U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2010
Commission File Number 333-150385
HQ GLOBAL EDUCATION INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
No.27, Jinsha Road, Jinnan Village, Lijingpu Township,
Shahe Section, Ningxiang County, Hunan Province, China 410600
(Address of principal executive offices, including zip code)
Tel: (86 731) 87828601
Fax: (86 731) 87828601
(Telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the last 90 days. YES [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer,"
"non-accelerated filer," and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 or the Exchange Act). YES [ ] NO [X ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 33,000,000 shares as of April 14,
2010.
HQ GLOBAL EDUCATION INC.
TABLE OF CONTENTS
Part I Financial Information 1
Item 1. Financial Statements 1
Condensed Consolidated Balance Sheets as of February 28, 2010
(unaudited) and August 31, 2009 (audited) 1
Condensed Consolidated Statements of Operations and Comprehensive
Income for the Three and Six Months Ended February 28, 2010 and 2009
(Unaudited) 2
Condensed Consolidated Statements of Cash Flows for the Three and
Six Months Ended February 28, 2010 and 2009 (Unaudited) 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 30
Part II Other Information 31
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits 32
Signatures 33
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS
February 28, August 31,
2010 2009
----------- -----------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,570,385 $ 3,848,040
Accounts receivable, net of allowance of $55,836 as of
February 28, 2010 and August 31, 2009 10,411,046 5,713,491
Other receivables 50,027 2,203
Due from related party 524,131 2,447,482
Inventory 656,743 1,504,764
Advances to vendors 3,376,850 2,375,364
----------- -----------
Total current assets 20,589,182 15,891,344
PROPERTY AND EQUIPMENT, NET 18,517,354 14,862,590
INTANGIBLE ASSETS, NET 1,026,737 477,339
----------- -----------
TOTAL ASSETS $40,133,273 $31,231,273
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans $ 1,018,164 $ 732,002
Long term loans - current portion 73,249 629,522
Accounts payable 1,954,803 1,327,622
Taxes payable 42,452 20,580
Payroll payable 278,223 241,477
Unearned revenues 1,536,010 8,275
Other payables and accrued liabilities 1,434,923 902,725
----------- -----------
Total current liabilities 6,337,824 3,862,203
LONG TERM LOANS 637,268 402,601
----------- -----------
TOTAL LIABILITIES 6,975,092 4,264,804
----------- -----------
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value, 40,000,000 shares
authorized, -0- shares issued and outstanding at
February 28, 2010 and August 31, 2009
Common Stock, $0.0001 par value 100,000,000 shares authorized,
33,000,000 and 20,500,000 shares issued and outstanding at
February 28, 2010 and August 31, 2009, respectively 3,300 2,050
Additional paid-in capital 1,226,674 1,227,924
Accumulated other comprehensive income 1,692,151 1,672,524
Statutory reserve 8,490,436 6,946,771
Retained earnings 21,745,620 17,117,200
----------- -----------
Total stockholders' equity 33,158,181 26,966,469
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $40,133,273 $31,231,273
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements
1
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended For the six months ended
February 28, February 28,
2010 2009 2010 2009
------------ ------------ ------------ ------------
Revenues $ 6,865,096 $ 9,930,518 $ 19,874,174 $ 21,642,933
Cost of revenue (3,656,526) (5,643,869) (11,515,018) (13,067,679)
------------ ------------ ------------ ------------
Gross profit 3,208,570 4,286,649 8,359,156 8,575,254
Selling expenses (107,664) (149,169) (243,758) (346,232)
General and administrative expenses (476,672) (462,701) (928,236) (889,531)
------------ ------------ ------------ ------------
Income from operations 2,624,234 3,674,779 7,187,162 7,339,491
Other expenses
Interest expenses (25,766) (20,559) (45,127) (39,428)
Other expenses (553) (7,322) (969,950) (14,773)
------------ ------------ ------------ ------------
Total other expenses (26,319) (27,881) (1,015,077) (54,201)
------------ ------------ ------------ ------------
Income before income taxes 2,597,915 3,646,898 6,172,085 7,285,290
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income 2,597,915 3,646,898 6,172,085 7,285,290
------------ ------------ ------------ ------------
Other comprehensive item
Foreign currency translation gain (loss) 5,762 (44,350) 19,627 (1,929)
------------ ------------ ------------ ------------
Comprehensive Income $ 2,603,677 $ 3,602,548 $ 6,191,712 $ 7,283,361
============ ============ ============ ============
Basic and diluted income per common share $ 0.11 $ 0.18 $ 0.28 $ 0.36
============ ============ ============ ============
Basic and diluted weighted average common
shares outstanding 23,416,667 20,500,000 21,950,276 20,500,000
============ ============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
2
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
For the six months ended
February 28,
2010 2009
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,172,085 $ 7,285,290
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 900,645 786,797
Loss on disposal of property & equipment 969,369 --
Changes in assets and liabilities
(Increase) decrease in -
Accounts receivable (4,692,513) (3,122,717)
Other receivables (47,810) (859,158)
Inventories 848,808 764,228
Increase (decrease) in -
Accounts payables 626,130 (53,225)
Payroll Payable 36,575 204,427
Taxes payable 21,852 8,203
Unearned revenues 1,527,334 6,274,530
Other payables and accrued liabilities 531,454 431,549
------------ ------------
Net cash provided by operating activities 6,893,929 11,719,924
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of intangible assets (30,757) --
Acquisition of property & equipment (7,031,696) (1,516,607)
------------ ------------
Net cash used in investing activities (7,062,453) (1,516,607)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions -- 877,963
Repayments on long-term loans (36,615) --
Repayments on related party loans -- (2,250,959)
Proceeds from related party loans 1,924,491 --
------------ ------------
Net cash provided by (used in) financing activities 1,887,876 (1,372,996)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS 2,993 (3,688)
NET INCREASE IN CASH & CASH EQUIVALENTS 1,722,345 8,826,631
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 3,848,040 3,328,231
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 5,570,385 $ 12,154,862
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income tax paid $ -- $ --
============ ============
Interest paid $ 52,128 $ 54,656
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
HQ Global Education Inc. ("the Company"), formerly known as Green Star Mining
Corp., was incorporated under the laws of the State of Daleware on January 22,
2008. On February 8, 2010, the Company acquired all of the outstanding capital
stock of Risetime Group Limited ("Risetime"), a BVI business company
incorporated in British Virgin Islands on December 17, 2007. Risetime owns 100%
of the equity of Xiangtan Nicestar Business Administration Co., Ltd. ("Xiangtan
Nicestar") through its 100% subsidiary, Global Education International Ltd.
("GEI"), an investment holding company incorporated in Hong Kong on November 15,
2007. Xiangtan Nicestar is a wholly foreign-owned entity incorporated in
Xiangtan City, Hunan Province, People's Republic of China on September 30, 2009
and is primarily engaged in providing business administration, planning and
consulting services. Substantially all Risetime and GEI's operations are
conducted in China through Xiangtan Nicestar, and through contractual
arrangements with Xiangtan Nicestar's consolidated affiliated entities in China,
including Hunan Oya Education Technology Co., Ltd. ("Oya") and Oya's
subsidiaries and variable interest entities ("VIEs"). Oya, incorporated in
Changsha City, Hunan Province, People's Republic of China on November 20, 2008,
is primarily engaged in providing vocational education service and vocational
skills training service.
In connection with the acquisition, the Company issued 20,500,000 shares of
common stock to the shareholder of Risetime in exchange for all of the capital
stock of Ristetime (the "Share Exchange" or "Merger"). Upon the completion of
the Merger, the shareholders of Risetime own approximately 62.12% of the issued
and outstanding capital stock of the Company and consequently control the
business and operation of the Company.
The acquisition was accounted for as a reverse merger under the purchase method
of accounting since there was a change of control. Accordingly, Risetime and its
subsidiaries will be treated as the continuing entity for accounting purposes.
In March 2010, subsequent to the end of the first quarter of fiscal year 2010,
Green Star Mining Corp. changed its name to HQ Global Education Inc. to more
effectively reflect the Company's business and communicate the Company's brand
identity to customers.
On July 28, 2009, Oya entered into certain exclusive agreements with Changsha
Huanqiu Vocational Secondary School ("Changsha Huanqiu") and Shaoshan Huanqiu
Vocational Technical Secondary School ("Shaoshan Huanqiu") and their
shareholders. Pursuant to these agreements, Oya provides exclusive consulting
and other general business operation services to Changsha Huanqiu and Shaoshan
Huanqiu in exchange for substantially all net income of Changsha Huanqiu and
Shaoshan Huanqiu. Oya has the right to appoint all senior management personnel
of Changsha Huanqiu and Shaoshan Huanqiu.
On November 28, 2009, Xiangtan Nicestar entered into certain exclusive
agreements with Oya and its shareholders. Pursuant to these agreements, Xiangtan
Nicestar provides exclusive consulting and other general business operation
services to Oya in exchange for substantially all net income of Oya. All voting
rights of Oya are assigned to Xiangtan Nicestar and Xiangtan Nicestar has the
right to appoint all directors and senior management personnel of Oya. In
addition, Oya's shareholders have pledged their equity interest in Oya to
Xiangtan Nicestar as collateral for the fees for consulting and other services
due to Xiangtan Nicestar.
As a result of these contractual arrangements, which obligates Oya to absorb a
majority of the risk of loss from Changsha Huanqiu and Shaoshan Huanqiu's
activities and enable Oya to receive a majority of its expected residual
4
returns, Oya accounts for Changsha Huanqiu and Shaoshan Huanqiu as variable
interest entities under ASC 810, "Consolidation". Accordingly, Oya consolidates
Changsha Huanqiu and Shaoshan Huanqiu's results, assets and liabilities. For the
same reason, Xiangtan Nicestar accounts for Oya as a VIE and consolidates Oya's
results, assets and liabilities.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six and three months
ended February 28, 2010 and 2009 are not necessarily indicative of the results
that may be expected for the full years.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the financial statements
of the Company, Risetime, GEI, Xiangtan Nicestar, Oya, as well as Oya's
subsidiaries and VIEs. All significant inter-company balances and transactions
are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes, and disclosure of contingent
liabilities at the date of the financial statements. Estimates are used for, but
not limited to, the selection of the useful lives and residual values of
property and equipment and intangible assets, provision necessary for contingent
liabilities, fair values, revenue recognition, budgeted costs and other similar
charges. Management believes that the estimates utilized in preparing its
financial statements are reasonable and prudent. Actual results could differ
from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents. The Company
maintains bank accounts in the PRC.
Total cash at February 28, 2010 and August 31, 2009 amounted to $5,570,385 and
$3,848,040, respectively, of which no deposits are covered by insurance. The
Company has not experienced any losses in such accounts and management believes
it is not exposed to any risks on its cash in bank accounts.
ACCOUNTS RECEIVABLE
Accounts receivable consists of balances due from the enterprises for the
education services provided and due from China Overseas-Educated Scholars
Development Foundation for tuition revenues. Accounts receivable are recorded at
net realizable value consisting of the carrying amount less an allowance for
uncollectible amounts.
The Company does periodical reviews as to whether the carrying values of
accounts have become impaired. The assets are considered to be impaired if the
collectability of the balances become doubtful, accordingly, the management
estimates the valuation allowance for anticipated uncollectible receivable
balances. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate. As of February 28, 2010 and August 31, 2009,
the allowance for doubtful debts was $55,836.
5
ADVANCES TO VENDORS
Advances to vendors consist of balances paid for materials for construction of
classrooms and related teaching facilities that have not been provided to or
received by the Company. Advances to vendors are reviewed periodically to
determine whether their carrying value has become impaired. The Company
considers the assets to be impaired if the collectability of the services and
materials become doubtful. Advances to vendors as of February 28, 2010 and
August 31, 2009 amounted to $3,376,850 and $2,375,364, respectively. And the
Company determines that no reserve is necessary for the six months ended
February 28, 2010 and 2009.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation and
any impairment losses. The cost of an asset comprises of its purchase price and
any directly attributable costs of bringing the asset to its working condition
and location for its intended use. Expenditure incurred after the fixed assets
have been put into operation, such as repairs and maintenance and overhaul
costs, is normally charged to the profit and loss account in the year in which
it is 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 beyond its originally assessed standard of
performances, the expenditure is capitalized as an additional cost of the asset.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, less any estimated residual value. Estimated useful
lives of the assets are as follows:
Teaching and dormitory facilities 10 - 30 years
Educational equipments and books 5 years
Office equipments and other equipments 5 years
Automobiles 5 years
Any gain or loss on disposal or retirement of a fixed asset is recognized in the
profit and loss account and is the difference between the net sales proceeds and
the carrying amount of the relevant asset. When property and equipment are
retired or otherwise disposed of, the assets and accumulated depreciation are
removed from the accounts and the resulting profit or loss is reflected in
income.
Expenditures for maintenance and repairs are charged to expense as incurred.
Additions, renewals and betterments are capitalized.
CONSTRUCTION-IN-PROGRESS
The Company constructs certain of its property, plant and equipment. In addition
to cost under the construction contracts, external costs directly related to the
construction of such facilities, including equipment installation and shipping
costs, are capitalized. Depreciation is recorded at the time assets are placed
in service.
INTANGIBLE ASSETS
Intangible assets are accounted for in accordance with the provisions of ASC
350, "Goodwill and Other Intangible Assets". Under ASC 350, intangible asset
included in the carrying value of investments is accounted for using the equity
6
method of accounting, and certain other intangible assets deemed to have
indefinite useful lives are not amortized. Indefinite-lived intangible assets
are assessed for impairment at least annually based on comparisons of their
respective fair values to their carrying values.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with ASC 360, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company is required to review its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through the estimated
undiscounted cash flows expected to result from the use and eventual disposition
of the assets. Whenever any such impairment exists, an impairment loss will be
recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including property, plant and equipment and
other assets, for recoverability at least annually or more frequently upon the
occurrence of an event or when circumstances indicate that the net carrying
amount is greater than its fair value. Assets are grouped and evaluated at the
lowest level for their identifiable cash flows that are largely independent of
the cash flows of other groups of assets. The Company considers historical
performance and future estimated results in its evaluation of potential
impairment and then compares the carrying amount of the asset to the future
estimated cash flows expected to result from the use of the asset. If the
carrying amount of the asset exceeds estimated expected undiscounted future cash
flows, the Company measures the amount of impairment by comparing the carrying
amount of the asset to its fair value. The estimation of fair value is generally
determined by using the asset's expected future discounted cash flows or market
value. The Company estimates fair value based on the information available in
making whatever estimates, judgments and projections are considered necessary.
There was no impairment of long-lived assets during the six months ended
February 28, 2010 and 2009.
UNEARNED REVENUES
Unearned revenues represent amounts received from students for tuition and
service fee relating to the outside-school practice service. The Company
recognizes these funds as a current liability until the revenue can be
recognized. The balance of unearned revenues is not refundable.
REVENUE RECOGNITION
The Company's revenue policies are in compliance with the provision of ASC 605
"Revenue Recognition". The Company recognizes revenue when the following
fundamental criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) the services have been rendered, (iii) the fees are fixed or determinable
and (iv) collection of the resulting receivable is reasonably assured.
Details are as follows:
(a) Tuition revenue received for educational programs and services is
recognized proportionately according to the progress the students
complete the educational programs in the school. Tuition paid in
advance is recorded as unearned revenues.
(b) The Company provides off-campus internship arrangement for students
and collects service charges at fixed amount from both recruiters and
students. Revenue is recognized upon completion of the internship
program.
(c) The Company provides other services mainly logistic services for
students and the revenue from such services is recognized upon
completion of the service.
7
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
which allows for the recognition and measurement of deferred tax assets based
upon the likelihood of realization of tax benefits in future years. Under the
asset and liability approach, deferred taxes are provided for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not these items will either expire before the Company is able
to realize their benefits, or that future deductibility is uncertain.
The Company records a valuation allowance for deferred tax assets, if any, based
on its estimates of its future taxable income as well as its tax planning
strategies when it is more likely than not that a portion or all of its deferred
tax assets will not be realized. If the Company is able to utilize more of its
deferred tax assets than the net amount previously recorded when unanticipated
events occur, an adjustment to deferred tax assets would increase the Company's
net income when those events occur. The Company had no deferred tax items as of
February 28, 2010 and August 31, 2009.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs consist primarily of salaries and
commissions for sales representatives, salaries for administrative staffs, rent
expenses, depreciation expense and employee benefits for administrative staffs.
COMPREHENSIVE INCOME
ASC 220, "Comprehensive Income" requires disclosure of all components of
comprehensive income and loss on an annual and interim basis. Comprehensive
income and loss is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Accumulated other comprehensive income arose from the changes
in foreign currency exchange rates.
STATEMENT OF CASH FLOWS
In accordance with ASC 230, "Statement of Cash Flows," cash flows from the
Company's operations is calculated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statements of cash
flows will not necessarily agree with changes in the corresponding balances on
the balance sheets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, taxes payable, notes payable and other loans payable. Management has
estimated that the carrying amounts approximate their fair value due to the
short-term nature. The carrying amount of long-term loans approximates the fair
value based on the Company's expected borrowing rate for debt with similar
remaining maturities and comparable risk in market.
SUBSEQUENT EVENTS
The Company has evaluated subsequent events that have occurred through the
filing date and has determined there were no material events since the balance
sheet date of this report.
8
EARNINGS PER SHARE
The Company computes earnings per share ("EPS") in accordance with ASC 260,
"Earnings Per Share", which requires companies with complex capital structures
to present basic and diluted EPS. Basic EPS is measured as net income divided by
the weighted average common shares outstanding for the period. Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., convertible securities, options and warrants) as
if they had been converted at the beginning of the periods presented, or
issuance date, if later. Potential common shares that have an anti-dilutive
effect (i.e., those that increase income per share or decrease loss per share)
are excluded from the calculation of diluted EPS.
FOREIGN CURRENCY TRANSLATION
The Company's financial information is presented in US dollars. In accordance
with ASC 830, "Foreign Currency Matters", an entity's functional currency is the
currency of the primary economic environment in which the entity operates;
normally, that is the currency of the environment in which an entity primarily
generates and expends cash. Since substantially all operations of the Company
are conducted in the PRC, the functional currency of the Company is Renminbi
("RMB"), the currency of the PRC. Transactions at the Company which are
denominated in currencies other than RMB are translated into RMB at the exchange
rate quoted by the People's Bank of China prevailing at the dates of the
transactions. Exchange gains and losses resulting from transactions denominated
in a currency other than that RMB are included in statements of operations as
exchange gains. The financial statements of the Company have been translated
into U.S. dollars in accordance with ASC 830, "Foreign Currency Matters". The
financial information is first prepared in RMB and then is translated into U.S.
dollars at period-end exchange rates as to assets and liabilities and average
exchange rates as to revenue and expenses. Capital accounts are translated at
their historical exchange rates when the capital transactions occurred. The
effects of foreign currency translation adjustments are included as a component
of accumulated other comprehensive income in shareholders' equity.
February 28, 2010 August 31, 2009
----------------- ---------------
Period end RMB: US$ exchange rate 6.8260 6.8306
Average RMB: US$ exchange rate 6.8280 6.8343
The RMB is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US
dollars at the rates used in translation.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of accounts receivable and other receivables. The
Company does not require collateral or other security to support these
receivables. The Company conducts periodic reviews of its clients' financial
condition and customer payment practices to minimize collection risk on accounts
receivable.
ADVERTISING
Advertising is expensed as incurred. Advertising expenses were included in
selling expenses and amounted to $7,532 and $71,292 for the six months ended
February 28, 2010 and 2009, respectively.
9
OPERATING LEASES
Leases where substantially all the rewards and risks of ownership of assets
remain with the lessor are accounted for as operating leases. Rental payables
under operating lease are recognized as expense on a straight-line basis over
the lease term.
RISKS AND UNCERTAINTIES
The operations of the Company are located in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
general state of the PRC economy.
The Company's operations in the PRC may be subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among other
things.
RECENT ACCOUNTING PRONOUNCEMENTS
In December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities. This
Accounting Standards Update amends the FASB Accounting Standards Codification
for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity's economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity's involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of this
ASU; however, the Company does not expect the adoption of this ASU to have a
material impact on its financial statements.
In October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605) "Multiple Deliverable Revenue Arrangements - A Consensus
of the FASB Emerging Issues Task Force". This update provides application
guidance on whether multiple deliverables exist, how the deliverables should be
separated and how the consideration should be allocated to one or more units of
accounting. This update establishes a selling price hierarchy for determining
the selling price of a deliverable. The selling price used for each deliverable
will be based on vendor-specific objective evidence, if available, third-party
evidence if vendor-specific objective evidence is not available, or estimated
selling price if neither vendor-specific or third-party evidence is available.
The Company will be required to apply this guidance prospectively for revenue
arrangements entered into or materially modified after January 1, 2011; however,
earlier application is permitted. The management is in the process of evaluating
the impact of adopting this standard on the Company's financial statements.
10
In August 2009, the FASB updated the accounting standards to provide additional
guidance on estimating the fair value of a liability in a hypothetical
transaction where the liability is transferred to a market participant. The
standard is effective for the first reporting period, including interim periods,
beginning after issuance. The Company does not expect the adoption to have a
material effect on the Company's consolidated results of operations and
financial condition.
In June 2009, FASB established Accounting Standards CodificationTM
("Codification") as the single source of authoritative accounting principles
recognized by the FASB in the preparation of financial statements in conformity
with the GAAP. The Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. The Codification is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. Adoption of the
Codification is not expected to have a material impact on the Company's results
of operations or financial position.
In June 2009, FASB updated the accounting standards related to the consolidation
of variable interest entities ("VIEs"). The standard amends current
consolidation guidance and requires additional disclosures about an enterprise's
involvement in VIEs. The standard shall be effective as of the beginning of each
reporting entity's first annual reporting period that begins after November 15,
2009, for interim periods within the first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is
prohibited. The Company does not expect the adoption to have a material impact
on the Company's results of operations or financial position.
In May 2009, FASB issued ASC 855, Subsequent Events. The standard establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. An entity should apply the requirements of ASC 855 to
interim or annual financial periods ending after June 15, 2009. Adoption of this
standard does not have a material impact on the Company's results of operations
or financial position.
In April 2009, the FASB updated the accounting standards to provide guidance on
estimating the fair value of a financial asset or liability when the trade
volume and level of activity for the asset or liability have significantly
decreased relative to historical levels. The standard requires entities to
disclose the inputs and valuation techniques used to measure fair value and any
changes in valuation inputs or techniques. In addition, debt and equity
securities as defined by GAAP shall be disclosed by major category. This
standard is effective for interim and annual reporting periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15, 2009,
and is to be applied prospectively. The adoption did not have a material effect
on the Company's results of operations and financial condition.
In April 2009, the FASB updated the accounting standards for the recognition and
presentation of other-than-temporary impairments. The standard amends existing
guidance on other-than-temporary impairments for debt securities and requires
that the credit portion of other-than-temporary impairments be recorded in
earnings and the noncredit portion of losses be recorded in other comprehensive
income. The standard requires separate presentation of both the credit and
noncredit portions of other-than-temporary impairments on the financial
statements and additional disclosures. This standard is effective for interim
and annual reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. At the date of adoption, the
portion of previously recognized other-than-temporary impairments that represent
the noncredit related loss component shall be recognized as a cumulative effect
of adoption with an adjustment to the opening balance of retained earnings with
11
a corresponding adjustment to accumulated other comprehensive income (loss). The
adaption of this standard did not have a material effect on the preparation of
the Company's consolidated financial statements.
NOTE 3. INVENTORY
Inventory consists of the following:
As of As of
February 28, August 31,
2010 2009
---------- ----------
(Unaudited) (Audited)
Course materials $ 6,560 $ 45,525
Logistic supplies 40,228 364,122
Office supplies 2,348 202,362
Other materials and supplies 4,144 176,316
Textbooks 603,463 716,439
---------- ----------
Total $ 656,743 $1,504,764
========== ==========
NOTE 4. RELATED PARTY TRANSACTIONS
As of February 28, 2010 and August 31, 2009, the balance due from related party
represents loans to Shenzhen Linghai International Cargo Agent Co., Ltd
("Shenzhen Linghai"). Shenzhen Linghai is owned by Ms. Zhong Juanjuan, sister of
Ms. Zhong Yabin, 10% shareholder of Oya. The loan is unsecured, interest free
and repayable on demand.
NOTE 5. PROPERTY, PLANT AND EQUIPMENTS
As of February 28, 2010 and August 31, 2009, the detail of property, plant and
equipments was as follows:
As of As of
February 28, August 31,
2010 2009
------------ ------------
(Unaudited) (Audited)
Teaching and dormitory facilities $ 15,532,291 $ 10,288,401
Educational equipments and books 3,682,710 4,068,173
Office equipments and other equipments 573,570 2,235,171
Automobiles 269,391 269,211
------------ ------------
Sub-total 20,057,962 16,860,956
Less: accumulated depreciation (4,977,485) (5,165,936)
Add: Construction in progress 3,436,877 3,167,570
------------ ------------
Property, plant and equipment, net $ 18,517,354 $ 14,862,590
============ ============
For the six months ended February 28, 2010, a total amount of $1,047,188 was
completed and transferred from construction in progress to teaching and
dormitory facilities.
12
Depreciation expense for the six months ended February 28, 2010 and 2009 was
$889,295 and $781,085, respectively.
NOTE 6. INTANGIBLE ASSETS, NET
As of February 28, 2010 and August 31, 2009, intangible assets are land use
rights, which are recorded at cost less accumulated amortization. Amortization
is provided on a straight-line basis over the estimated useful lives, which is
generally 50 years and represents the shorter of the estimated usage periods or
the terms of the agreements. The details of land use rights are as
follows:
As of As of
February 28, August 31,
2010 2009
---------- ----------
Land use rights $1,122,734 $ 561,926
Less: accumulated amortization (95,997) (84,587)
---------- ----------
Land use rights, net $1,026,737 $ 477,339
========== ==========
Amortization expenses for the land use rights totaled $11,350 and $5,712 for the
six months ended February 28, 2010 and 2009, respectively.
NOTE 7. SHORT-TERM LOANS
As at August 31, 2009, the short-term borrowings consisted of two loans of
$292,949 (RMB 2,000,000) and $439,423 (RMB 3,000,000) from Changsha Foundation
for Education. The two loans were unsecured and bore an interest at 5% per annum
and are repayable on March 17, 2010 and July 31, 2010, respectively. The
$292,949 loan was extended with the new maturity date on March 16, 2011. As of
February 28, 2010, in addition to the loans mentioned above, the Company
borrowed a new short-term loan of $285,672 (RMB1,950,000) from Ningxiang Rural
credit Cooperative Union. The loan bears an interest at 8.50% per annum and will
mature on December 13, 2010 and was secured by a land use right of the Company
with the cost of $432,073.
NOTE 8. LONG-TERM LOANS
The details of long-term loans outstanding as at February 28, 2010 are as
follows:
Interest
Lender Term rate Principal
------------------------------------------- ---------------------------- ------- ------------------------
From To RMB US$
------------ ------------ --------- ---------
LONG-TERM LOAN - CURRENT PORTION
Changsha Foundation for Education Jul 31, 2008 Jul 18, 2010 0.00% 500,000 73,249
--------- ---------
500,000 73,249
LONG-TERM LOAN - NON-CURRENT PORTION
Ningxiang Rural Credit Cooperative Union Sep 1, 2009 Jul 21, 2011 8.64% 1,600,000 234,397
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 13, 2011 10.80% 1,350,000 197,773
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 23, 2011 10.80% 1,400,000 205,098
--------- ---------
4,350,000 637,268
13
The details of long-term loans outstanding as at August 31, 2009 are as follows:
Interest
Lender Term rate Principal
------------------------------------------- ---------------------------- ------- ------------------------
From To RMB US$
------------ ------------ --------- ---------
LONG-TERM LOAN - CURRENT PORTION
Ningxiang Rural Credit Cooperative Union May 30, 2009 May 30, 2010 10.80% 2,000,000 292,801
Ningxiang Rural Credit Cooperative Union Dec 28, 2007 Dec 28, 2009 12.10% 1,800,000 263,521
Changsha Foundation for Education July 31, 2008 July 18, 2010 0.00% 500,000 73,200
--------- ---------
4,300,000 629,522
LONG-TERM LOAN - NON-CURRENT PORTION
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 13, 2011 10.80% 1,350,000 197,641
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 23, 2011 10.80% 1,400,000 204,960
--------- ---------
2,750,000 402,601
The loans borrowed from Ningxiang Rural Credit Cooperative Union were
collateralized by the buildings with an aggregate cost of $743,249 and land use
rights with an aggregate cost of $46,640. The $73,200 loan borrowed from
Changsha Foundation for Education was unsecured and bore no interest. The
$292,801 and 263,521 loans were repaid in September 2009 and December 2009,
respectively. For the six months ended February 28, 2010 and 2009, the Company
incurred $56,836 and $64,103 interests for the above loans.
NOTE 9. OTHER PAYABLES AND ACCRUED LIABILITIES
As of February 28, 2010 and August 31, 2009, other payables and accrued
liabilities are as follows:
As of As of
February 28, August 31,
2010 2009
---------- ----------
Staff welfare payable $1,016,863 $ 836,434
Others 418,060 66,291
---------- ----------
Total $1,434,923 $ 902,725
========== ==========
14
NOTE 10. TAXES
(A) CORPORATION INCOME TAX ("CIT") AND BUSINESS TAX
The Company is governed by the Income Tax Law of the People's Republic of China
concerning the private-run enterprises, which are generally subject to tax at a
new statutory rate of 25% on income reported in the statutory financial
statements after appropriate tax adjustments. The applicable business tax rate
for educational service is currently 5%.
The PRC government also provides various incentives to companies that engage in
the development of vocational education. Such incentives include reduced tax
rates, tax exemptions and other measures. According to Law of the People's
Republic of China on Promotion of Privately-run Schools, implemented from
September 1, 2003, and the Notice of Tax Policy for Education Activities
(Caishui [2004] No.39), issued and became effective on February 5, 2004, some
specific enterprises, organizations and schools could enjoy the same tax
incentives as the schools run by the government, and could be exempt from
business tax and income tax accordingly. As the operation of the Company meets
the requirements of the regulations aforementioned, the Company is therefore
exempt from business tax and income tax.
No income tax and business tax were provided for the reporting period in
accordance with the regulations of the relevant taxing authorities.
(B) TAX PAYABLE
The Company's tax payable represents the unremitted individual income tax
withheld on behalf of the employees. As of February 28, 2010 and August 31,
2009, the tax payable amounted to $42,452 and $20,580, respectively.
NOTE 11. STOCKHOLDERS' EQUITY
(A) COMMON STOCK
HQ Global Education Inc. ("the Company"), formerly Green Star Mining Corp., was
incorporated under the laws of the State of Delaware on January 22, 2008, with
100,000,000 shares of common stock authorized at par value of US$0.0001.
On January 25, 2008, the Company issued a total of 1,500,000 shares of common
stock to Nan E. Weaver for cash in the amount of $0.01 per share for a total of
$15,000.
On July 22, 2008 the Company issued a total of 1,000,000 shares of common stock
to individuals for cash in the amount of $0.025 per share for a total of $
25,000.
On November 23, 2009, the Company approved a 5-for-1 forward stock split of all
issued and outstanding shares of common stock of the Company. On November 25,
2009, the Financial Industry Regulatory Authority ("FINRA") approved the
Company's application for forward stock split applicant. As a result, effective
on December 7, 2009 and prior to the Share Exchange consummated on February 8,
2010, the Company had a total of 12,500,000 shares of common stock issued and
outstanding.
15
On February 8, 2010, the Company entered into a share exchange agreement with
Risetime and its sole shareholder, Nicestar International Ltd. ("Nicestar"), a
British Virgin Islands company. Pursuant to the Share Exchange Agreement, the
Company issued 20,500,000 shares of its common stock, par value $0.0001 per
share, to Nicestar, representing 62.12% of the Company's issued and outstanding
common stock, in exchange for all of the outstanding shares of Risetime held by
Nicestar. Immediately after this share exchange, the Company had 33,000,000
shares of common stock issued and outstanding.
As of February 28, 2010 and August 31, 2009, there was 33,000,000 and 20,500,000
share of common stock issued and outstanding, respectively.
(B) PREFERRED STOCK
On December 31, 2009, the Board of Directors of the Company authorized
40,000,000 shares of preferred stock at par value of $0.001. As of February 28,
2010 and August 31, 2009, there was zero share of preferred stock issued and
outstanding.
(C) STATUTORY RESERVE
According to Law of the People's Republic of China on Promotion of Privately-run
Schools, implemented from September 1, 2003, the Company and the related
subsidiaries are required to set aside at least 25% of their after-tax net
profits each year, if any, to fund the statutory reserves for the future
development of educational activities. The statutory reserves are not
distributable in the form of cash dividends to the shareholders.
For the six months ended February 28, 2010 and 2009, the Company has made
appropriations in the amount of $1,543,665 and $1,821,311 to this statutory
reserve, respectively. As of February 28, 2010 and August 31, 2009, the balances
of the statutory reserve were $8,490,436 and $6,946,771, respectively.
NOTE 12. WEIGHTED AVERAGE NUMBER OF SHARES
In February 2010, the Company entered into a share exchange transaction which
has been accounted for as a reverse merger under the purchase method of
accounting since there has been a change of control. The Company computes the
weighted-average number of common shares outstanding in accordance with ASC 805,
Business Combinations, which states that in calculating the weighted average
shares when a reverse merger takes place in the middle of the year, the number
of common shares outstanding from the beginning of that period to the
acquisition date shall be computed on the basis of the weighted-average number
of common shares of the legal acquiree (the accounting acquirer) outstanding
during the period multiplied by the exchange ratio established in the merger
agreement. The number of common shares outstanding from the acquisition date to
the end of that period shall be the actual number of common shares of the legal
acquirer (the accounting acquiree) outstanding during that period.
NOTE 13. COMMITMENTS
OPERATING LEASE
The commitments are primarily the rental for the campus of Shaoshan Huanqiu
Vocational Technical Secondary School, a VIE of Oya, and for the Company's
office space and warehouse. As of February 28, 2010, the commitments related to
the above rental are as follows:
16
For Years Ended August 31, RMB US$
-------------------------- ---------- ----------
2010 488,912 $ 71,625
2011 967,682 141,764
2012 944,686 138,395
2013 1,008,109 147,686
2014 1,075,844 157,609
Thereafter 898,895 131,687
---------- ----------
Total 5,384,128 $ 788,766
========== ==========
CAPITAL COMMITMENTS
In exchange for obtaining the approval to provide educational services in the
schools of Hunan Province and Sichuan Province in the PRC, the Company have
commitments with the local governments to spend a total amount of Rmb122,800,000
($17,987,060) for the expansion of those schools during the company's operating
periods within them. As of February 28, 2010, Rmb29,192,311 ($4,275,927) has
incurred regarding these commitments. The outstanding Rmb93,607,690
($13,711,133) is for the remaining contract periods should be incurred according
to the following schedule:
By December 31, RMB US$
--------------- ----------- -----------
2010 17,000,000 $ 2,490,065
2011 21,104,990 3,091,341
2012 800,000 117,180
2013 800,000 117,180
2014 800,000 117,180
Thereafter 53,102,700 7,778,187
----------- -----------
Total 93,607,690 $13,711,133
=========== ===========
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain statements in Management's Discussion and Analysis ("MD&A"), other than
purely historical information, including estimates, projections, statements
relating to our business plans, objectives, and expected operating results, and
the assumptions upon which those statements are based, are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements generally are
identified by the words "believe," "project," "expect," "anticipate,"
"estimate," "intend," "strategy," "plan," "may," "should," "will," "would,"
"will be," "will continue," "will likely result," and similar expressions.
Forward-looking statements are based on current expectations and assumptions
that are subject to risks and uncertainties, which may cause actual results to
differ materially from the forward-looking statements. A detailed discussion of
risks and uncertainties that could cause actual results and events to differ
materially from such forward-looking statements is included in this report or
other reports or documents we file with the Securities and Exchange Commission
from time to time. We undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
OVERVIEW
Management's discussion and analysis is intended to help the reader understand
the results of operations and financial condition of the Company. The following
discussion should be read in conjunction with the Consolidated Financial
Statements and accompanying notes ("Notes") included in this Form 10-Q.
The Company was incorporated under the laws of the State of Delaware on January
22, 2008 and became an OTC-listed reporting issuer on September 11, 2008.
Currently, the Company's CUSIP Number is 40431B100 and is having its common
stock trade on OTC Bulletin Board with the ticker HQGE.
On February 11, 2010, the Company completed a reverse acquisition transaction
with Risetime Group Limited ("Risetime"), a company incorporated under the laws
of British Virgin Island. The exchange was consummated under the laws of the
State of Delaware and pursuant to the terms of the Share Exchange Agreement
dated as of February 8, 2010 ("Share Exchange Agreement").
Pursuant to the Share Exchange Agreement, the Company issued 20,500,000 shares
of its common stock, par value $0.0001 per share, to the stockholder of
Risetime, Nicestar International Limited ("Nicestar"), representing 62.12% of
the Company's issued and outstanding common stock, in exchange for the 1(one)
outstanding sharein Risetime held by Nicestar. Immediately after giving effect
to the reverse transaction, the Company had 33,000,000 shares of its common
stock outstanding. Pursuant to this exchange, Risetime became a wholly-owned
subsidiary of the Company.
Most of the business operations of Risetime, namely our operation, are conducted
through Risetime's Chinese variable interest entity - Hunan Oya Education
Technology Co., Ltd. ("Oya"), a customized educational service provider. Oya
carries out the "Customized Education" mode in China and offers a wide range of
educational programs and services through vocational secondary schools. Our
business consists primarily of education programs for various vocational skills,
school logistic services and development of educational materials. We have
abundant student sources that cover 21 provinces and 26 nationalities, including
graduates from junior high schools, senior high schools and junior colleges,
unemployed people and rural labor force.
From the entrance to WTO, hosting the 2008 Olympic Games, to hosting the 41st
World Expo in Shanghai in 2010, China has been regarded as the manufacturing
center of the world and has attracted a majority of international financial
sources. In line with the high economic growth rate, demand for workers and
technicians with specific skills has increased dramatically. To match the
requirements, the Chinese government issued several regulations such as
Vocational Education Law of the People's Republic of China, Regulations of the
People's Republic of China on Chinese-Foreign Cooperation in Running Schools,
and Law of the People's Republic of China on the Promotion of Privately-run
Schools to enhance the development of the vocational education industry. Under
such preferential policies, we have experienced significant growth in our
business in recent years. Our net income increased from $7,797,558 in the twelve
18
months ended August 31, 2008 to $10,667,175 in the twelve months ended August
31, 2009, demonstrating an annual growth rate of 36.80%. As of February 28,
2010, we had 2,692 faculty members in total to serve students at 8 vocational or
technical schools. We have established cooperative relationship with nearly 120
enterprises to supply our trained students and make various training courses
available to their employees. These cooperative enterprises are located mainly
in the economical centers of China, which cover, inter alia, Yangtze River Delta
(radiating from Shanghai to Nanjing, Hangzhou, Wuxi, Ningbo and other coastal
areas), the Pearl River Delta (radiating from Shenzhen to Dongguan, Guangzhou,
Huizhou, Panyu, Qingyuan, Shaoguan and other coastal areas), and many inland
provinces in China. For the six months ended February 28, 2010, the employment
rate remained 100% for the students who graduated from our educational programs.
Our revenue historically has fluctuated quarterly in our fiscal year due to a
flexible educational calendar year. Holidays, especially the Chinese New Year,
are one of the critical factors we have to consider while determining our
teaching calendar. For instance, our students left for winter vacation and
Chinese New Year in February 2010 and returned for the second teaching semester
in March 2010, which is one month later than 2009. Therefore, a large portion of
tuition fees has to be recognized in the third quarter, instead of the second
quarter of the fiscal year 2010. That is the major reason we saw a decrease in
revenue for the current reporting period ended February 28, 2010. Yet, because
of the time difference in certain revenue recognition, the operating results in
the third and fourth quarters will be higher than the same period of prior year.
OPERATING ACTIVITIES
ORDER-ORIENTED EDUCATION
Mr. Guangwen He is the founder and CEO of Oya Education Technology Co., Ltd.,
Changsha HQ Global Vocational School and Shaoshan HQ Global Technical School. He
has been engaged in vocational education and related investments since 1994.
"Order-oriented Education", or customized education, was created by Mr. Guangwen
He and currently is our main operation mode. At present, we run 8 schools in
total, namely, Changsha HQ Global Vocational School, Shaoshan HQ Global
Vocational School, Shaoshan Vocational Secondary School, Yingjing Vocational
School, Tianquan Vocational School, Shimian Vocational School, Lushan Vocational
School and Shaoyang Industrial Vocational Technical School, via exclusive
business cooperation agreements. We divide our teaching calendar into two
semesters every year. The first and second semester for fiscal year 2008 lasted
from September 2007 to January 2008 and from February 2008 to August 2008
(including two-month summer break), respectively, our first and second semester
for fiscal year 2009 lasted from September 2008 to January 2009 and from
February 2009 to August 2009 (including two-month summer break), respectively.
Our most recent teaching semester lasted from September 1, 2009 to January 31,
2010. During this semester, we offered a total of around 60 programs under 17
categories to 32,238 students.
Order-oriented Education refers to the educational program that tailors
vocational education and training via cooperation agreements between us and
various enterprises. Under Order-oriented Education, we design and offer courses
to meet the specific needs of target employers. We first try to understand the
requirements of the industry, such as the specific skills and the number of
potential employees that are needed, and sign cooperation contracts with the
enterprises. Our schools then customize the curriculums according to the
specific requirements. At this stage, our revenue is derived from the students'
tuition and is recognized proportionately within the semester.
In the winter and summer break, work-study programs, i.e. off-campus
internships, are arranged for students. Our teachers work as the team leaders
for these students who are sent to different enterprises in groups. Such
on-field practice help students understand the business atmosphere and the
production process and prepare them with certain skills the enterprises are
looking for. As a result, students are competent for their position without
further training once they graduate from our secondary schools.
For the internship arrangement, commissions are charged to the enterprises based
on the number of students they receive and we also obtain management fees from
students with a fixed rate per student per month. Such revenue is recognized
upon the completion of the internship arrangement. Upon graduation, eligible
students are usually hired by the same enterprises in which they take the
19
internship. In such instances, students are to make a one-off payment to us for
employment recommendations. Based on the training programs we design and the
number of students we offer, we collect commissions for employment
recommendation from recruiters at a fixed amount per person. We recognize such
revenue upon the completion of all the services related to the job arrangement.
"Order-oriented Education" reflects the resource sharing between schools and
enterprises. It benefits our students in their job hunting endeavors after
graduation. As a consequence, student recruitment witnessed a significant
expansion in recent years for our 8 schools that are located in Shaoshan,
Changsha and Shaoyang of Hunan Province, and in Lushan, Shimian, Tianquan and
Yingjing of Sichuan Province, respectively. To carry out the customized training
program, we set up cooperative relationships with approximately 120 enterprises
as of February 28, 2010, including Fuji Xerox Technology (Shenzhen) Co., Ltd.,
Flextronics (Zhuhai) Co., Ltd., Dongguan Master Electronics Co., Ltd., Huizhou
Manley Toys Limited, Shanghai Inventec Co., Ltd., among many others.
RAIN-DEW PLAN TENGFEI PROJECT
On December 28, 2007, the State Council Leading Group Office of Poverty
Alleviation and Development of the People's Republic of China launched "Rain-dew
Plan Tengfei Project" (the "Project") together with China Overseas Scholarship
Development Foundation in Hunan Province and several other provinces. The
Project aims to support the junior middle school graduates with financial
hardship, to receive the continuing educational program. Students under the
Project are recommended for work at enterprises located in Yangtze River Delta
and Pearl River Delta after they finish the vocational or technical training
programs in our schools that last for one to three years. Some of the students
can even apply for overseas education after they graduate from our schools.
China Overseas Scholarship Development Foundation is responsible for paying
upfront fees to our schools under the Project, including the tuitions and
miscellaneous fees as required by the customized educational program. Students
only need to pay their living expenses and travel expenses during the
educational program and start to pay back their tuitions, without interest rate,
to China Overseas Scholarship Development Foundation after they get employed.
Our school in Changsha became one of the educational program providers under the
Project since the second semester of 2008. The Project provides an important
source of our students. During the first year of the project, 5,310 students
were enrolled from 18 cities or areas and majoring in Computer and Application,
Application of Electronics Technology, Apparel Design and Manufacturing,
E-commerce and others. The number of students from the Project increased to
11,673 in the first semester of 2010 and is expected to increase further in the
coming year.
PROSPECT
Under economic globalization, enterprises in China are expanding faster than
ever and this has resulted in a serious shortage of skilled personnel. According
to the Vocational Education 5-Year Development Plan issued on May 17, 2007 by
the Ministry of Education, the number of secondary vocational students shall
reach 21 million in 2010. A study conducted by National Institute for
Educational Research showed that the shortage of technical talents will range
from 17.46 million to 26.65 million as of 2010. This provides a huge expansion
space for the vocational education in mainland China and provides desirable
opportunities for the development of our business.
For the following three years, our business development plan includes:
* Under the customized education mode, we will build several new
teaching facilities at our existing schools so as to expand the
capacity of student enrollment. Meanwhile, in addition to the eight
schools we currently operate, we are expecting to add six to ten
vocational or technical schools in the coming years which potentially
locate in Yunnan Province, Shanxi Province, Liaoning Province, Guangxi
Province and so on, in addition to the eight schools we currently
operate.
* We are going to reach agreements to cooperate in running maritime
schools in Dongying and Weifang in Shandong Province, so that we may
start to offer marine service-related majors to students in these
cities.
20
* We will build solid cooperative relationship with more enterprises and
actively promote the customized education mode. Our students will be
giving more chances for internship. Meanwhile, we will make certain
training programs available for employees at target enterprises.
* We will further integrate the social resources to launch the "Remote
Network Education".
* We have set up a department responsible for editing and compiling the
teaching materials for our educational programs, which we believe will
safeguard our education quality. We have obtained licenses from Press
and Publication Bureau of Hunan Province for editing, publishing and
issuing books, and we have reached a cooperative agreement with Hunan
People's Publishing House. In coming years, publication of teaching
materials will be incorporated in our business operation and we expect
to distribute such materials nationwide to outside schools.
* To keep our development sustainable, we will enhance image building of
our brand and create distinctive brand characters. Management believes
this is essential for stable long term growth. We continue to see
improvement in the core capacity of our management team, marketing
team and auditing team as well as in our overall business capability.
CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated 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 our reported assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. We
evaluate our estimates on an on-going basis and use them on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances as the 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 because of different
assumptions or conditions.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2010 AND
2009
Results of operation are a general reflection of our experience in providing
customized educational programs, the reputation of our schools, the scalability
of our schools and the total number of students, all of which demonstrated a
growth trend in the past years and are expected to expand in the future. Our
expansion can be reflected specifically in the increase of our student
enrollment, the development of new customized educational programs, the
cooperation with more target employers, the education appropriations from local
government for running new schools. The accumulative number of students
(including current students and students graduated from our schools) increased
from 34,000 for the semester ended August 31, 2005 when we operated one
vocational school, to approximately 93,800 for the eight schools we operated in
the semester ended February 28, 2010.
The following table summarizes our operating results for the three months and
six months ended February 28, 2010 and 2009, respectively:
21
For the three months ended For the six months ended
February 28, Comparison February 28, Comparison
------------------- -------------------- ------------------- --------------------
2010 2009 Amount Percent 2010 2009 Amount Percent
---- ---- ------ ------- ---- ---- ------ -------
US$ US$ US$ % US$ US$ US$ %
Revenues 6,865,096 9,930,518 (3,065,422) (30.87) 19,874,174 21,642,933 (1,768,759) (8.17)
Cost of revenue (3,656,526) (5,643,869) 1,987,343 (35.21) (11,515,018) (13,067,679) 1,552,661 (11.88)
---------- ---------- ---------- ------- ----------- ----------- ---------- -------
Gross profit 3,208,570 4,286,649 (1,078,079) (25.15) 8,359,156 8,575,254 (216,098) (2.52)
Selling expenses (107,664) (149,169) 41,505 (27.82) (243,758) (346,232) 102,474 (29.60)
G&A expenses (476,672) (462,701) (13,971) 3.02 (928,236) (889,531) (38,705) 4.35
---------- ---------- ---------- ------- ----------- ----------- ---------- -------
Income from operations 2,624,234 3,674,779 (1,050,545) (28.59) 7,187,162 7,339,491 (152,329) (2.08)
Other expenses (26,319) (27,881) 1,562 (5.60) (1,015,077) (54,201) (960,876) 1,772.80
Income taxes -- -- -- -- -- -- -- --
---------- ---------- ---------- ------- ----------- ----------- ---------- -------
Net income 2,597,915 3,646,898 (1,048,983) (28.76) 6,172,085 7,285,290 (1,113,205) (15.28)
========== ========== ========== ======= =========== =========== ========== =======
For the six months ended February 28, 2010, we achieved total revenue of
$19,874,174, representing a decrease of 8.17% when compared to $21,642,933 for
the same period of fiscal year 2009. For the three months ended February 28,
2010, we achieved total revenue of $6,865,096, representing a decrease of 30.87%
when compared to $9,930,518 for the same period of 2009. Revenue decreased due
to the whole month of February of 2010 is winter vocation and no revenue was
recognized in this month.
Similarly, since the students did not return to schools in February 2010, there
was not as much cost incurred as the same period in 2009. During the reporting
period, off-campus internship arrangement began in the middle of November 2010
and lasted for a longer term comparing with the same period in 2009. In
connection with the increased student enrolments, more students are involved in
off-campus internship arrangement, especially the profit related internship.
This has resulted in the significant increase in gross margin of the second
fiscal quarter of 2010 compared to the same period in 2009.
This chart below shows the time difference of our relative teaching calendars in
2010 and 2009:
2009 2010
------------------------------------ ------------------------------------
Period of first semester September 1, 2008 - January 15, 2009 September 1, 2009 - January 31, 2010
Chinese New Year January 26, 2009 February 14, 2010
Start of second semester February 12, 2009 March 1, 2010
In order to better illustrate the operating results for the Company, we list the
profit and loss statement of each semester as follows:
22
OPERATING RESULTS FOR EACH SEMESTER FROM 2008 TO 2010
Stated in US$ 2010 2009 2008
------------ ----------------------------- -----------------------------
1st Semester 2nd Semester 1st Semester 2nd Semester 1st Semester
------------ ------------ ------------ ------------ ------------
Revenues 19,874,174 18,518,788 17,592,570 16,005,406 12,798,577
Cost of revenue (11,515,018) (11,477,851) (11,358,571) (10,805,949) (8,387,230)
----------- ----------- ----------- ----------- -----------
Gross profit 8,359,156 7,040,937 6,233,999 5,199,457 4,411,347
Selling expenses (243,758) (307,196) (333,380) (430,592) (294,483)
G&A expenses (928,236) (986,070) (832,107) (539,539) (460,900)
----------- ----------- ----------- ----------- -----------
Income from operations 7,187,162 5,747,671 5,068,512 4,229,326 3,655,964
Other expenses (1,015,077) (105,460) (43,548) (73,047) (14,685)
----------- ----------- ----------- ----------- -----------
Income before income taxes 6,172,085 5,642,211 5,024,964 4,156,279 3,641,279
=========== =========== =========== =========== ===========
In line with the business expansion, both revenue and profit have demonstrated
successive growth in each semester of these fiscal years. Our net profit was
$3,641,279 in the first semester of 2008 which lasted from September 2007 to
January 2008, $4,156,279 in the second semester of 2008 which lasted from
February 2008 to June 2008, $5,024,964 in the first semester of 2009 which
lasted from September 2008 to January 2009, $5,642,211 in the second semester of
2009 which lasted from February 2009 to June 2009, and $6,172,085 in the first
semester of 2010 which lasted from September 2009 to January 2010, respectively.
The stable growth in operating results in each semester was the combined effect
of the following factors:
For the first semester of 2010, the Company achieved total revenue of
$19,874,174, representing an increase of $2,281,604 or 12.97% when compared to
$17,592,570 for the first semester of 2009. The significant increase in revenue
was mainly attributable to the expansion of our operation as reflected in the
following:
(1) Student enrollment in the semester started September 1, 2008 totaled 28,782
and the number increased to 32,238 in the first semester of 2010 which
started from September 1, 2009, representing an increase of 12.01%.
(2) Cooperation agreements we entered into with maritime school in Shandong
Province took effect from the semester started September 1, 2009. According
to the agreements, we provide the student enrollment services to the
maritime school and are entitled to receive the flat fees for each student
we enroll on behalf of maritime school. We sent 105 students to the
maritime school during the first semester of 2010 and this new business
contributed $220,000 to total revenue.
(3) As of April 30, 2009, our variable interest entities, Hunan Oya Education
Technology Co., Ltd. entered into exclusive business cooperation agreements
with Shaoshan Vocational Secondary School ("Shaoshan Vocational School"),
operated in Shaoshan, Hunan Province and from then on the operating results
of Shaoshan Vocational School was consolidated into our financial
statements. On September 1, 2009, Shaoshan Vocational School commenced
operation and contributed $1.3 million to the total revenue for the first
semester of 2010.
(4) The increase in revenue from off-campus internship arrangement. With the
expanding student enrollment, the number of students who participated in
off-campus internship arrangements increased from 13,723 in the first
semester of 2009 to 19,318 in the first semester of 2010, with a rate of
40.77%.
The cost of sales incurred was $11,515,018 in the first semester of 2010,
$11,358,571 in the first semester of 2009 and $8,387,230 in the first semester
of 2008. Revenue outpaced cost of sales and we saw a higher gross profit margin
23
in first semester of 2010. With the increase of student enrollment, variable
cost increased while the fixed cost remains stable. In addition, off-campus
internship generated a higher revenue and margin during this reporting period,
given the fact that more students participated in the off-campus internship in
well-paid industry for a comparatively longer term.
Selling expenses decreased from $333,380 in the first semester of 2009 to
$243,758 in the first semester of 2010, representing a decrease of 26.88%.
Thanks to our extending business and enhanced reputation, more enterprises are
willing to establish cooperation relationship with us, which was very helpful to
reduce the marketing efforts on our part. More students are interested with our
vocational education and training program so that we were able to reduce travel,
advertising as well as other related expenses. In the end, total selling
expenses decreased accordingly.
G&A expenses increased from $460,900 in the first semester of 2008 to $832,107
in the first semester of 2009, and increased to $928,236 in the first semester
of 2010. The increase of 11.55% in G&A expenses was mainly attributable to two
factors:
(1) New school. We employed more management personnel for our new school -
Shaoshan Vocational Secondary School since April 2009 and this led to an
increase of $76,750 in salaries and welfare.
(2) The listing of the Company. The Company went public in the first semester
of 2010. In order to prepare for public listing, the Company had to recruit
more management staff and this has resulted in the increase in salaries and
welfare. The management personnel's salaries and welfare of the Company was
$157,413 in the first semester of 2010, representing an increase of
$113,568 or 259.02% comparing with the $43,845 of the first semester of
2009. At the same time, entertainment expenses also increased.
REVENUES
The table below illustrates the revenue from different services for the first
semesters of 2010 and 2009:
2010 2009 Comparison
1st Semester 1st Semester Amount Percent
------------ ------------ ------ -------
US$ US$ US$ %
Tuition revenue 12,654,239 10,802,076 1,852,163 17.15
Revenue of off-campus internship arrangement 1,481,484 984,377 497,107 50.50
Revenue of other services 5,738,451 5,806,117 (67,666) (1.17)
---------- ---------- ---------- -----
Total revenue 19,874,174 17,592,570 2,281,604 12.97
========== ========== ========== =====
(1) Tuition revenue is collected from students after we file and update our fee
schedules with each local authority. An increase in tuition revenue was
resulted from the increase in the students enrolled and the new campus in
Shaoshan, Hunan Province.
(2) Revenue from our off-campus internship arrangement service is collected at
a fixed amount per student each time from employers, and a fixed amount
from the student per month. We launched such arrangements with more
enterprises in 2010 comparing with 2009. During the first semester of 2010,
cooperative enterprises were looking for more students, so we sent them
additional 5,595 students under off-campus internship arrangement. In the
meanwhile, the term of the off-campus internship arrangement in the first
semester of 2010 was longer than that in the first semester of 2009. The
above mentioned factors have led to the increase in revenue.
(3) Revenue of "other services" consists of revenue from campus logistics
services and governmental subsidies for vocational education. The
government pays subsidies periodically. The decrease in the revenue from
other services was due to the change of the local government's incentive
policy for educational industry. We received more subsidies in the first
semester of 2009 than the first semester of 2010.
24
SELLING EXPENSES
The table below set forth the selling expenses for the three months and six
months ended February 28, 2010 and February 28, 2009:
For the three months ended For the six months ended
February 28, Comparison February 28, Comparison
------------------ ------------------ ----------------- ------------------
2010 2009 Amount Percent 2010 2009 Amount Percent
---- ---- ------ ------- ---- ---- ------ -------
US$ US$ US$ % US$ US$ US$ %
Salary and staff welfare 51,956 60,659 (8,703) (14.35) 97,967 104,258 (6,291) (6.03)
Office expenses 5,167 14,684 (9,517) (64.81) 7,781 16,636 (8,855) (53.22)
Advertising 2,301 7,888 (5,588) (70.84) 5,833 65,734 (59,901) (91.13)
Travel expenses 31,959 38,374 (6,415) (16.72) 83,299 99,331 (16,032) (16.14)
Others 16,281 27,564 (11,283) (40.93) 48,878 60,273 (11,395) (18.91)
-------- -------- -------- ----- -------- -------- -------- -----
Total 107,664 149,169 (41,505) (27.82) 243,758 346,232 (102,474) (29.60)
======== ======== ======== ===== ======== ======== ======== =====
Our selling expenses decreased by 27.82% from $149,169 in the three months ended
February 28, 2009 to $107,664 in the three months ended February 28, 2010, and
decreased by 29.60% from $346,232 in the six months ended February 28, 2009 to
$243,758 in the six months ended February 28, 2010. The decrease was primarily
due to the decrease of advertising and travel expenses. With the growth of our
business and reputation, more enterprises sought our customized education
programs in the current year, which ensured the reduction of marketing efforts
on our part. More students also got to know our vocational education and
training program and travel, advertising as well as other related expenses were
reduced, and this led to the decrease in total selling expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
The table below illustrates the details of General and administrative expenses
for the three months and six months ended February 28, 2010 and 2009:
For the three months ended For the six months ended
February 28, Comparison February 28, Comparison
------------------ ------------------ ----------------- ------------------
2010 2009 Amount Percent 2010 2009 Amount Percent
---- ---- ------ ------- ---- ---- ------ -------
US$ US$ US$ % US$ US$ US$ %
Salary and staff welfare 212,172 210,984 1,188 0.56 405,320 376,603 28,717 7.63
Office expenses 96,425 113,168 (16,743) (14.79) 206,226 264,201 (57,975) (21.94)
Maintenance 1,063 1,124 (61) (5.43) 1,711 3,467 (1,756) (50.65)
Rental 31,790 28,676 3,114 10.86 61,231 56,432 4,799 8.50
Depreciation 5,698 12,568 (6,870) (54.66) 28,105 17,025 11,080 65.08
Others 129,524 96,182 33,342 34.67 225,643 171,803 53,840 31.34
------- ------- ------- ----- ------- ------- ------- -----
Total 476,672 462,702 13,970 3.02 928,236 889,531 38,705 4.35
======= ======= ======= ===== ======= ======= ======= =====
Our general and administrative expenses increased by 3.02% from $462,702 for the
three months ended February 28, 2009 to $476,672 for the three months ended
February 28, 2010, and increased by 4.35% from $889,531 for the six months ended
February 28, 2009 to $928,236 for the six months ended February 28, 2010. This
increase was primarily due to the increase in the salaries and welfares paid to
our administrative staff, including senior managers and other employees in
finance and accounting, and general administration. These employees were hired
to support our expanded operations in the fiscal year 2010.
25
OTHER EXPENSES
The other expenses slightly decreased from $27,881 for the three months ended
February 28, 2009 to $26,319 for the three months ended February 28, 2010, and
increased significantly from $54,201 for the six months ended February 28, 2009
to $1,015,077 for the six months ended February 28, 2010. This increase was
primarily due to the disposal of aged fixed assets in the first fiscal quarter
of 2010.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity have been cash generated from operating
activities and financing activities.
As of February 28, 2010, our total assets were $40,133,273, representing an
increase of $8,902,000 or 28.50% when compared with $31,231,273 on August 31,
2009. As of February 28, 2010, we had $20,589,182 in current assets,
representing an increase of $4,697,838 or 29.56% when compared with $15,891,344
on August 31, 2009. As of February 28, 2010, non-current assets were
$19,544,091, representing an increase of $4,204,162 or 27.41% as compared to
$15,339,929 on August 31, 2009.
Current assets as of February 28, 2010 consist of cash and cash equivalents of
$5,570,385, inventory of $656,743, accounts receivable of $10,411,046, other
debtors of $574,158 and advances to vendors of $3,376,850.
Most of our transactions with customers are settled in cash. The balance of
accounts receivable (net of allowance) increased $4,697,555, from $5,713,491 as
of August 31, 2009 to $10,411,046 as of February 28, 2010. Such increase is
attributable to the accounts receivable due from China Overseas Scholarship
Development Foundation under the Rain-dew project that started from September
2008. As of February 28, 2010, $2,307,120 or approximately 22.04% of accounts
receivable, aged less than three months; $4,346,670or 41.53% of accounts
receivable, aged from four months to six months; $1,792,651 or 17.13% of
accounts receivable aged from six months to 12 months; and $2,020,478 or 19.3%
only of accounts receivable aged for more than 12 months. Due to the fact that
almost all of the accounts receivable aged more than 12 months are receivable
from the government authorities, the management determines that no reserve is
necessary.
As of February 28, 2010, our total liabilities were $6,975,092, representing an
increase of $2,710,288 or 63.55% as compared to $4,264,804 on August 31, 2009.
As of February 28, 2010, the balance of loan outstanding was $1,728,681,
representing a decrease of $35,444 or 2% as compared to $1,764,125 on August 31,
2009. Accounts payable were $1,954,803 as of February 28, 2010, representing an
increase of $627,181 or 47.24% as compared with $1,327,622 on August 31, 2009.
As of February 28, 2010, accounts payable were primarily due to Changsha
University of Science & Technology for a cooperative education program and to
maritime schools for the tuition we collected on behalf of them under the
cooperation agreements. As of February 28, 2010, the balance of unearned
revenues was $1,536,010, representing an increase of $1,527,735 as compared to
$8,275 on August 31, 2009. The unearned revenue on February 28, 2010 was mainly
tuition and other service fee received in advance from students and enterprises.
August 31, 2009 was the end of school year, by when, most advance received from
students had been transferred to revenue.
As of February 28, 2010, stockholder's equity was $33,158,181, representing an
increase of $6,191,712 or 22.96% as compared to $26,966,469 on August 31, 2009.
CASH FLOWS
As of February 28, 2010, the Company's cash and cash equivalents were
$5,570,385, representing an increase of $1,722,345 as compared with $3,848,040
on August 31, 2009.
As of February 28, 2010, net cash flows provided by operating activities were
$6,893,929, representing a decrease of $4,825,995 as compared with $11,719,924
on February 28, 2009. The decrease was mainly due to the decrease of unearned
revenues collected from students. The second semester of 2009 started in
February 2009, when the Company received advance payment from student for
tuitions for the second semester and was recognized as unearned revenue, whereas
26
in 2010, the second semester started from early March, there is no tuitions paid
in advance before February 28, 2010. This resulted in the significant decrease
in net cash flows provided by operating activities.
As of February 28, 2010, net cash flows used in investing activities were
$7,062,453, representing an increase of $5,545,846 as compared with $1,516,607
on February 28, 2009. The major investment for the six months ended February 28,
2010 refers to the construction of the dormitory buildings and teaching
facilities in Shaoyang, Tianquan and Shaoshan campus. The financial resources
were generated from operating activities and credit funds.
As of February 28, 2010, net cash flows provided by financing activities were
$1,887,876, representing an increase of $3,260,872 as compared with net cash
used in financing activities of $1,372,996 for the six months ended February 28,
2009. During the six months ended February 28, 2009, there was a capital
contribution of $877,963 and the cash inflow was offset by the repayment of
loans from the related parties in the amount of $2.2 million. During the six
months ended February 28, 2010, the Company received the repayment of $1,924,491
related party loan. With the combined effect of above mentioned factors, the net
cash flows provided by financing activities increased.
FUTURE INVESTMENT PLAN
Pursuant to the cooperation agreements with the schools, our total investment
amount during the cooperation periods is $17,987,060. Up to February 28, 2010,
we have invested $4,275,927 in several schools and the amount of $13,711,133
will be paid within the cooperation periods. The table below illustrates the
details of the cooperation agreements with exact investment amount and
implementation status of these agreements:
Location Total contract Amount Investment amount
of school Cooperation period amount invested committed in future
--------- ------------------ ------ -------- -------------------
US$ US$ US$
Shaoshan From Apr 2009 to Jun 2029 8,788,466 1,420,071 7,368,395
Shaoyang From Jan 2008 to Jan 2026 4,394,233 439,423 3,954,810
Lushan From May 2006 to Jul 2021 1,464,744 805,609 659,135
Tianquan From Feb 2006 to Jul 2021 1,874,873 900,423 974,450
Shimian From Jan 2006 to Jul 2021 1,464,744 710,401 754,343
---------- ---------- ----------
Total 17,987,060 4,275,927 13,711,133
========== ========== ==========
FOREIGN CURRENCY TRANSLATION
The Company's financial information is presented in US dollars. The functional
currency of the Company is Renminbi ("RMB"), the currency of the PRC.
Transactions at the Company which are denominated in currencies other than RMB
are translated into RMB at the exchange rate quoted by the People's Bank of
China prevailing at the dates of the transactions. Exchange gains and losses
resulting from transactions denominated in a currency other than that RMB are
included in statements of operations as exchange gains. The period end exchange
rate as of February 28, 2010 was 6.8260, fluctuated not much compared with the
exchange rate 6.8306 as of August 31, 2009. The average exchange rate for the
three months ended February 28, 2010 was 6.8280, slightly decreased compared
with the exchange rate 6.8343 of the same period of prior year.
TAXATION
The PRC government also provides various incentives to companies that engage in
the development of vocational education. Such incentives include reduced tax
27
rates, tax exemptions and other measures. According to Law of the People's
Republic of China on Promotion of Privately-run Schools, implemented from
September 1, 2003, and the Notice of Tax Policy for Education Activities
(Caishui [2004] No.39), issued and effective on February 5, 2004, some specific
enterprises, organizations and schools enjoy the same tax incentives as the
schools run by the government, and could be exempt from business tax and income
tax accordingly. As the operation of the Company meets the requirements of the
aforementioned regulations, the Company is exempt from business tax and income
tax.
RECENT ACCOUNTING PRONOUNCEMENTS
In December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities. This
Accounting Standards Update amends the FASB Accounting Standards Codification
for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity's economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity's involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of this
ASU; however, the Company does not expect the adoption of this ASU to have a
material impact on its financial statements.
In October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605) "Multiple Deliverable Revenue Arrangements - A Consensus
of the FASB Emerging Issues Task Force". This update provides application
guidance on whether multiple deliverables exist, how the deliverables should be
separated and how the consideration should be allocated to one or more units of
accounting. This update establishes a selling price hierarchy for determining
the selling price of a deliverable. The selling price used for each deliverable
will be based on vendor-specific objective evidence, if available, third-party
evidence if vendor-specific objective evidence is not available, or estimated
selling price if neither vendor-specific or third-party evidence is available.
The Company will be required to apply this guidance prospectively for revenue
arrangements entered into or materially modified after January 1, 2011; however,
earlier application is permitted. The management is in the process of evaluating
the impact of adopting this standard on the Company's financial statements.
In August 2009, the FASB updated the accounting standards to provide additional
guidance on estimating the fair value of a liability in a hypothetical
transaction where the liability is transferred to a market participant. The
standard is effective for the first reporting period, including interim periods,
beginning after issuance. The Company does not expect the adoption to have a
material effect on the Company's consolidated results of operations and
financial condition.
In June 2009, FASB established Accounting Standards CodificationTM
("Codification") as the single source of authoritative accounting principles
recognized by the FASB in the preparation of financial statements in conformity
with the GAAP. The Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. The Codification is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. Adoption of the
Codification is not expected to have a material impact on the Company's results
28
of operations or financial position.In June 2009, FASB updated the accounting
standards related to the consolidation of variable interest entities ("VIEs").
The standard amends current consolidation guidance and requires additional
disclosures about an enterprise's involvement in VIEs. The standard shall be
effective as of the beginning of each reporting entity's first annual reporting
period that begins after November 15, 2009, for interim periods within the first
annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The Company does not expect the
adoption to have a material impact on the Company's results of operations or
financial position.
In May 2009, FASB issued ASC 855, Subsequent Events. The standard establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. An entity should apply the requirements of ASC 855 to
interim or annual financial periods ending after June 15, 2009. Adoption of this
standard does not have a material impact on the Company's results of operations
or financial position.
In April 2009, the FASB updated the accounting standards to provide guidance on
estimating the fair value of a financial asset or liability when the trade
volume and level of activity for the asset or liability have significantly
decreased relative to historical levels. The standard requires entities to
disclose the inputs and valuation techniques used to measure fair value and any
changes in valuation inputs or techniques. In addition, debt and equity
securities as defined by GAAP shall be disclosed by major category. This
standard is effective for interim and annual reporting periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15, 2009,
and is to be applied prospectively. The adoption did not have a material effect
on the Company's results of operations and financial condition.
In April 2009, the FASB updated the accounting standards for the recognition and
presentation of other-than-temporary impairments. The standard amends existing
guidance on other-than-temporary impairments for debt securities and requires
that the credit portion of other-than-temporary impairments be recorded in
earnings and the noncredit portion of losses be recorded in other comprehensive
income. The standard requires separate presentation of both the credit and
noncredit portions of other-than-temporary impairments on the financial
statements and additional disclosures. This standard is effective for interim
and annual reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. At the date of adoption, the
portion of previously recognized other-than-temporary impairments that represent
the noncredit related loss component shall be recognized as a cumulative effect
of adoption with an adjustment to the opening balance of retained earnings with
a corresponding adjustment to accumulated other comprehensive income (loss). The
adaption of this standard did not have a material effect on the preparation of
the Company's consolidated financial statements.
OFF BALANCE SHEET ARRANGEMENTS
We have not entered into any financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholders' equity, or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSRES ABOUT MARKET RISKS
The Company is subject to certain market risks, including changes in interest
rates and currency exchange rates. The Company does not undertake any specific
actions to limit those exposures.
29
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our principal executive officer and the principal financial officer (our
president), we have conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as of the
end of the period covered by this report. Based on this evaluation, our
principal executive officer and principal financial officer concluded as of the
evaluation date that our disclosure controls and procedures were effective such
that the material information required to be included in our Securities and
Exchange Commission reports is accumulated and communicated to our management,
including our principal executive and financial officer, recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms relating to our company, particularly during
the period when this report was being prepared.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting that
occurred during the fiscal quarter ended February 28, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceeding or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our business,
financial condition or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
1. RVERSE MERGER TRANSACTION
On February 11, 2010, the Company completed a reverse acquisition
transaction with Risetime Group Limited ("Risetime"), a company
incorporated under the laws of British Virgin Island. The exchange was
consummated under the laws of the State of Delaware and pursuant to the
terms of the Share Exchange Agreement dated as of February 8, 2010 ("Share
Exchange Agreement"). The reverse merger followed a series of material
change of the Company, such as completing an acquisition of Risetime
pursuant to the Share Exchange Agreement, change in the control of the
Company, etc. The detailed information has been disclosed in the super 8-K
dated on February 8, 2010.
2. CHANGE IN FISCAL YEAR
Effective March 22, 2010, the Company changed its fiscal year end to August
31 from its former fiscal year end of February 28. Thus, its financial
reporting system will be more synchronized with its management processes
and education cycles.
3. CHANGE IN NAME
The company has changed its name from Green Star Mining Corp. to HQ Global
Education Inc., approved by FINRA and effective as of the opening of
businesses on March 22, 2010. The Company has also been granted a new
symbol on the OTC Bulletin Board. The new symbol is "HQGE".
The name change is according to the Amended and Restated Certificate of
Incorporation, effective as of February 24, 2010. The Amended and Restated
Certificate of Incorporation was filed with the Secretary of State of
Delaware on February 24, 2010.
31
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
31.1 - Certification pursuant to Rule 13a-14 and Rule 15d-14(a) of the Exchange
Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 - Certification pursuant to Rule 13a-14 and Rule 15d-14(a) of the Exchange
Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32
SIGNATURES
Pursuant to the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf in Spokane, WA, by the undersigned, thereunto duly authorized.
April 14, 2010 Registrant: HQ Global Education Inc.
By: /s/ Guangwen He
----------------------------------
Guangwen He
Chief Executive Officer
By: /s/ Yunjie Fang
----------------------------------
Yunjie Fang
Chief Financial Officer
33