and expects to receive a
50% reduction in their statutory PRC enterprise income tax rates. If such status
is not achieved, ZHLD could be subject to increased tax expense in fiscal years
subsequent to December 31, 2009. Furthermore, additional taxes can be assessed,
beyond statutory rates enacted and approved tax abatements received by the
Company, or ZHLD. The Company’s ZETC subsidiary is currently exempt from PRC
taxation, as it operates a business enterprise engaged in educational
opportunities. The Company’s other subsidiaries; BHYHZ and ZHLDBJ
are taxed at the PRC statutory rate (25%), and have not accrued for taxes since
inception, due to recurring losses incurred since inception.
F-11
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.
The Company has no deferred tax assets or liabilities as of December 31, 2009and
2008. In addition, the Company has not recorded a deferred tax expense for the
two years ended December 31, 2009 and 2008.
Value added
tax
The
Provisional Regulations of the PRC 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.
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 $0 and $536,876 during
the years ended December 31, 2009 and 2008, respectively.
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 December
31, 2009 and 2008, the Company has advanced $223,860 and $80,000 to WEI, an
acquisition of the Company that has not been fully completed as of December 31,
2009, due to the non-resolution of ongoing administrative and legal matters in
connection with the acquisition of WEI. These advances were made to expand WEI’s
operations either inside or outside of the PRC. Management has fully reserved
these advances as of December 31, 2009, until such time as all administrative
and legal matters regarding the WEI acquisition being fully resolved. The
resolution of these WEI acquisition matters will either result in the WEI
acquisition being fully completed, or the abandonment of the WEI acquisition. In
addition, the Company prior to the formation of ZHLDBJ advanced $62,006 to
related party’s of this entity. ZHLDBJ was established on January 4, 2009, at
which time these advances became inter-company advances and have been eliminated
in consolidation.
All
advances to related parties are non- interest bearing and due upon
demand.
Stock based compensation - The
Company records compensation expense associated with stock-based awards and
other forms of equity compensation. Such compensation would include the
recording of cost resulting from all stock-based payment transactions including
shares issued under its stock option plans. The Company records expense over the
vesting period in connection with stock options granted. The compensation
expense for stock-based awards includes an estimate for forfeitures and is
recognized over the expected term of the award on a straight line
basis.
F-12
Fair value of financial instruments
- The Company has adopted newly issued generally accepted accounting
principles with regards to fair value measurement for assets and liabilities
that establishes a common definition for fair value to be applied to existing
generally accepted accounting principles that require the use of fair value
measurements, establishes a framework for measuring fair value and expands
disclosure about such fair value measurements. The adoption of these recently
issued principles did not have an impact on the Company’s financial position or
operating results, but did expand certain disclosures.
Current
fair value of financial instruments defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Additionally,
current standards require the use of valuation techniques that maximize the use
of observable inputs and minimize the use of unobservable inputs. These inputs
are prioritized below:
|
Level 1
|
Observable inputs such as quoted
market prices in active markets for identical assets or
liabilities
|
|
Level 2
|
Observable market-based inputs or
unobservable inputs that are corroborated by market
data
|
|
Level 3
|
Unobservable inputs for which
there is little or no market data, which require the use of the reporting
entity’s own assumptions.
|
The
Company did not have any Level 2 or Level 3 assets or liabilities as of December
31, 2009.
Cash and
cash equivalents of approximately $65,035,300, include money market securities
and commercial paper that are considered to be highly liquid and easily tradable
as of December 31, 2009. These securities are valued using inputs observable in
active markets for identical securities and are therefore classified as
Level 1 within our fair value hierarchy.
In
addition to fair value requirements noted above, recent standards expands
opportunities for the use of fair value measurements in financial reporting and
permits entities to choose to measure many financial instruments and certain
other items at fair value. The Company did not elect the fair value options for
any of its qualifying financial instruments.
Reclassifications - Certain
reclassifications have been made to the prior periods’ financial statements to
conform to the current year presentation. These reclassifications had no effect
on previously reported results of operations or the sum of retained earnings and
statutory reserve.
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-
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of a variable interest entity,
and increases the frequency of required reassessments to determine whether
a company is the primary beneficiary of a variable interest entity. The
guidance is applicable for annual periods beginning after November 15,
2009 and interim periods therein and thereafter. The Company does not
expect the adoption of this standard to have a material effect on its
financial position or results of
operations.
|
|
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-
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In June 2009, the FASB issued
authoritative guidance which eliminates the concept of a qualifying
special-purpose entity, creates more stringent conditions for reporting a
transfer of a portion of a financial asset as a sale, clarifies other
sale-accounting criteria, and changes the initial measurement of a
transferor’s interest in transferred financial assets. The guidance is
applicable for annual periods beginning after November 15, 2009 and
interim periods therein and thereafter. The Company does not expect the
adoption of this standard to have a material effect on its financial
position or results of
operations.
|
|
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-
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In August 2009, the FASB issued
guidance on measuring liabilities at fair value. This guidance amends the
fair value measurements and disclosures by providing additional guidance
clarifying the measurement of liabilities at fair value. This new
accounting guidance is effective for reporting period ending after
December 15, 2009. The Company is evaluating this new guidance and the
possible impact that the adoption of this new accounting guidance will
have on their consolidated financial
statements.
|
F-13
Recent
accounting pronouncements
Recent
accounting pronouncements applicable to the Company are summarized
below.
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|
-
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Effective for interim and
annual periods ending after September 15, 2009, the FASB Accounting
Standards Codification TM (the “Codification” or
“ASC”) is the single source of authoritative literature of U.S. generally
accepted accounting principles (“GAAP”). The Codification consolidates all
authoritative accounting literature into one internet-based research tool,
which supersedes all pre-existing accounting and reporting standards,
excluding separate rules and other interpretive guidance released by the
SEC. New accounting guidance is now issued in the form of Accounting
Standards Updates, which update the Codification. The Company adopted the
Codification in the period ending September 30, 2009. The adoption of
Codification did not result in any change the Company’s significant
accounting policies.
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|
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-
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In May 2009 the FASB issued
standards that establish general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. These
standards require the disclosure of the date through which an entity has
evaluated subsequent events and the basis for that date, that is, whether
the date represents the date the financial statements were issued or were
available to be issued. This standard was effective in the first interim
period ending after June 15, 2009. The Company expects this standard to
have an impact on disclosures in their consolidated financial statements,
but the nature and magnitude of the specific effects will depend upon the
nature, terms and value of the any subsequent events occurring after
adoption.
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-
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In June 2009, the FASB issued
authoritative guidance which eliminates the exemption for qualifying
special-purpose entities from consolidation requirements, contains new
criteria for determining the primary beneficiary of a variable interest
entity, and increases the frequency of required reassessments to determine
whether a company is the primary beneficiary of a variable interest
entity. The guidance is applicable for annual periods beginning after
November 15, 2009 and interim periods therein and thereafter. The Company
does not expect the adoption of this standard to have a material effect on
its financial position or results of
operations.
|
|
|
-
|
In June 2009, the FASB issued
authoritative guidance which eliminates the concept of a qualifying
special-purpose entity, creates more stringent conditions for reporting a
transfer of a portion of a financial asset as a sale, clarifies other
sale-accounting criteria, and changes the initial measurement of a
transferor’s interest in transferred financial assets. The guidance is
applicable for annual periods beginning after November 15, 2009 and
interim periods therein and thereafter. The Company does not expect the
adoption of this standard to have a material effect on its financial
position or results of
operations.
|
|
|
|
|
|
-
|
EITF Issue No. 07-5 (ASC 815),
“Determining Whether an Instrument (or embedded Feature) is Indexed to an
Entity’s Own Stock” (EITF 07-5) was issued in June 2008 to clarify how to
determine whether certain instruments or features were indexed to an
entity’s own stock under EITF Issue No. 01-6 (ASC 815), “The Meaning of
“Indexed to a Company’s Own Stock” (EITF 01-6) (ASC 815),. EITF 07-5(ASC
815), applies to any freestanding financial instrument (or embedded
feature) that has all of the characteristics of a derivative as defined in
FAS 133, for purposes of determining whether that instrument (or embedded
feature) qualifies for the first part of the paragraph 11(a) scope
exception. It is also applicable to any freestanding financial instrument
(e.g., gross physically settled warrants) that is potentially settled in
an entity’s own stock, regardless of whether it has all of the
characteristics of a derivative as defined in FAS 133 (ASC 815), for
purposes of determining whether to apply EITF 00-19 (ASC 815). EITF
07-5(ASC 815) does not apply to share-based payment awards within the
scope of FAS 123(R), Share-Based Payment (FAS 123(R) (ASC 718)). However,
an equity-linked financial instrument issued to investors to establish a
market-based measure of the fair value of employee stock options is not
within the scope of FAS 123(R) and therefore is subject to EITF 07-5(ASC
815).
|
|
|
-
|
In January 2009, the FASB
issued FSP EITF 99-20-1 (ASC 325), to amend the impairment guidance in
EITF Issue No. 99-20 (ASC 325) in order to achieve more consistent
determination of whether an other-than-temporary impairment
(“OTTI”) has occurred. This FSP amended EITF 99-20 (ASC 325) to more
closely align the OTTI guidance therein to the guidance in Statement
No. 115 (ASC 320, 10-35-31). Retrospective application to a prior
interim or annual period is prohibited. The guidance in this FSP was
considered in the assessment of OTTI for various securities at
December 31, 2008.
|
F-14
|
|
-
|
On June 5, 2003, the United
States Securities and Exchange Commission (“SEC”) adopted final rules
under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), as
amended by SEC Release No. 33-9072 on October 13, 2009. Commencing with
its annual report for the year ending March 31, 2011, the Company will be
required to include a report of management on its internal control over
financial reporting. The internal control report must include a statement
of:
|
◦
Management’s responsibility for establishing and maintaining adequate
internal control over its financial reporting;
◦
Management’s assessment of the effectiveness of its internal control over
financial reporting as of year- end; and
◦
The framework used by management to evaluate the effectiveness of the
Company’s internal control over financial reporting.
Furthermore,
it is required to file the auditor’s attestation report separately on the
Company’s internal control over financial reporting on whether it believes that
the Company has maintained, in all material respects, effective internal control
over financial reporting.
|
|
-
|
In August 2009, the FASB
issued the FASB Accounting Standards Update No. 2009-04 “Accounting for
Redeemable Equity Instruments - Amendment to Section 480-10-S99” which
represents an update to section 480-10-S99, distinguishing liabilities
from equity, per EITF Topic D-98, Classification and Measurement of
Redeemable Securities. The Company does not expect the adoption of this
update to have a material impact on its consolidated financial position,
results of operations or cash
flows.
|
|
|
-
|
In August 2009, the FASB issued
the FASB Accounting Standards Update No. 2009-05 “Fair Value Measurement
and Disclosures Topic 820 – Measuring Liabilities at Fair Value”, which
provides amendments to subtopic 820-10, Fair Value Measurements and
Disclosures – Overall, for the fair value measurement of liabilities. This
update provides clarification that in circumstances in which a quoted
price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using one or more of
the following techniques: 1. A valuation technique that uses: a. The
quoted price of the identical liability when traded as an asset b. Quoted
prices for similar liabilities or similar liabilities when traded as
assets. 2. Another valuation technique that is consistent with the
principles of topic 820; two examples would be an income approach, such as
a present value technique, or a market approach, such as a technique that
is based on the amount at the measurement date that the reporting entity
would pay to transfer the identical liability or would receive to enter
into the identical liability. The amendments in this update also clarify
that when estimating the fair value of a liability, a reporting entity is
not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of
the liability. The amendments in this update also clarify that both a
quoted price in an active market for the identical liability when traded
as an asset in an active market when no adjustments to the quoted price of
the asset are required are Level 1 fair value measurements. The Company
does not expect the adoption of this update to have a material impact on
its consolidated financial position, results of operations or cash
flows.
|
|
|
-
|
In September 2009, the FASB
issued the FASB Accounting Standards Update No. 2009-08 “Earnings Per
Share – Amendments to Section 260-10-S99”,which represents technical
corrections to topic 260-10-S99, Earnings per share, based on EITF Topic
D-53, Computation of Earnings Per Share for a Period that includes a
Redemption or an Induced Conversion of a Portion of a Class of Preferred
Stock and EITF Topic D-42, The Effect of the Calculation of Earnings per
Share for the Redemption or Induced Conversion of Preferred Stock. The
Company does not expect the adoption of this update to have a material
impact on its consolidated financial position, results of operations or
cash flows.
|
F-15
|
|
-
|
In September 2009, the FASB
issued the FASB Accounting Standards Update No. 2009-09 “Accounting for
Investments-Equity Method and Joint Ventures and Accounting for
Equity-Based Payments to Non-Employees”. This update represents a
correction to Section 323-10-S99-4, Accounting by an Investor for
Stock-Based Compensation Granted to Employees of an Equity Method
Investee. Additionally, it adds observer comment Accounting Recognition
for Certain Transactions Involving Equity Instruments Granted to Other
Than Employees to the Codification. The Company does not expect the
adoption to have a material impact on its consolidated financial position,
results of operations or cash
flows.
|
|
|
-
|
In September 2009, the FASB
issued the FASB Accounting Standards Update No. 2009-12 “Fair Value
Measurements and Disclosures Topic 820 – Investment in Certain Entities
That Calculate Net Assets Value Per Share (or Its Equivalent)”, which
provides amendments to Subtopic 820-10, Fair Value Measurements and
Disclosures-Overall, for the fair value measurement of investments in
certain entities that calculate net asset value per share (or its
equivalent). The amendments in this update permit, as a practical
expedient, a reporting entity to measure the fair value of an investment
that is within the scope of the amendments in this update on the basis of
the net asset value per share of the investment (or its equivalent) if the
net asset value of the investment (or its equivalent) is calculated in a
manner consistent with the measurement principles of Topic 946 as of the
reporting entity’s measurement date, including measurement of all or
substantially all of the underlying investments of the investee in
accordance with Topic 820. The amendments in this update also require
disclosures by major category of investment about the attributes of
investments within the scope of the amendments in this update, such as the
nature of any restrictions on the investor’s ability to redeem its
investments at the measurement date, any unfunded commitments (for
example, a contractual commitment by the investor to invest a specified
amount of additional capital at a future date to fund investments that
will be made by the investee), and the investment strategies of the
investees. The major category of investment is required to be determined
on the basis of the nature and risks of the investment in a manner
consistent with the guidance for major security types in U.S. GAAP on
investments in debt and equity securities in paragraph 320-10-50-1B. The
disclosures are required for all investments within the scope of the
amendments in this update regardless of whether the fair value of the
investment is measured using the practical expedient. The Company does not
expect the adoption to have a material impact on its consolidated
financial position, results of operations or cash
flows.
|
|
|
-
|
In October 2009, the FASB issued
guidance for amendments to FASB Emerging Issues Task Force on EITF Issue
No. 09-1 “ Accounting
for Own-Share Lending Arrangements in Contemplation of a Convertible Debt
Issuance or Other Financing ” (Subtopic 470-20) “Subtopic”.
This accounting standards update establishes the accounting and reporting
guidance for arrangements under which own-share lending arrangements
issued in contemplation of convertible debt issuance. This Statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2009. Earlier adoption is not
permitted. The Company does not expect the adoption to have a material
impact on its consolidated financial position, results of operations or
cash flows.
|
A variety
of proposed or otherwise potential accounting standards are currently under
study by standard setting organizations and various regulatory agencies. Due to
the tentative and preliminary nature of those proposed standards, management has
not determined whether implementation of such proposed standards would be
material to the consolidated financial statements.
F-16
|
4.
|
Concentrations of Business and
Credit Risk
|
The
majority of the Company’s bank accounts in banks located in the PRC 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 in the PRC. As of
December 31, 2009, The Company maintains cash in the US, in a financial
institution insured by the FDIS that has approximately $14,636,000 in funds in
excess of FDIC insured amounts.
For the
years ended December 31, 2009 and 2008, no single customer accounted for 10% or
more of revenues.
As of
December 31, 2009 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, 2009.
Payments
of dividends may be subject to some restrictions.
|
5.
|
Cash and Cash
Equivalents
|
Cash and
cash equivalents consist of the following:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
on Hand — China
|
$
|
1,398
|
$
|
417
|
||||
|
Bank
Deposits — China
|
49,898,143
|
22,705,067
|
||||||
|
Bank
Deposits — US
|
15,135,791
|
712,614
|
||||||
|
$
|
65,035,332
|
$
|
23,418,098
|
|||||
|
6.
|
Advance to Related
Parties
|
Advance
to related parties consist of the following:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Advance
to WEI
|
$
|
-
|
$
|
80,000
|
||||
|
Advance
to ZHLDBJ
|
-
|
62,006
|
||||||
|
$
|
-
|
$
|
142,006
|
|||||
Advances
were made to expand WEI’s operations either inside or outside of the PRC. Due to
the non-resolution of ongoing administrative and legal matters in connection
with the acquisition of WEI, Company management has fully reserved these
advances as of December 31, 2009, until such time as all administrative and
legal matters regarding the WEI acquisition are fully resolved. The resolution
of these WEI acquisition matters will either result in the WEI acquisition being
fully completed, or the abandonment of the WEI acquisition. In addition, the
Company prior to the formation of ZHLDBJ advanced $62,006 to related party’s of
this entity. ZHLDBJ was established on January 4, 2009, at which time these
advances became inter-company advances and have been eliminated in
consolidation.
F-17
|
7.
|
Accounts
Receivables
|
Accounts
Receivables are all unsecured and due upon demand:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Mobi
Advertising
|
$
|
966,308
|
$
|
467,450
|
||||
|
Others
|
308,419
|
2,157
|
||||||
|
$
|
1,274,727
|
$
|
469,607
|
|||||
The Mobi
advertising is an agent for the company’s on-line advertising business with
trade terms of a six-month receivable period. The others are receivables from
sales of prepaid cards to re-sellers.
|
8.
|
Prepaid
Expenses
|
Prepaid
Expenses consist of the following:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Prepaid
rent
|
$
|
305,853
|
$
|
312,343
|
||||
|
Prepaid
teachers and online material
|
294,622
|
456,137
|
||||||
|
Prepaid
services and professional fees
|
81,441
|
66,529
|
||||||
|
Prepaid
outdoor advertising
|
1,812,973
|
1,939,736
|
||||||
|
Prepaid
printing fee
|
-
|
633,188
|
||||||
|
Other
prepaid expenses
|
197,421
|
29,573
|
||||||
|
$
|
2,692,310
|
$
|
3,437,506
|
|||||
|
9.
|
Property and
Equipment
|
Property
and Equipment consist of the following:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Buildings
|
$
|
4,455,227
|
$
|
3,562,826
|
||||
|
Transportation
vehicles
|
192,189
|
191,427
|
||||||
|
Communication
equipment
|
3,148,972
|
2,664,840
|
||||||
|
Furniture
and fixtures
|
2,030,114
|
1,567,032
|
||||||
|
9,826,502
|
7,986,125
|
|||||||
|
Depreciation
|
(3,236,520
|
)
|
(2,224,856
|
)
|
||||
|
Net
|
$
|
6,589,982
|
$
|
5,761,269
|
||||
F-18
For the
year ended December 31, 2009 and 2008 depreciation expense totaled $1,011,664
and $910,490, respectively. Allocated in the years ended December 31, 2009 and
2008 depreciation expenses totaling $374,100 and $296,356, respectively, were
included in cost of goods sold, the remainder of depreciation expense for the
respective periods is included in operating expenses.
As of
December 31, 2009 the Company does not have any land use rights agreements with
the PRC for the office buildings owned by the Company. The Government owns the
land where the Company’s buildings are located and provides to the Company its
usage for free.
In the
PRC land use rights are the legal rights for an entity to use lands for a fixed
period of time. The PRC adopts dual land tenure system under which land
ownership is independent of land use rights. The land is either owned by the
state (“State Land”) or by rural collective economic organization (“Collective
Land”).
|
10.
|
Intangibles and Capitalized
Software
|
Intangibles
and capitalized software of the Company consist of franchise rights, software
and the transfer of minority interest in the BHYHZ subsidiary for no
consideration.
Franchise
Rights
The
franchise rights owned by the Company consist of the following:
|
-
|
The ACCP training course is an
authority for training software engineers under authorized training
procedures with authorized
textbooks.
|
|
-
|
The BENET training course is an
authority for training internet engineers under authorized training
procedures with authorized
textbooks.
|
Capitalized
Software
The
Capitalized software of the Company consists of all the Company’s software,
among which two main ones are the following:
|
-
|
The Usage rights for job seekers
is software to help university students to search jobs, post their
resumes, and communicate with potential
employers.
|
|
-
|
The Usage right for learners is
software to help elementary and secondary students to do assignments, test
papers, and get instructions from
teachers.
|
BHYHZ
Intangible
In
connection with the organization of BHYHZ, the Company transferred to an
unrelated non-profit organization, a 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 an intangible asset, related
to their customer base, that is being amortized over four years. At December 31,
2009, the intangible asset relating to this transaction was $43,696 net of
amortization of $21,848. The minority ownership interest share of operating
losses of BHYHZ is 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, 2009 and 2008 were $83,325 and $90,963,
respectively.
F-19
Intangibles
and Capitalized Software consist of the following:
|
December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ACCP
training course
|
$
|
790,975
|
$
|
787,838
|
||||
|
BENET
training course
|
58,591
|
58,358
|
||||||
|
Usage
rights — Job Seekers
|
439,430
|
437,688
|
||||||
|
Usage
rights—Learner
|
292,954
|
291,792
|
||||||
|
Other
softwares
|
578,668
|
511,500
|
||||||
|
Minority
interest in BHYHZ subsidiary
|
43,696
|
43,696
|
||||||
|
2,204,314
|
2,130,872
|
|||||||
|
Less:
accumulated amortization
|
(1,466,553
|
)
|
(891,800
|
)
|
||||
|
Intangibles,
net
|
$
|
737,761
|
$
|
1,239,072
|
||||
For the
year ended December 31, 2009 and 2008, amortization expenses totaled $574,753,
and $668,134, respectively, and were recorded in cost of goods sold and
operating expenses.
Future
amortization of intangible and capitalized software assets is as
follows:
|
Year Ended December 31,
|
||||
|
$
|
337,566
|
|||
|
2011
|
204,615
|
|||
|
2012
|
53,529
|
|||
|
2013
|
32,242
|
|||
|
2014
|
32,242
|
|||
|
2015
|
32,242
|
|||
|
2016
|
27,955
|
|||
|
2017
|
17,370
|
|||
|
$
|
737,761
|
|||
|
11.
|
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. 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, 2009 and 2008,
the Company had deferred revenue of $1,008,884 and $1,227,806,
respectively.
F-20
|
12.
|
Stockholders’
Equity
|
The
Company recorded the following equity transactions during the year ended
December 31, 2009:
|
|
-
|
On June 5, 2009, the Company
issued 17,000 common shares with par value US$0.001 per share to RedChip
Companies Inc. for its services at a market value of
$46,070.
|
|
|
|
|
|
-
|
On June 18, 2009, the Company
issued 16,334 common shares with par value US$0.001 per share to certain
employees according to the Company’s 2009 Incentive Stock Plan Inc. at a
market value of $47,369.
|
|
|
-
|
On October 5, 2009, the Company
issued 3,162,055 common shares according to the Underwriting Agreement
with Rodman & Renshaw, LLC (the "Underwriter") for the sale of
3,162,055 shares of the Company's common stock, par value $0.001 per
share, for a purchase price of $5.17 per share (net of discounts and
commissions), which is 94% of the per share public offering price of $5.50
per share .
|
|
|
|
|
|
-
|
On October 16, 2009, the Company
issued 434,308 common shares according to the Underwriting Agreement with
Rodman & Renshaw, LLC (the "Underwriter") for the sale of additional
434,308 shares (overallotment), par value $0.001 per share, for a purchase
price of $5.17 per share (net of discounts and commissions), which is 94%
of the per share public offering price of $5.50 per share
.
|
|
|
|
|
|
-
|
On October 29, 2009, the Company
issued 137,005 common shares with par value US$0.001 per share to certain
employees according to the Company’s 2009 Incentive Stock Plan Inc. at a
market value of $685,025.
|
|
|
-
|
On November 30, 2009, the Company
issued 53,000 common shares with par value US$0.001 per share to RedChip
Companies Inc. for its services according to a Joint Marketing Agreement
at a market value of
$265,000.
|
|
|
-
|
During the year ended December
31, 2009 a total of 3,095,502 Series A Preferred Shares were converted
into 1,031,834 shares of common
stock.
|
|
|
-
|
During the year ended December
31, 2009, warrants for the acquisition of 3,497,825 shares of common stock
were exercised, resulting in the issuance of 3,296,787 share of common
stock, of which 364,804 shares were from cashless exercises. Total cash
received from exercised warrants were
$6,429,725.
|
The
Company recorded the following equity transactions during the year ended
December 31, 2008:
|
|
-
|
On June 27, 2008, the Company
issued 400,000 common shares with a market value of $2.33 per share to Mr.
Yuli Guo, to acquire 70% of
WEI.
|
|
|
-
|
During the year ended December
31, 2008 warrants for the purchase of 1,482,801 shares of common stock
were exercised for proceeds of
$2,667,559.
|
|
|
-
|
During the year ended December
31, 2008 a total of 1,800,000 Series A Preferred Shares were converted
into 600,000 shares of common stock valued at
$667,800.
|
|
|
-
|
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. As of December 31, 2008 no shares have been
repurchased.
|
F-21
|
13.
|
Earnings Per
Share
|
Per GAAP
the Company reconciles the numerator and denominator of the basic and diluted
earnings per share (EPS) computations.
For the
years ended December 31, 2009 and 2008, dilutive shares include shares
attributable to convertible preferred stock, exercisable warrants and
exercisable option.
The
following reconciles the components of the EPS computation.
|
Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
income available to common shareholders
|
$
|
15,206,772
|
$
|
10,009,499
|
||||
|
Weighted
average shares outstanding - basic
|
24,081,002
|
21,549,381
|
||||||
|
Effect
of dilutive securities
|
1,541,604
|
3,113,449
|
||||||
|
Weighted
average shares outstanding - diluted
|
25,622,606
|
24,662,830
|
||||||
|
Earnings
per share - basic
|
$
|
0.63
|
$
|
0.46
|
||||
|
Earnings
per share - diluted
|
$
|
0.59
|
$
|
0.41
|
||||
|
14.
|
Statutory
Reserves
|
The
Company is required to make appropriations to reserve funds, comprising the
statutory surplus reserve, statutory public welfare fund and discretionary
surplus reserve, based on after-tax net income determined in accordance with
generally accepted accounting principles of the People’s Republic of China (the
“PRC GAAP”). Appropriation to the statutory surplus reserve should be at least
10% of the after tax net income determined in accordance with the PRC GAAP until
the reserve is equal to 50% of the entities’ registered capital or members’
equity. Appropriations to the statutory public welfare fund are at a minimum of
5% of the after tax net income determined in accordance with PRC GAAP.
Commencing on January 1, 2006, the new PRC regulations waived the requirement
for appropriating retained earnings to the statutory public welfare fund. The
public welfare fund no longer requires the Company to contribute, but the
Company can’t dissolve it. As of December 31, 2007, the Company appropriated 50%
of its registered capital to statutory reserve for Heilongjian Zhonghe Education
Training Center, and has not contributed additional funds to this subsidiary
statutory surplus reserve, as they are in compliance with all applicable PRC
rules. The Company’s other subsidiary has not reached their maximum contribution
required for their statutory reserve; accordingly contributions were made for
the year ended December 31, 2008. For the year ended December 31, 2009 and
2008, statutory reserves activity is as follows:
|
Harbin Zhong He Li
Da Education
Technology, Inc
|
Heilongjiang
Zhonghe
Education
Training Center
|
Beijing Hua Yu Hui
Zhong Technology
Development Co., Ltd
|
Total
|
||||||||||
|
Balance
– January 1, 2008
|
$
|
870,018
|
$
|
281,867
|
$
|
-
|
$
|
1,151,885
|
|||||
|
Allocations
to Statutory reserves
|
838,353
|
-
|
-
|
838,353
|
|||||||||
|
Balance
– December 31, 2008
|
1,708,371
|
281,867
|
-
|
1,990,238
|
|||||||||
|
Allocations
to Statutory reserves
|
1,025,905
|
-
|
-
|
1,025,905
|
|||||||||
|
Balance
– December 31, 2009
|
$
|
2,734,276
|
$
|
281,867
|
$
|
-
|
$
|
3,016,143
|
|||||
F-22
|
15.
|
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 may have a material adverse affect on the Company’s
financial condition and operations.
|
16.
|
Warrants and
Options
|
Warrants
Years
Ended December 31, 2009 and 2008:
|
|
-
|
The Company did not grant any
warrants during the year ended December 31, 2009 and
2008.
|
Warrant
activity for the years ended December 31, 2009 and 2008 is as
follows:
|
Shares
underlying
warrants
|
Weighted
average
Exercise Price
|
|||||||
|
Outstanding
as of January 1, 2008
|
5,130,210
|
$
|
2.03
|
|||||
|
Granted
|
-
|
-
|
||||||
|
Exercised
|
(1,482,801
|
)
|
1.80
|
|||||
|
Expired
or cancelled
|
-
|
-
|
||||||
|
Outstanding
as of December 31, 2008
|
3,647,409
|
$
|
2.12
|
|||||
|
Granted
|
-
|
-
|
||||||
|
Exercised
|
(3,497,825
|
)
|
1.84
|
|||||
|
Expired
or cancelled
|
(50,000
|
)
|
1.29
|
|||||
|
Outstanding
as of December 31, 2009
|
99,584
|
$
|
3.00
|
|||||
The
following table summarizes information about stock warrants outstanding and
exercisable as of December 31, 2009.
|
Exercise Price
|
Outstanding
December 31,
2009
|
Weighted
Average
Remaining
Life in Years
|
Number
exercisable
|
||||||||||
|
$
|
3.00
|
99,584
|
3.34
|
99,584
|
|||||||||
The
remaining warrants, for 99,584 shares, have already been exercised in
January 2010.The Company has no warrants left as of the date of this report
issuance on March 15, 2009.
F-23
Options:
During
the year ended December 31, 2009 the Company established the 2009 Incentive
Stock Plan, with 1,000,000 authorized shares to be issued or granted in stock
options.
In June
2009 the Company granted options to employees to purchase 396,000 shares of
common stock at prices ranging from $2.90 to $3.19 per share. All options
granted have a three year life from the date of issuance and all options have an
exercise price equal to the market value of the Company’s commons shares on the
date of grant. Of these granted options, a total of 366,000 vest in three equal
tranches over two years with the first tranche vesting immediately upon the
grant date, with the remaining two tranches vesting in equal amounts of shares
on the following two anniversary dates from the date of grant. The remaining
30,000 options granted to an employee all vest on the first anniversary of their
grant date.
In June
2009 the Company granted an option to purchase 20,000 shares of common stock at
$2.90 per share, to a non-employee for legal services rendered. This option has
a three year life, is fully vested on the date of grant, and has an exercise
price equal to the market value for the Company’s commons shares on the date of
grant. The fair value of options granted in June 2009 were estimated on the date
of grant using the Blacks-Scholes valuation model and the following assumptions:
a risk free interest rate of 1.88%, a weighted expected life of 2.25 year, a
dividend rate of 0.0%, and a weighted expected volatility of 151.88%. The
Company recorded $418,984 in compensation expenses, net of related tax
effects, related to these option grant for the year ended December 31,
2009.
In
September 2009 the Company granted options to an employee to purchase 30,000
shares of common stock at an exercise price of $5.59 per share. All options
granted have a three year life from the date of issuance and all options have an
exercise price equal to the market value of the Company’s commons shares on the
date of grant. These options, vest in three equal tranches over two years with
the first tranche vesting immediately upon the grant date, with the remaining
two tranches vesting in equal amounts of shares on the following two anniversary
dates from the date of grant.
The fair
value of the September 2009 granted options were estimated on the date of grant
using the Blacks-Scholes valuation model and the following assumptions: a risk
free interest rate of 1.45%, a weighted expected life of 2.25 year, a dividend
rate of 0.0%, and a weighted expected volatility of 231.45%. The Company
recorded $52,467 in compensation expenses, net of related tax effects,
related to this option grant for the year ended December 31, 2009.
In
November 2009 the Company granted options to an independent director to
purchase 10,000 shares of common stock at an exercise price of $5.40 per share.
All options granted have one year life from the date of issuance and all options
have an exercise price equal to the market value of the Company’s commons shares
on the date of grant. These options, vest immediately at the grant
date.
The fair
value of the November 2009 granted options were estimated on the date of grant
using the Blacks-Scholes valuation model and the following assumptions: a risk
free interest rate of 0.51%, a weighted expected life of 0.75 year, a dividend
rate of 0.0%, and a weighted expected volatility of 83.17%. The Company recorded
$12,210 in compensation expenses, net of related tax effects, related to
this option grant for the year ended December 31, 2009.
In June
2008 pursuant to the terms of an employment agreement with the prior CFO of the
Company, the Company granted an option for 10,000 shares of the Company’s common
stock at an exercise price of $3.05, the then market price on the date of grant.
These options have a one year life and expire on the first anniversary of the
date of grant. The options vest monthly in installments of approximately 833
shares per month. The Company recorded expense over the vesting period in
connection with these options granted.
The fair
value of the June 2008 granted option was estimated on the date of grant using
the Blacks-Scholes valuation model and the following assumptions: a risk free
interest rate of 2.17%, a weighted expected life of 0.75 year, a dividend rate
of 0.0%, and a weighted expected volatility of 86.53%. The Company recorded
$3,794 and $5,326 in compensation expenses, net of related tax effects,
related to this option grant for the year ended December 31, 2009 and 2008,
respectively. The option has expired and forfeited as of December 31,
2009.
F-24
The
Company measures the intrinsic value of options at the end of each reporting
period until options are exercised cancelled or expire unexercised. As of
December 31, 2009 there are 294,000 options with a weighted average exercise
price of $3.28 and a weighted average remaining life of 2.5 years, that
remain outstanding and continue to be remeasured at the intrinsic value over
their remaining vesting period ranging from 6 months to1.75 years. Compensation
expense in any given period is calculated as the difference between total earned
compensation at the end of the period, less total earned compensation at the
beginning of the period. Compensation earned is calculated on a straight line
basis over the requisite service period for any given option award. A total of
approximately $203,000 in compensation expense remains unearned as of December
31, 2009. The intrinsic value for exercisable options as of December 31, 2009 is
approximately $441,000.
Stock
option activity for the year ended December 31, 2009 is summarized as
follows:
|
Shares
underlying
options
|
Weighted
average
Exercise Price
|
|||||||
|
Outstanding
as of January 1, 2008
|
-
|
$
|
-
|
|||||
|
Granted
|
10,000
|
3.05
|
||||||
|
Exercised
|
-
|
-
|
||||||
|
Expired
/ cancelled / forfeited
|
-
|
-
|
||||||
|
Outstanding
as of December 31, 2008
|
10,000
|
$
|
3.05
|
|||||
|
Granted
|
456,000
|
3.33
|
||||||
|
Exercised
|
-
|
-
|
||||||
|
Expired
/ cancelled / forfeited
|
(10,000
|
)
|
3.05
|
|||||
|
Outstanding
as of December 31, 2009
|
456,000
|
$
|
3.33
|
|||||
The
following table summarizes the Company’s stock options outstanding at December
31, 2009.
|
Exercise Price
|
Outstanding
December 31,
2009
|
Weighted
Average
Remaining
Life in Years
|
Number
exercisable
|
|||||||
| $ |
3.19
|
300,000
|
2.47
|
100,000
|
||||||
| $ |
2.90
|
116,000
|
2.47
|
42,000
|
||||||
| $ |
5.59
|
30,000
|
2.73
|
10,000
|
||||||
| $ |
5.40
|
10,000
|
0.87
|
10,000
|
||||||
|
456,000
|
2.44
|
162,000
|
||||||||
F-25
|
17.
|
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 PRC 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 wholly owned foreign
enterprise. The Company received a 100% tax holiday for the year ended December
31, 2006, and then 50% reduction of the prevailing tax 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%. For the years ended December 31, 2008, ZHLD’s
effective income tax rate was at 7.5%, based on having received a 50% exemption
in the year ended December 31, 2007 when the prevailing effective tax rate was
30%, and an additional 50% exemption as ZHLD was a technology and software
entity. During the year ended December 31, 2009, ZHLD obtained similar
exemptions to those of the year ended December 31, 2008; however, the prevailing
tax rate had a minimum threshold of 10% for the year ended December 31, 2009.
During the year ended December 31, 2009, the Company was assessed an additional
PRC enterprise income tax, above their effective rate, due to tax regulations
implemented by the PRC in the year ended December 31, 2009 relating to a prior
period. ZHLD management, expects ZHLD to continue being qualified as a
technology and software entity, and expects to receive a 50% reduction in their
statutory PRC enterprise income tax rates. If such status is not achieved, ZHLD
could be subject to increased tax expense in fiscal years subsequent to December
31, 2009. Furthermore, additional taxes can be assessed, beyond statutory rates
enacted and approved tax abatements received by the Company, or ZHLD. The
Company’s ZETC subsidiary is currently exempt from PRC taxation, as it operates
a business enterprise engaged in educational opportunities. The
Company’s other subsidiaries; BHYHZ and ZHLDBJ are taxed at the PRC statutory
rate (25%), and have not accrued for taxes since inception, due to recurring
losses incurred since inception.
The
components of income (loss) before income tax consist of approximately
following:
|
Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
U.S.
Operations
|
$
|
(1,916,000
|
)
|
$
|
(782,000
|
)
|
||
|
Chinese
Operations
|
18,328,000
|
11,370,000
|
||||||
|
$
|
16,412,000
|
$
|
10,588,000
|
|||||
The
components of the provision for income taxes are approximately as
follows:
|
Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Federal,
State and Local
|
$
|
-
|
$
|
-
|
||||
|
Peoples
Republic of China –Federal and Local
|
1,295,000
|
668,000
|
||||||
|
$
|
1,295,000
|
$
|
668,000
|
|||||
F-26
The table
below approximately summarizes the reconciliation of the Company’s income tax
provision computed at the statutory U.S. Federal rate and the actual tax
provision:
|
Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Income
tax provision at Federal statutory rate
|
$
|
5,745,000
|
$
|
3,705,000
|
||||
|
State
income taxes, net of Federal benefit
|
755,000
|
487,000
|
||||||
|
Permanent
differences
|
600,000
|
93,000
|
||||||
|
U.S.
tax rate in excess of foreign tax rate
|
(2,676,000
|
)
|
(1,603,000
|
)
|
||||
|
Abatement
of foreign income taxes
|
(3,487,000
|
)
|
(2,231,000
|
)
|
||||
|
Additional
tax assessment for PRC income taxes – assessed in current period
related to prior period
|
131,000
|
-
|
||||||
|
Increase
in valuation allowance
|
227,000
|
217,000
|
||||||
|
Tax
provision
|
$
|
1,295,000
|
$
|
668,000
|
||||
The
Company has a U.S net operating loss carryforward of approximately $2,200,000 as
of December 31, 2009 which will begin to expire in 2025. Under IRC section 382,
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 of
approximately $875,000 associated with these net operating loss carryforwards
was fully reserved as of December 31, 2009.
Had the
tax exemption not been in place for the partial year ended December 31, 2009 and
2008, the Company estimates the following pro forma financial statement
impact.
|
Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(Proforma)
|
(Proforma)
|
|||||||
|
Net
income before tax provision
|
$
|
16,412,000
|
$
|
10,588,000
|
||||
|
Less
Tax provision not exempted
|
1,295,000
|
668,000
|
||||||
|
Less
Tax provision exempted
|
3,287,000
|
1,516,000
|
||||||
|
Net
income
|
11,830,000
|
8,404,000
|
||||||
|
Less:
net loss attributable to noncontrolling interests
|
(90,000
|
)
|
(91,000
|
)
|
||||
|
Net
income – attributable to the Company
|
$
|
11,920,000
|
$
|
8,495,000
|
||||
|
18.
|
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.
F-27
(c)
Exchange risk
The
Company cannot 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 PRC 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 PRC
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.
|
19.
|
Subsequent
Events
|
In
accordance with ASC 855, “Subsequent Events” the Company evaluated subsequent
events after the balance sheet date of December 31, 2009 through March 15, 2010,
which is the date the financial statements were issued.
On
January 27, 2010, the stock of China Education Alliance, Inc was approved and
began trading on the NYSE under the symbol: CEU. Prior to that the stock was
traded on NYSE Amex.
On
February 3, 2010, China Education Alliance, Inc.announced that through its
wholly owned subsidiary, Harbin Zhong He Li Da Education Technology, Inc.
("ZHLD"), it has incorporated a new company in the People's Republic of China,
Beijing New Shifan Education & Technology ("New Shifan"), with registered
capital of RMB 1.95 million. Further, New Shifan has acquired all the assets and
operations of Beijing Shifan Culture Communication Co., Ltd. ("Beijing Shifan")
for RMB 6 million. Beijing Shifan, focused on the advancement of science and
mathematics education, publishes the "Senior High School Students
Mathematic, Physics, and Chemistry" magazine, which has been endorsed by the PRC
Ministry of Education. Beijing Shifan is also the sponsor and organizer of a
nationwide contest for middle school and high school students. This national
competition tests the students' academic abilities in mathematics, physics and
chemistry. There are currently 23 provinces and cities and more than 100,000
students participating in the contest, and the winners of the contest qualify
for enrollment in some of the top universities in the People's Republic of
China. The acquisition has very significant impact on the secondary education
market in China. Mrs. Yin Xiaojie, the former sole shareholder, owner
and CEO of Beijing Shifan, will take on a management position at New Shifan and
will own 35 percent equity interest in New Shifan, while ZHLD owns 65 percent
interest.
F-28
Item 9. Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure.
None.
|
Item 9A.
|
Controls and
Procedures.
|
See Item
9A(T) below.
35
Item
9A(T). Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
The
Company maintains a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by the Company in the reports filed
under the Securities Exchange Act, is recorded, processed, summarized and
reported within the time periods specified by the SEC's rules and forms.
Disclosure controls are also designed with the objective of ensuring that this
information is accumulated and communicated to the Company's management,
including the Company's chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosure.
Pursuant
to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation
with the participation of the Company’s management, including Xiqun Yu, the
Company’s chief executive officer, and Zibing Pan, the Company’s chief financial
officer, of the effectiveness of the Company’s disclosure controls and
procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the
fiscal year ended December 31, 2009. Based upon that evaluation, the Company’s
chief executive officer and chief financial officer concluded that the Company’s
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports that the Company files or
submits under the Exchange Act, is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and forms. Our chief
executive officer and chief financial officer also concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports required to be filed or submitted under the Exchange
Act is accumulated and communicated to the our management, including our chief
executive officer and chief financial officer, to allow timely decisions
regarding required disclosure.
Management’s
Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over our financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act. The Company’s management is
also required to assess and report on the effectiveness of the Company’s
internal control over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 (“Section 404”). Internal control over
financial reporting is a process to provide reasonable assurance regarding the
reliability of the Company’s financial reporting for external
purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes policies and procedures that: (i)
pertain to maintaining records that in reasonable detail accurately and fairly
reflect the Company’s transactions; (ii) provide reasonable assurance that
transactions are recorded as necessary for preparation of the Company’s
financial statements and that receipts and expenditures of company assets are
made in accordance with management authorization; and (iii) provide reasonable
assurance that unauthorized acquisition, use or disposition of company assets
that could have a material effect on our financial statements would be prevented
or detected on a timely basis.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate.
The
Company’s management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2009. In making this assessment, it used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control—Integrated
Framework. This evaluation was conducted by Xiqun Yu, the Company’s chief
executive officer, and Zibing Pan, the Company’s chief financial officer. Based
on its assessment, the Company’s management believes that, as of December 31,
2009, the Company’s internal control over financial reporting is effective based
on those criteria.
This
annual report does not include an attestation report of the Company’s registered
accounting firm regarding internal control over financial reporting. The
management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission.
36
Changes
in Internal Control over Financial Reporting
No
changes in the Company's internal control over financial reporting have come to
management's attention during the Company's last fiscal quarter that have
materially affected, or are likely to materially affect, the Company's internal
control over financial reporting.
Limitations
on Controls
Management
does not expect that the Company's disclosure controls and procedures or the
Company's internal control over financial reporting will prevent or detect all
error and fraud. Any control system, no matter how well designed and operated,
is based upon certain assumptions and can provide only reasonable, not absolute,
assurance that its objectives will be met. Further, no evaluation of controls
can provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
Company have been detected. The Company's disclosure controls and
procedures are designed to provide reasonable assurance of achieving their
objectives and the Company's chief executive officer and chief financial officer
have concluded that the Company's disclosure controls and procedures are
effective at that reasonable assurance level.
|
Item 9B.
|
Other
Information.
|
None.
PART
III
|
Item 10.
|
Directors, Executive Officers and
Corporate Governance.
|
The
following are our officers and directors as of the date of this prospectus. Most
of our officers and directors are residents of the PRC and, therefore, it may be
difficult for investors to effect service of process within the U.S. upon them
or to enforce judgments against them obtained from the U.S. courts.
The
following table sets forth certain information concerning our directors and
executive officers:
|
Name
|
Age
|
Position
|
||
|
Xiqun
Yu
|
42
|
Chairman
of the board, chief executive officer, president and
director
|
||
|
Zibing
Pan
|
41
|
Chief
financial officer
|
||
|
James
Hsu 1
|
57
|
Director
|
||
|
Ansheng
Huang 2,3
|
63
|
Director
|
||
|
Liansheng
Zhang 1,2,3
|
68
|
Director
|
||
|
Yizhao
Zhang 1,2,3
|
40
|
Director
|
1
Member of the audit committee.
2
Member of the compensation committee.
3
Member of the nominating committee
Mr. Xiqun Yu has been our
chairman and chief executive officer since the organization of our subsidiaries
in 2001. He has more than 18 years of experience in senior management with
several Northern PRC-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.
37
Mr. Zibing Pan was appointed
our Chief Financial Officer on August 20, 2009. Mr. Pan is a Certified Public
Accountant, certified by the Oklahoma State Board of Accountancy and member of
American Institute of Certified Public Accountant (AICPA) and Oklahoma Society
of Certified Public Accountants (OSCPA). Mr. Pan graduated with a Master of
Business Administration from the University of Central Oklahoma in 1999. He
obtained his Bachelor of Arts from Anhui University, China in 1988. Prior to
joining to the Company, Mr. Pan was an audit manager with EideBailly CPAs &
Business Advisors (“EideBailly”) at Oklahoma City office. From September 1998 to
September 2005, Mr. Pan was a statistical analyst and economist with the State
of Oklahoma. From 1994 to1996, Mr. Pan worked as a loan project officer for
Asian Development Bank (ADB) Loan Management Office in Anhui, China. He managed
various ADB loan projects and assisted communication and translation between ADB
and Chinese government. From 1988 to 1994, Mr. Pan was an associate
professor at Anhui University, China, teaching English language.
Mr. James 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 the PRC, 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 the PRC, and YYnet Communications, a
company which specializes in information system services. He received a 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. Ansheng Huang has been a
director since October 2007. Mr. Huang has been the training director of
Vocational Education Equipment Commission at the National Association of
Vocation Education of China 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 PRCMinistry of Education. Mr. Huang
graduated from the Department of Beijing Institute of Education with a
Bachelor’s Degree in Physics.
Mr. Lianzheng 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 the PRCfor 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.
Mr. Yizhao Zhang is currently
the chief financial officer of Universal Travel Group (NYSE: UTA). He is also an
independent director of China Green Agriculture Inc. (NYSE: CGA), Kaisa
Holdings Group (HK: 1638) and China Carbon Graphite, Inc. (OTC BB: CHGI),
respectively. Mr. Zhang has over 13 years of experience in accounting and
internal control, corporate finance, and portfolio management. Previously,
Mr. Zhang held senior positions in Energoup Holdings Corporation(OTC BB:
ENHD), Shengtai Pharmaceutical Inc. (OTC BB: SGTI), China Natural
Resources Incorporation (NASDAQ CM: CHNR) and Chinawe Asset Management
Corporation (OTC BB: CHWE). Mr. Zhang also had experiences in portfolio
management and asset trading in Guangdong South Financial Services Corporation
from 1993 to 1999. He is a certified public accountant of the state of Delaware,
and a member of the American Institute of Certified Public Accountants (AICPA).
Mr. Zhang graduated with a bachelor ’ s degree in economics from Fudan
University, Shanghai in 1992 and received an MBA degree with financial analysis
and accounting concentrations from the State University of New York at Buffalo
in 2003.
The
directors will serve until our next annual meeting, or until their successors
are duly elected and qualified. The officers serve at the pleasure of the
Board.
38
Director
Qualifications
Directors
are responsible for overseeing the Company’s business consistent with their
fiduciary duty to stockholders. This significant responsibility requires
highly-skilled individuals with various qualities, attributes and professional
experience. The board believes that there are general requirements for service
on the Company’s board of directors that are applicable to all directors and
that there are other skills and experience that should be represented on the
board as a whole but not necessarily by each director. The board and the
Nominating Committee consider the qualifications of director and director
candidates individually and in the broader context of the board’s overall
composition and the Company’s current and future needs.
Qualifications
for All Directors
In its
assessment of each potential candidate, including those recommended by
stockholders, the Nominating Committee considers the nominee’s judgment,
integrity, experience, independence, understanding of the Company’s business or
other related industries and such other factors the Nominating Committee
determines are pertinent in light of the current needs of the board. The
Nominating Committee also takes into account the ability of a director to devote
the time and effort necessary to fulfill his or her responsibilities to the
Company.
The board
and the Nominating Committee require that each director be a recognized person
of high integrity with a proven record of success in his or her field. Each
director must demonstrate innovative thinking, familiarity with and respect for
corporate governance requirements and practices, an appreciation of multiple
cultures and a commitment to sustainability and to dealing responsibly with
social issues. In addition to the qualifications required of all directors, the
Board conducts interviews of potential director candidates to assess intangible
qualities including the individual’s ability to ask difficult questions and,
simultaneously, to work collegially. The board does not have a specific
diversity policy, but considers diversity of race, ethnicity, gender, age,
cultural background and professional experiences in evaluating candidates for
board membership. Diversity is important because a variety of points of view
contribute to a more effective decision-making process.
Qualifications,
Attributes, Skills and Experience to be Represented on the Board as a
Whole
The board
has identified particular qualifications, attributes, skills and experience that
are important to be represented on the board as a whole, in light of the
Company’s current needs and its business priorities. The board believes that it
should include some directors with a high level of financial literacy and some
directors who possess relevant business experience as a Chief Executive Officer
or a President or like position. Marketing is the core focus of our business and
the Company seeks to develop and deploy the world’s most innovative and
effective marketing and technology. Therefore, the board believes that marketing
and technology experience should be represented on the board. The Company is
involved in the education business in the PRC. Therefore the
Company’s business also requires compliance with a variety of regulatory
requirements and relationships with various governmental entities. Therefore,
the board believes that governmental, political or diplomatic expertise should
be represented on the Board.
Set forth
below are a chart and a narrative disclosure that summarize the specific
qualifications, attributes, skills and experiences described above. An “X” in
the chart below indicates that the item is a specific reason that the director
has been nominated to serve on the Company’s Board. The lack of an “X” for a particular
qualification does not mean that the director does not possess that
qualification or skill. Rather, an “X” indicates a specific area of focus
or expertise of a director on which the board currently relies.
39
|
Xiqun Yu
|
Zibing Pan
|
James Hsu
|
Liansheng Zhang
|
Yizhao Zhang
|
||||||
|
High
level of financial literacy
|
X
|
X
|
||||||||
|
Diversity
of race, ethnicity, gender, age, cultural background or professional
experience
|
||||||||||
|
Extensive
knowledge of the Company’s business
|
X
|
X
|
||||||||
|
Marketing/Marketing
related technology experience
|
X
|
X
|
||||||||
|
Relevant
Chief Executive/President or like experience
|
X
|
X
|
X
|
|||||||
|
Governmental,
political or diplomatic expertise
|
X
|
X
|
X
|
Xiqun Yu
Extensive knowledge of Company’s
business - Mr. Yu has been our chairman and Chief Executive
Officer since the organization of our subsidiaries in 2001.
Marketing/Marketing related
technology experience - He has more than 18 years of experience in senior
management with several Northern PRC-based enterprises and was responsible for
marketing, strategic planning and designing for many of these
corporations.
Relevant Chief Executive/President
or like experience – Apart from being our chairman and Chief Executive
Officer since the organization of our subsidiaries in 2001, Mr. Yu previously
served as 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.
Governmental, political or
diplomatic expertise - Mr. Yu is a member of the Council of China Harbin
Advertising Association and is a Director of the China Internet Network
Association.
Zibing
Pan
High level of financial
literacy - Mr. Pan is a Certified Public Accountant, certified by the
Oklahoma State Board of Accountancy and member of American Institute of
Certified Public Accountant (AICPA) and Oklahoma Society of Certified Public
Accountants (OSCPA). Mr. Pan graduated with a Master of Business Administration
from the University of Central Oklahoma in 1999. Prior to joining to the
Company, Mr. Pan was an audit manager with EideBailly CPAs & Business
Advisors (“EideBailly”) at Oklahoma City office. From September 1998 to
September 2005, Mr. Pan was a statistical analyst and economist with the State
of Oklahoma.
James
Hsu
Extensive knowledge of the Company’s
business - 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 the PRC, since 1997.
40
Governmental, political or
diplomatic expertise - He is a founder of HeritageEast, a company which
promotes cultural exchange between the U.S. and the PRC.
Marketing/Marketing related
technology experience – Mr. Hsu is a founder of YYnet Communications, a
company which specializes in information system services.
Relevant Chief Executive/President
or like experience - 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 and the
founder of both HeritageEast and YYnet Communications.
Liansheng
Zhang
Governmental, political or
diplomatic expertise - Mr. Zhang has also been appointed as a People’s
Representative during the 9th (1998) and 10th (2003) National People’s Congress
of the PRCfor his extraordinary achievement in Polymer Science and
Technology.
Yizhao
Zhang
High level of financial
literacy - Mr. Zhang has over 13 years of experience in accounting and
internal control, corporate finance, and portfolio management. Mr. Zhang
also had experiences in portfolio management and asset trading in Guangdong
South Financial Services Corporation from 1993 to 1999. He is a certified public
accountant of the state of Delaware, and a member of the American Institute of
Certified Public Accountants (AICPA). Mr. Zhang graduated with a bachelor’s
degree in economics from Fudan University, Shanghai in 1992 and received an MBA
degree with financial analysis and accounting concentrations from the State
University of New York at Buffalo in 2003.
Relevant Chief Executive/President
or like experience – Mr. Zhang is currently the chief financial officer
of Universal Travel Group (NYSE: UTA). He is also an independent director of
China Green Agriculture Inc. (NYSE: CGA), Kaisa Holdings Group (HK: 1638)
and China Carbon Graphite, Inc. (OTC BB: CHGI), respectively. Previously, Mr.
Zhang held senior positions in Energoup Holdings Corporation (OTC BB:
ENHD), Shengtai Pharmaceutical Inc. (OTC BB: SGTI), China Natural
Resources Incorporation (NASDAQ CM: CHNR) and Chinawe Asset Management
Corporation (OTC BB: CHWE).
Save as
otherwise reported above, none of our directors hold directorships in other
reporting companies.
There are
no family relationships among our directors or officers.
To our
knowledge, during the last ten years, none of our directors and executive
officers (including those of our subsidiaries) has:
|
|
·
|
Had a bankruptcy petition filed
by or against any business of which such person was a general partner or
executive officer either at the time of the bankruptcy or within two years
prior to that time.
|
|
|
·
|
Been convicted in a criminal
proceeding or been subject to a pending criminal proceeding, excluding
traffic violations and other minor
offenses.
|
|
|
·
|
Been subject to any order,
judgment or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in any type of
business, securities or banking
activities.
|
|
|
·
|
Been found by a court of
competent jurisdiction (in a civil action), the SEC, or the Commodities
Futures Trading Commission to have violated a federal or state securities
or commodities law, and the judgment has not been reversed, suspended or
vacated.
|
|
|
·
|
Been the subject to, or a party
to, any sanction or order, not subsequently reverse, suspended or vacated,
of any self-regulatory organization, any registered entity, or any
equivalent exchange, association, entity or organization that has
disciplinary authority over its members or persons associated with a
member.
|
41
Committees
of the Board of Directors
Our board
of directors has three committees, the audit committee, the compensation
committee and the nominating committee. The audit committee and compensation
committee was established in October 2007, and the nominating committee was
establish in October 2007. 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 ourfinancial
statements.
The
members of the audit committee are YizhaoZhang (Chairman), James Hsu and
Liansheng Zhang. The members of the compensation committee are Liansheng Zhang
(Chairman), Yizhao Zhang and Ansheng Huang. The nominating committee similarly
comprises of Liansheng Zhang (Chairman), Yizhao Zhang and Ansheng
Huang.
Audit
Committee and Audit Committee Financial Expert
Our board
of directors established an audit committee in October 2007. The audit committee
is responsible for (i) recommending independent accountants to the Board, (ii)
reviewing our financial statements with management and the independent
accountants, (iii) making an appraisal of our audit effort and the effectiveness
of our financial policies and practices and (iv) consulting with management and
our independent accountants with regard to the adequacy of internal accounting
controls. Our audit committee members are YizhaoZhang
(Chairman), James Hsu and Liansheng Zhang.
Our board
of directors has determined that it has an "audit committee financial expert" as
defined by Item 401(h) of Regulation S-K as promulgated by the Securities and
Exchange Commission. Our audit committee financial expert is Yizhao Zhang. The
directors who serve on the audit committee are "independent" directors based on
the definition of independence in the listing standards of the New York Stock
Exchange. Our Board of Directors has adopted a written charter for the Audit
Committee. The Charter is available on our website at
http://www.chinaeducationalliance.com/Governance.jsp.
42
Compensation
Committee
Our board
of directors established a compensation committee in October 2007.
The
compensation committee of the board of directors is responsible for (i)
determining the general compensation policies, (ii) establishing compensation
plans, (iii) determining senior management compensation and (iv) administering
our stock option plans. The members of the compensation committee currently are
Liansheng Zhang (Chairman), Yizhao Zhang and Ansheng Huang. The members of our
compensation committee or their affiliates did not provide additional service to
the Company or its affiliates in an amount in excess of $120,000 during the
Company’s fiscal year ended December 31, 2009.
Our board
of directors has adopted a written compensation committee
charter. The charter is available on our website at
http://www.chinaeducationalliance.com/Governance.jsp. The directors who serve on
the compensation committee are "independent" directors based on the definition
of independence in the listing standards of the New York Stock
Exchange.
Nominating
Committee
Our
board of directors established a nominating committee in June
2009.
The
purpose of the nominating committee of the board of directors is to assist the
board of directors in identifying and recruiting qualified individuals to become
board members and select director nominees to be presented for board and/or
stockholder approval. The nominating committee will be involved evaluating the
desirability of and recommending to the board any changes in the size and
composition of the board, evaluation of and successor planning for the chief
executive officer and other executive officers. The qualifications of
any candidate for director will be subject to the same extensive general and
specific criteria applicable to director candidates generally. The members of
the nominating committee currently are Liansheng Zhang (Chairman), Yizhao Zhang
and Ansheng Huang.
The
directors who serve on the nominating committee are "independent" directors
based on the definition of independence in the listing standards of the New York
Stock Exchange. The nominating committee has a written charter. The charter is
available on our website at
http://www.chinaeducationalliance.com/Governance.jsp. The nominating committee
will consider qualified director candidates recommended by stockholders if such
recommendations for director are submitted in writing to our Secretary at 58
Heng Shan Road, Kun Lun Shopping Mall,Harbin, The People’s Republic of China
150090, provided such recommendation has been made in accordance with the
relevant by-laws.
At this
time, no additional specific procedures to propose a candidate for consideration
by the nominating committee, nor any minimum criteria for consideration of a
proposed nomination to the board, have been adopted.
Code
of Ethics
We have
adopted a code of ethics to apply to our principal executive officer, principal
financial officer, principal accounting officer and controller, or persons
performing similar functions. The Code of Ethics is currently available on our
website.
The board
and its committees held the following number of meetings during the fiscal year
of 2009:
43
|
Board
of Directors
|
0 | |||
|
Audit
Committee
|
0 | |||
|
Compensation
Committee
|
0 | |||
|
Nominating
Committee
|
0 |
The
meetings include meetings that were held by means of a conference telephone
call, but do not include actions taken by unanimous written consent, which
amounting to 9.
Each
director attended at least 75% of the total number of meetings of the board and
those committees on which he served during the year.
Our
non-management directors did not meet in executive session during
2009.
Board
Leadership Structure and Role in Risk Oversight
Xiqun Yu
is our chairman and chief executive officer. We have four independent directors.
We do not have a lead independent director. Our Board has three standing
committees, each of which is comprised solely of independent directors with a
committee chair. The Board believes that the Company’s chief executive officer
is best situated to serve as Chairman of the Board because he is the director
most familiar with our business and industry and the director most capable of
identifying strategic priorities and executing our business strategy. In
addition, having a single leader eliminates the potential for confusion and
provides clear leadership for the Company. We believe that this leadership
structure has served the Company well.
Our Board
of Directors has overall responsibility for risk oversight. The Board has
delegated responsibility for the oversight of specific risks to Board committees
as follows:
|
|
·
|
The Audit Committee oversees the
Company’s risk policies and processes relating to the financial statements
and financial reporting processes, as well as key credit risks, liquidity
risks, market risks and compliance, and the guidelines, policies and
processes for monitoring and mitigating those
risks.
|
|
|
·
|
The Nominating Committee oversees
risks related to the company’s governance structure and
processes.
|
Our Board
of Directors is responsible to approve all related party transactions according
to our Code of Ethics. We have not adopted written policies and procedures
specifically for related person transactions.
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(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our executive officers and directors and
persons who own more than 10% of a registered class of our equity securities to
file with the SEC initial statements of beneficial ownership, reports of changes
in ownership and annual reports concerning their ownership of our common stock
and other equity securities, on Form 3, 4 and 5 respectively. Executive
officers, directors and greater than 10% shareholders are required by the SEC
regulations to furnish our company with copies of all Section 16(a) reports they
file.
Based
solely on our review of the copies of such reports received by us and on written
representations by our officers and directors regarding their compliance with
the applicable reporting requirements under Section 16(a) of the Exchange Act,
we believe that, with respect to the fiscal year ended December 31, 2009, our
officers and directors, and all of the persons known to us to own more than 10%
of our common stock, filed all required reports on a timely basis except Zibing
Pan was late for one Form 3 filing.
44
The
following table sets forth information with respect to the compensation of each
of the named executive officers for services provided in all capacities to China
Education Alliance, Inc. and its subsidiaries in the fiscal years ended December
31, 2009 and 2008 in their capacity as such officers. Mr. Xiqun Yu,
our chief executive officer and also one of our directors, receives no
additional compensation for his services in his capacity as director. No other
executive officer orformer executive officer received more than $100,000 in
compensation in the fiscal years reported below.
|
Name
and
Principal
Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-equity
Incentive
Plan
Compensation
($)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
|
Xiqun
Yu
|
2009
|
21,000
|
—
|
—
|
313,000
|
—
|
—
|
—
|
334,000
|
|||||||||||||||||||||||||
|
Chief
|
||||||||||||||||||||||||||||||||||
|
Executive
|
2008
|
21,000
|
—
|
—
|
—
|
—
|
—
|
—
|
21,000
|
|||||||||||||||||||||||||
|
Officer
|
||||||||||||||||||||||||||||||||||
|
(principal
|
||||||||||||||||||||||||||||||||||
|
executive
|
||||||||||||||||||||||||||||||||||
|
officer)(1)
|
||||||||||||||||||||||||||||||||||
|
Zibing
Pan
|
||||||||||||||||||||||||||||||||||
|
Chief
|
2009
|
38,000
|
—
|
—
|
52,000
|
—
|
—
|
—
|
90,000
|
|||||||||||||||||||||||||
|
Financial
|
||||||||||||||||||||||||||||||||||
|
Officer
|
2008
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||||
|
(principal
|
||||||||||||||||||||||||||||||||||
|
financial
|
||||||||||||||||||||||||||||||||||
|
officer)(2)
|
||||||||||||||||||||||||||||||||||
|
Susan
Liu
|
||||||||||||||||||||||||||||||||||
|
Former
|
2009
|
50,000
|
—
|
—
|
4,000
|
—
|
—
|
—
|
54,000
|
|||||||||||||||||||||||||
|
Chief
|
||||||||||||||||||||||||||||||||||
|
Financial
|
2008
|
39,000
|
—
|
—
|
5,000
|
—
|
—
|
—
|
44,000
|
|||||||||||||||||||||||||
|
Officer(3)
|
||||||||||||||||||||||||||||||||||
|
Chunqing
|
||||||||||||||||||||||||||||||||||
|
Wang
|
2009
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||||
|
Former
|
||||||||||||||||||||||||||||||||||
|
Chief
|
2008
|
5,000
|
—
|
—
|
—
|
—
|
—
|
—
|
5,000
|
|||||||||||||||||||||||||
|
Financial
|
||||||||||||||||||||||||||||||||||
|
Officer
(4)
|
||||||||||||||||||||||||||||||||||
|
|
(1)
|
This
option to purchase 300,000 shares of common stock was issued pursuant to
China Education Alliance, Inc.'s 2009 Incentive Stock Plan and an
Incentive Stock Option Agreement dated as of June 18, 2009. The option
shall become exercisable during the term of Mr. Yu’s employment in three
(3) equal annual installments of 100,000 shares of common stock each, the
first installment to be exercisable on June 18, 2009, with additional
installments becoming exercisable on each of the first and second
anniversaries thereof. There are no other notable conditions
to exercisability, tandem feature, reload feature, tax-reimbursement
feature, and any provision that could cause the exercise price to be
lowered.
|
|
|
(2)
|
Mr.
Zibing Pan joined us as our Chief Financial Officer on August 20, 2009. On
September 24, 2009, he was granted an option to purchase 30,000 shares of
common stock of Company annually at an exercise price of $5.59, which
option shall vest in one-third installments over three years, the first
installment to be exercisable on September 24, 2009 (the "Initial Vesting
Date"), with additional installments becoming exercisable on each of the
first and second anniversaries following the Initial Vesting Date. There
are no other notable conditions to exercisability, tandem feature, reload
feature, tax-reimbursement feature, and any provision that could cause the
exercise price to be lowered.
|
|
|
(3)
|
Ms. Susan Liu joined us as our
Chief Financial Officer on June 2, 2008 and resigned on August 20,
2009.
|
|
|
(4)
|
Mr.
Chunqing Wang resigned as our Chief Financial Officer on June 2,
2008.
|
The
dollar amount set forth in the summary compensation table with respect to the
option awards reflects the aggregate grant date fair value of the option awards
computed in accordance with FASB ASC Topic 718. For all assumptions made in the
valuation refer to footnote 16 “Warrants and Options” in the Company’s footnotes
to the financial statements.
45
Outstanding
Equity Awards at 2009 Fiscal Year End
As of
December 31, 2009, no options were exercised, and options to purchase 456,000
shares of the Company’s common stock were outstanding.
Outstanding
Equity Awards at Fiscal Year-End December 31, 2009
Option/Stock
awards
|
Name
|
Number of
securities
underlying
unexercised
options (#)
exercisable
|
Number of
securities
underlying
unexercised
options (#)
unexercisable
|
Equity
incentive
plan awards:
Number of
securities
underlying
unexercised
unearned
options (#)
|
Option
exercise
price ($)
|
Option
expiration
date
|
Number
of shares
or units
of stock
that have
not
vested (#)
|
Market
value of
shares or
units of
stock that
have not
vested ($)
|
Equity
incentive
plan awards:
Number of
unearned
shares, units
or other
rights that
have not
vested (#)
|
Equity
incentive plan
awards:
Market or
payout value
of unearned
shares, units
or other
rights that
have not
vested ($)
|
||||||||||||||||||||||||
|
Xiqun
Yu
|
100,000 | 200,000 | - | 3.19 |
6/18/2012
|
- | - | - | - | ||||||||||||||||||||||||
|
Zack
Pan
|
10,000 | 20,000 | - | 5.59 |
9/24/2012
|
- | - | - | - | ||||||||||||||||||||||||
|
Xuxin
Dong
|
10,000 | 20,000 | - | 2.90 |
6/18/2012
|
- | - | - | - | ||||||||||||||||||||||||
|
Tao
Wang
|
3,333 | 6.667 | - | 2.90 |
6/18/2012
|
- | - | - | - | ||||||||||||||||||||||||
|
Jianwei
Zhou
|
667 | 1,333 | - | 2.90 |
6/18/2012
|
- | - | - | - | ||||||||||||||||||||||||
|
Shangyi
Tian
|
1,000 | 2,000 | - | 2.90 |
6/18/2012
|
- | - | - | - | ||||||||||||||||||||||||
|
Lianshuang
Li
|
1,000 | 2,000 | - | 2.90 |
6/18/2012
|
- | - | - | - | ||||||||||||||||||||||||
|
Xiuli
Han
|
1,000 | 2,000 | - | 2.90 |
6/18/2012
|
- | - | - | - | ||||||||||||||||||||||||
|
Hongbo
Ma
|
1,000 | 2,000 | - | 2.90 |
6/18/2012
|
- | - | - | - | ||||||||||||||||||||||||
|
Quanxi
Wang
|
667 | 1,333 | - | 2.90 |
6/18/2012
|
- | - | - | - | ||||||||||||||||||||||||
|
Liansheng
Zhang
|
3,333 | 6.667 | - | 2.90 |
6/18/2012
|
- | - | - | - | ||||||||||||||||||||||||
|
Yizhao
Zhang
|
30,000 | - | 2.90 |
6/18/2012
|
- | - | - | - | |||||||||||||||||||||||||
|
James
Hsu
|
10,000 | - | 5.40 |
11/15/2010
|
- | - | - | - | |||||||||||||||||||||||||
|
Tai
Ming Tan
|
20,000 | - | 2.90 |
6/18/2012
|
- | - | - | - | |||||||||||||||||||||||||
|
Total
|
162,000 | 294,000 | |||||||||||||||||||||||||||||||
46
Employment
Agreements
We do not
currently provide any contingent or deferred forms of compensation arrangements,
annuities, or retirement benefits to our executive officers or
directors. We had entered into a five year employment agreement with of our
Chief Executive Officer and our ex-Chief Financial Officer, Chunqing Wang, 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 was 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.
On June
2, 2008, we appointed Susan Liu as our Chief Financial Officer pursuant to an
employment agreement dated June 2, 2008. Ms. Liu’s compensation as our Chief
Financial Officer is set forth in an employment agreement between Ms. Liu and us
dated June 2, 2008. Under that agreement, Ms. Liu was to receive compensation
consisting of the following: (i) a monthly salary of CA$6,000, (ii) an annual
bonus equivalent to one month’s salary, payable in December of each year, based
on the monthly salary in effect on November 30 of that year, (iii) such benefits
as are available to our other employees, and (iv) options to purchase a
total of 10,000 shares of our common stock, such options to vest monthly in
equal installments commencing from June 2, 2008 through June 1, 2009. Susan Liu
resigned on August 20, 2009.
On August
20, 2009, we appointed Zibing Pan as our new Chief Financial Officer pursuant to
an employment agreement between Mr. Pan and us dated August 20,
2009. Under that agreement, Mr. Pan is to receive an annual salary of
$100,000, and an additional $300 per month towards the payment of his medical,
health and dental benefits, disability, accident and life insurance.
Additionally, Mr. Pan will be granted an option to purchase 30,000 shares of
common stock of Company annually at an exercise price equivalent to the closing
price per share of common stock on the date of the grant, which option shall
vest in one-third installments over three years. As an incentive to Mr. Pan, on
completion of two full years of service to the Company, the Company shall award
him an additional option to purchase 40,000 shares of the Company’s common stock
at an exercise price equivalent to the closing price per share of common stock
on the date of the grant, which option shall vest in one-third installments over
three years.
Compensation
Discussion and Analysis
We strive
to provide our named executive officers (as defined in Item 402 of Regulation
S-K) with a competitive base salary that is in line with their roles and
responsibilities when compared to peer companies of comparable size in similar
locations.
It is not
uncommon for PRC private companies in the PRC to have base salaries as the sole
form of compensation. The base salary level is established and reviewed based on
the level of responsibilities, the experience and tenure of the individual and
the current and potential contributions of the individual. The base salary is
compared to the list of similar positions within comparable peer companies and
consideration is given to the executive’s relative experience in his or her
position. Base salaries are reviewed periodically and at the time of
promotion or other changes in responsibilities.
We plan
to implement a more comprehensive compensation program, which takes into account
other elements of compensation, including, without limitation, short and long
term compensation, cash and non-cash, and other equity-based compensation such
as stock options. We expect that this compensation program will be comparable to
the programs of our peer companies and aimed to retain and attract talented
individuals.
47
Board
Compensation
On June
17, 2009, the Board of Directors of the Company appointed Mr. Yizhao Zhang as
independent director of the Company. Mr. Zhang’s compensation as director of the
Company is set forth in an appointment letter with the Company dated June 17,
2009. He will be paid a monthly fee of $1,000. He will also be granted options
to purchase a total of 30,000 shares of common stock of the Company, par value
$0.001 per year of service at a price to be determined by the Compensation
Committee and the Board of Directors. The first set of options shall vest on the
first anniversary of its grant and may be exercised until three years from the
date of grant provided that Mr. Zhang is still a director of or otherwise
engaged by the Company at the date of vesting.
On June
18, 2009, the Company granted Liansheng Zhang 10,000 shares of common stock of
the Company. This option was issued pursuant to the Company's 2009 Incentive
Stock Plan and an Incentive Stock Option Agreement dated as of June 18, 2009.
The option shall become exercisable during the term of the Liansheng Zhang's
employment in three equal annual installments of 3,333 shares of common stock
each (save for the last installment of 3,334 shares), the first installment to
be exercisable on the date of this option (the "Initial Vesting Date"), with
additional installments becoming exercisable on each of the first and second
anniversaries following the Initial Vesting Date. Mr. Zhang also received $5,000
in fees in fiscal year 2009.
On
November 15, 2009, James Hsu was granted an option by the Company pursuant to
the Company's 2009 Incentive Stock Option Plan and an Incentive Stock Option
Agreement dated as of November 15, 2009. The option shall become vested and
exercisable as of November 15,2009 to purchase 10,000 shares of common stock at
the exercise price of $5.40 per share during the term of the James Hsu’s
employment with the Company and shall expire one year from November 15, 2009.
Mr. Hsu also received $10,000 in fees in fiscal year 2009.
The
following table sets forth the compensation received by our directors in fiscal
year 2009 in their capacity of directors:
|
Name and
Principal
Position
|
Fee
earned or
paid in
Cash ($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-equity
Incentive Plan
Compensation
($)
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
|
Total ($)
|
|||||||||||||||||||||
|
Xiqun
Yu
|
—
|
—
|
313,000
|
—
|
—
|
—
|
313,000
|
|||||||||||||||||||||
|
—
|
—
|
|||||||||||||||||||||||||||
|
James
Hsu
|
10,000
|
—
|
12,210
|
—
|
—
|
—
|
22,210
|
|||||||||||||||||||||
|
—
|
—
|
|||||||||||||||||||||||||||
|
Ansheng
|
||||||||||||||||||||||||||||
|
Huang
|
14,000
|
—
|
—
|
—
|
—
|
—
|
14,000
|
|||||||||||||||||||||
|
Liansheng
|
8,500
|
|||||||||||||||||||||||||||
|
Zhang
|
5,000
|
—
|
3,500
|
—
|
—
|
—
|
||||||||||||||||||||||
|
Yizhao
|
||||||||||||||||||||||||||||
|
Zhang
|
6,000
|
—
|
20,000
|
—
|
—
|
—
|
26,000
|
|||||||||||||||||||||
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The
following table sets forth certain information with respect to the beneficial
ownership of our voting securities by (i) any person or group owning more than
5% of any class of voting securities, (ii) each director, (iii) our chief
executive officer and (iv) all executive officers and directors as a group as of
March 8, 2010.
48
|
Name and Address
|
Number of
Shares
Beneficially
Owned (1)
|
Percentage of
Outstanding
Shares (1)
|
||||||
|
Executive
Officers and Directors
|
||||||||
|
Xiqun
Yu (1)
58
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
PRC
150090
|
12,783,335 | (2) | 40.39 | % | ||||
|
Zibing
Pan
58
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
PRC150090
|
10,000 | (3) | * | |||||
|
James
Hsu
58
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
PRC150090
|
10,000 | (4) | * | |||||
|
Ansheng
Huang
58
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
PRC150090
|
0 | 0 | % | |||||
|
Liansheng
Zhang
58
Heng Shan Rd.
Kun
Lun Shopping Mall Harbin,
PRC150090
|
3,333 | (5) | * | |||||
|
Yizhao
Zhang
45
Old MillstoneDrive, NIT 6
East
Windsor, NJ08520
|
0 | (6) | 0 | % | ||||
|
Officers
and Directors as a group (six individuals)
|
12,806,668 | 40.43 | % | |||||
*Represents
less than 1%
|
(1)
|
In determining beneficial
ownership of our common stock as of a given date, the number of shares
shown includes shares of common stock which may be acquired on exercise of
warrants or options or conversion of convertible securities within 60 days
of that date. In determining the percent of common stock owned by a person
or entity on March 8, 2010, (a) the numerator is the number of shares of
the class beneficially owned by such person or entity, including shares
which may be acquired within 60 days on exercise of warrants or options
and conversion of convertible securities, and (b) the denominator is the
sum of (i) the total shares of common stock outstanding on March 8, 2010
(31,651,251), and (ii) the total number of shares that the beneficial
owner may acquire upon conversion of the preferred and on exercise of the
warrants and options. Unless otherwise stated, each beneficial owner has
sole power to vote and dispose of its
shares.
|
|
( 2 )
|
The shares beneficially owned by
Xiqun Yu include (a) 12,683,335 shares of common stock directly owned by
Xiqun Yu, and (b) an option granted by the Company on June 18, 2009, to
purchase 300,000 shares of the Company’s common stock in three equal
installments, the first being vested on the date of the grant, and
additional installments being vested on the first and second anniversaries
of the date of the
grant.
|
49
|
( 3 )
|
Pursuant to an Incentive Stock
Option Agreement between Zibing Pan and the Company, on September 24,
2009, Zibing Pan was granted an option to purchase 30,000 shares of common
stock of Company annually at an exercise price equivalent to the closing
price per share of common stock on the date of the grant, which option
shall vest in one-third installments over three years, the first
installment to be exercisable on the date of this option, with additional
installments becoming exercisable on each of the first and second
anniversaries following the date of the
grant.
|
|
( 4 )
|
James Hsu was granted an option
by the Company pursuant to the Company's 2009 Incentive Stock Option Plan
and an Incentive Stock Option Agreement dated as of November 15, 2009. The
option shall become vested and exercisable as of November 15,2009 to
purchase 10,000 shares of common stock at the exercise price of $5.40 per
share during the term of the James Hsu’s employment with the Company and
shall expire one year from November 15,
2009.
|
|
( 5 )
|
Liansheng Zhang was granted an
option to purchase 10,000 shares of the common stock of the Company on
June 18, 2009. The option shall become exercisable during the term of the
Liansheng Zhang's employment in three equal annual installments of 3,333
shares of common stock each (save for the last installment of 3,334
shares), the first installment to be exercisable on the date of this
option, with additional installments becoming exercisable on each of the
first and second anniversaries following the date of the
option.
|
|
( 6 )
|
Yizhao Zhang was granted an
option to purchase 30,000 shares of the common stock of the Company
pursuant to the 2009 Incentive Stock Plan on June 18, 2009. The option
shall vest on the first anniversary of the date of the grant and may be
exercised until three years from the date of the grant of the
option.
|
Item
13. Certain Relationships and Related Transactions, and Director
Independence.
One of
our executive officers rents, in his name, two properties in Beijing, PRC 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, PRC. The rent for this facility is RMB 480,000 per
year (approximately US$68,943). The lease has a one year term, from October 1,
2008 through September 30, 2009. The lease has been renewed to be valid till
September 30, 2010.
As of
December 31, 2009 and December 31, 2008 the Company has outstanding advances
made to its subsidiary World Exchanges, Inc (WEI) of $223,860 and $80,000,
respectively, accounted for as advances to related parties.
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 New York Stock Exchange, and such
independent directors are Yizhao Zhang, James Hsu, Ansheng Huang and Liansheng
Zhang.
Item
14. Principal Accounting Fees and Services.
We were
billed by Sherb & Co., LLP, an independent public accounting firm, for the
following professional services they performed for us during the fiscal years
ended December 31, 2009 and 2008 as set forth in the table below.
|
Fiscal
year ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Audit
fees
|
$
|
103,000
|
$
|
88,000
|
||||
|
Audit-related
fees
|
$
|
—
|
$
|
—
|
||||
|
$
|
1,800
|
$
|
3,800
|
|||||
|
All
other fees
|
$
|
—
|
$
|
—
|
||||
50
Item
15. Exhibits, Financial Statement Schedules.
|
Exhibit
No.
|
Description
|
|
|
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 China Education Alliance, Inc. (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 China Education Alliance, Inc. (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 China Education Alliance, Inc. 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 China Education Alliance, Inc.’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 China Education Alliance, Inc.’s Form 10-QSB quarterly
report for its quarter ended September 30, 2007 filed with the SEC on
November 14, 2007.
|
|
|
ByLaws
of China Education Alliance, Inc. are incorporated herein by
reference to Exhibit 3.3 to the Form SB-2/A Registration Statement
of China Education Alliance, Inc. filed on February 7, 2003
(File No. 333-101167).
|
||
|
10.1
|
Stock
Transaction Agreement between and among China Education Alliance, Inc. and
the former owners of Harbin Zhonghelida Educational Technology Co., Ltd.,
a wholly owned subsidiary of China Education Alliance, Inc. is
incorporated herein by reference to Exhibit 10.3 to China
Education Alliance, Inc.’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 China Education Alliance,
Inc.’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 China Education Alliance, Inc. is incorporated
herein by reference to Exhibit 10.5 to China Education
Alliance, Inc.’s Form 10-KSB for the year ended December 31, 2005 and
filed with the SEC on April 17,
2006.
|
51
|
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 China Education Alliance, Inc.’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 China
Education Alliance, Inc.’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 China Education
Alliance, Inc. is hereby incorporated herein by reference to Exhibit 10.1
to the Form 8-K current report of China Education Alliance,
Inc. 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 China Education
Alliance, Inc. 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 KeJi 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 China Education
Alliance, Inc.filed with the SEC on November 1, 2006.
|
|
|
10.9
|
Investor
Relations Agreement dated November 1, 2006, between China
Education Alliance, Inc. 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 China Education Alliance, Inc.’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 China
Education Alliance, Inc., 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 China Education Alliance, Inc. 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 China
Education Alliance, Inc. 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 China Education
Alliance, Inc. 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 China Education Alliance, Inc. filed with the SEC on May 15,
2007.
|
|
|
10.15
|
Registration
Rights Agreement, dated May 8, 2007, among China Education
Alliance, Inc. , 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 China Education Alliance, Inc. filed with the SEC on May 15,
2007.
|
52
|
10.16
|
Closing
Escrow Agreement, dated May 8, 2007, among China Education
Alliance, Inc. , 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 China Education
Alliance, Inc. filed with the SEC on May 15, 2007.
|
|
|
10.17
|
Letter
agreement dated May 8, 2007 between China Education Alliance,
Inc. and SBI Advisors LLC, and related payment letter is hereby
incorporated herein by reference to Exhibit 99.7 to the Form 8-K
of China Education Alliance, Inc. 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 China Education Alliance, Inc. , 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 China Education Alliance,
Inc. y 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 China Education
Alliance, Inc. filed with the SEC on June 7, 2007.
|
|
|
10.20
|
Closing
Escrow Agreement, dated May, 2007, among China Education Alliance, Inc. ,
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 China Education Alliance, Inc. filed
with the SEC on June 7, 2007.
|
|
|
10.21
|
Letter
Agreement dated November 30, 2007, among China Education Alliance, Inc. ,
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 China Education Alliance, Inc. (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
HuiZhong Technology Development Co., Limited is incorporated herein by
reference to Exhibit 10.22 to the Form 10-KSB of China Education Alliance,
Inc. filed with the SEC on March 31,
2008.
|
|
10.
23
|
House
Lease Contract dated January 29, 2006 by and between Beijing Yi De Zhi
Bang Technology Limited and Beijing Huayuhuizhong Technology Development
Co., Ltd. is incorporated herein by reference to Exhibit 10.24
to the Form 10-KSB of China Education Alliance, Inc. filed with the SEC on
March 31, 2008.
|
|
|
10.
24
|
Employment
Contract between Zhonghelida Education Technology Co., Ltd and Xiqun Yu
dated August 9, 2004 is incorporated herein by reference to Exhibit 10.27
to the Form 10-KSB of China Education Alliance, Inc. filed with the SEC on
March 31, 2008.
|
|
|
10.
25
|
Employment
Contract between Zhonghelida Education Technology Co., Ltd and Chunqing
Wang dated August 9, 2004 is incorporated herein by reference to Exhibit
10.28 to the Form 10-KSB of China Education Alliance, Inc. filed with the
SEC on March 31, 2008.
|
|
|
10.26
|
Underwriting
Agreement dated as of September 29, 2009 by and between the Registrant and
Rodman & Renshaw, LLC, is incorporated herein by reference to Exhibit
10.1 to the Form 8-K of China Education Alliance, Inc. filed with the SEC
on September 30, 2009.
|
|
|
21.1
|
List
of Subsidiaries.
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm (Sherb & Co.,
LLP).
|
|
|
31.1
|
Certification
of the Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of the Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of
2002.
|
53
|
32.1
|
Certification
of the Principal Executive Officer pursuant to U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of the Principal Financial Officer pursuant to U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
54
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
CHINA
EDUCATION ALLIANCE, INC.
|
||
|
Date: October
25, 2010
|
By:
|
/s/ Xiqun Yu
|
|
Xiqun
Yu
President
and Chief Executive Officer
|
||
|
Date: October
25, 2010
|
By:
|
/s/ Zibing Pan
|
|
Zibing
Pan
Chief
Financial Officer
(Principal
Financial
Officer)
|
||
Pursuant
to the requirements of Section 13 or 15(d) of 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
|
|
|
|
|
|
|
|
/s/ Xiqun Yu
|
|
President, Chief Executive Officer
|
|
October
25, 2010
|
|
Xiqun Yu
|
|
Chairman of the Board of Directors
and Director (Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/ Zibing Pan
|
|
Chief Financial Officer
|
|
October
25, 2010
|
|
Zibing Pan
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/ James Hsu
|
|
Director
|
|
October
25, 2010
|
|
James Hsu
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
October
25, 2010
|
|
|
Ansheng Huang
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Liansheng Zhang
|
|
Director
|
|
October
25, 2010
|
|
Liansheng Zhang
|
|
|
|
|
|
/s/ Yizhao Zhang
|
|
Director
|
|
October
25, 2010
|
|
Yizhao Zhang
|
|
55