Russell E. Anderson, CPA
Russ Bradshaw, CPA
William R. Denney, CPA
Sandra Chen, CPA
5296 S. Commerce Dr
Suite 300
Salt Lake City, Utah 84107
USA
(T) 801.281.4700
(F) 801.281.4701
Suite A, 5/F
Max Share Center
373 Kings Road
North Point
Hong Kong
(T) 852.21.555.333
(F) 852.21.165.222
abcpas.net
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
China Bilingual Technology & Education Group, Inc.
Taiyuan Shanxi, China
We have audited the accompanying consolidated balance sheets of China Bilingual Technology & Education Group, Inc. (the Company) as of August 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income, cash flows, and changes in stockholders’ equity for the year ended August 31, 2012, the eight months ended August 31, 2011 and the year ended December 31, 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Bilingual Technology & Education Group, Inc. as of August 31, 2012 and 2011, and the results of its operations and its cash flows for the year ended August 31, 2012, the eight months ended August 31, 2011 and the year ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
s/Anderson Bradshaw PLLC
Salt Lake City, Utah
November 29, 2012
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Index to Consolidated Financial Statements
Consolidated Balance Sheets
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August 31,
2012
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August 31,
2011
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ASSETS
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Cash and cash equivalents
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Property, plant and equipment, net
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Deposit paid for long-term assets
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Short-term payable-acquisition
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Home purchase down payment
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Accrued expenses and other current liabilities
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Total Current Liabilities
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Long-term payable-acquisition
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Common Stock, $0.001par value; 75,000,000 shares authorized; 30,069,629, 30,014,528 issued and outstanding as of August 31, 2012 and 2011
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Additional paid in capital
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Accumulated other comprehensive income
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TOTAL STOCKHOLDERS’ EQUITY
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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The accompanying notes to these consolidated financial statements are an integral part of these balance sheets.
Consolidated Statements of Operations
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For the Years Ended
August 31,
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2012
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2011
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(Unaudited )
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42,200,354
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25,419,516
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23,839,738
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|
10,172,606
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18,360,616
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15,246,910
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General and Administrative Expenses
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3,140,188
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1,745,189
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3,140,188
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1,745,189
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15,220,428
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13,501,721
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56,605
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26,604
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(5,631,405
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)
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(95,571
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)
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NET INCOME BEFORE INCOME TAXES
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$
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9,645,628
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$
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13,432,754
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-
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-
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$
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9,645,628
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$
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13,432,754
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Earnings per Common Share:
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$
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0.32
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$
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0.45
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$
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0.32
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$
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0.45
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Weighted Average Common Shares Outstanding:
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30,094,205
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30,010,932
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30,094,205
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30,010,932
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The accompanying notes to consolidated financial statements are an integral part of these statements.
China Bilingual Technology & Education Group Inc. and Subsidiaries
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For the Eight Months Ended August 31,2011
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For the Year Ended December 31, 2010
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REVENUES
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$
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17,297,051
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$
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24,367,395
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COST OF REVENUES
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6,558,876
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10,841,190
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GROSS PROFIT
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10,738,175
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13,526,205
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OPERATING EXPENSES
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General and Administrative Expenses
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1,214,060
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1,593,386
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TOTAL OPERATING EXPENSES
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1,214,060
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|
|
1,593,386
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INCOME FROM OPERATIONS
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|
9,524,115
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11,932,819
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OTHER INCOME (EXPENSE)
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|
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Interest Income
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|
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15,516
|
|
|
|
33,262
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Interest Expense
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|
(95,571
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)
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|
-
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NET INCOME BEFORE INCOME TAXES
|
|
|
9,444,060
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|
|
|
11,966,081
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INCOME TAX EXPENSE
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-
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-
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NET INCOME
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|
$
|
9,444,060
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$
|
11,966,081
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Earnings per Common Share:
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Basic
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$
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0.31
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$
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0.43
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Diluted
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$
|
0.31
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$
|
0.43
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Weighted Average Common Shares Outstanding:
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|
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Basic
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30,008,014
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28,044,698
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Diluted
|
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30,008,014
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28,044,698
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The accompanying notes to consolidated financial statements are an integral part of these statements.
China Bilingual Technology & Education Group Inc. and Subsidiaries
|
|
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For the Years Ended
August 31,
|
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|
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2012
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|
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2011
|
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|
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(Unaudited )
|
|
|
|
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|
|
|
|
|
|
|
|
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|
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Foreign currency translation, net of tax
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|
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|
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|
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|
|
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The accompanying notes to consolidated financial statements are an integral part of these statements.
China Bilingual Technology & Education Group Inc. and Subsidiaries
|
|
For the Eight Months Ended August 31,2011
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For the Year Ended December 31, 2010
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|
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NET INCOME
|
|
$
|
9,444,060
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|
$
|
11,966,081
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|
|
|
|
|
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Foreign currency translation, net of tax
|
|
|
1,432,623
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|
|
|
801,583
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|
|
|
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|
|
|
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COMPREHENSIVE INCOME
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|
$
|
10,876,683
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$
|
12,767,664
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The accompanying notes to consolidated financial statements are an integral part of these statements.
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Accumulated
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Additional
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Other
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Total
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Common Stock
|
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Paid-In
|
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Comprehensive
|
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Retained
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Stockholders'
|
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Shares
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Amount
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Capital
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Income
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Earnings
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Equity (Deficit)
|
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Balance, December 31, 2009
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Foreign currency translation adjustment
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Balance, December 31, 2010
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Foreign currency translation adjustment
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Foreign currency translation adjustment
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The accompanying notes to these consolidated financial statements are an integral part of these balance sheets.
China Bilingual Technology & Education Group Inc. and Subsidiaries
(In US Dollars)
|
|
For The Years
Ended August 31,
|
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2012
|
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|
2011
|
|
|
|
|
|
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Unaudited
|
|
Cash flows from operating activities:
|
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|
|
|
|
|
|
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|
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Depreciation of property and equipment
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Amortization of land use rights
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Changes in operating assets and liabilities:
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|
|
|
|
|
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Adjustments in net cash (used in) provided by operating activities
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Net cash provided by (used in) operating activities
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash flows from investing activities:
|
|
|
|
|
|
|
|
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Deposits - long term assets
|
|
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|
|
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|
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Advances to related parties receivables
|
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Net cash used in investing activities
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash flows from financing activities:
|
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|
|
|
|
|
|
|
Payments on acquisition payables
|
|
|
|
|
|
|
|
|
(Repayments) of related party loans payables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Repayments) short term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents, beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term payable – acquisition
|
|
|
|
|
|
|
|
|
Long-term payable – acquisition
|
|
|
|
|
|
|
|
|
Deposit-long-term asset transfer to fixed asset
|
|
|
|
|
|
|
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
China Bilingual Technology & Education Group Inc. and Subsidiaries
(In US Dollars)
|
|
For the
Eight
Months Ended
August 31, 2011
|
|
|
For the
Year Ended
December 31, 2010
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
$
|
9,444,060
|
|
|
$
|
11,966,081
|
|
Depreciation of property and equipment
|
|
|
651,674
|
|
|
|
965,795
|
|
Amortization of land use rights
|
|
|
102,434
|
|
|
|
148,637
|
|
|
|
|
105,449
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Adjustments in net cash (used in) provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
(2,515,705
|
)
|
|
|
(845,830
|
)
|
|
|
|
108,421
|
|
|
|
(19,948
|
)
|
|
|
|
(90,525
|
)
|
|
|
(94,450
|
)
|
|
|
|
(16,873
|
)
|
|
|
126,057
|
|
|
|
|
(64,765
|
)
|
|
|
(234,874
|
)
|
|
|
|
(347,269
|
)
|
|
|
(1,076,964
|
)
|
|
|
|
9,139,176
|
|
|
|
(1,712,385
|
)
|
|
|
|
23,168
|
|
|
|
146,457
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
16,539,245
|
|
|
|
9,386,576
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Deposits - long term assets
|
|
|
(18,389
|
)
|
|
|
(8,618,441
|
)
|
|
|
|
(225,055
|
)
|
|
|
(191,953
|
)
|
|
|
|
(16,021,106
|
)
|
|
|
-
|
|
Proceeds from related parties receivables
|
|
|
-
|
|
|
|
3,062,969
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(16,264,550
|
)
|
|
|
(5,747,425
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments from related party loans
|
|
|
-
|
|
|
|
(1,215,691
|
)
|
|
|
|
8,420,939
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
8,420,939
|
|
|
|
(1,215,691
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
1,081,677
|
|
|
|
122,666
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
9,777,311
|
|
|
|
2,546,126
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
5,313,210
|
|
|
|
2,767,084
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
15,090,521
|
|
|
$
|
5,313,210
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
$
|
95,571
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
$
|
7,842,522
|
|
|
$
|
-
|
|
|
|
$
|
15,685,044
|
|
|
$
|
-
|
|
Short-term payable – acquisition
|
|
$
|
22,560,426
|
|
|
$
|
-
|
|
Long-term payable – acquisition
|
|
$
|
26,602,306
|
|
|
$
|
-
|
|
Deposit paid for long-term assets
|
|
$
|
(8,782,894
|
)
|
|
$
|
-
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
China Bilingual Technology & Education Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
For the Years Ended August 31, 2012 and 2011
Description of Business
China Bilingual Technology & Education Group Inc. (the “Company”), is an education company that owns and operates high-quality K-12 private boarding schools in China. The Company established school operations in 1998 and currently operates three schools encompassing kindergarten, elementary, middle and high school levels. The Company’s schools are located in Shanxi and Sichuan Provinces and focus on fluency and cultural skills in both Chinese and English, as well as the PRC core curriculum. The Company’s sector in education is not subject to corporate income tax in the PRC.
Control by Principal Shareholders
The Company’s directors, executive officers and their affiliates or related parties, own beneficially and in the aggregate, the majority of the voting power of the outstanding shares of the common stock of the Company. Accordingly, the directors, executive officers and their affiliates, if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including increasing the authorized capital stock of the Company and the dissolution, merger or sale of the Company's assets or business.
Financial Statements Presented
The consolidated financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”).
The Company was incorporated in the State of Nevada on March 31, 2009 under the name Designer Export, Inc. On June 30, 2010, the Company changed its name to China Bilingual Technology & Education Group Inc.
On June 30, 2010, the Company entered into a Share Exchange Agreement (the “Agreement”) with Kahibah Limited (“KL”), a British Virgin Islands (“BVI”) corporation and its shareholders. According to this Agreement, the Company acquired all the issued and outstanding shares of KL. The Company issued 26,100,076 shares of its common stock, after giving effect to the cancellation of 7,748,343 shares on June 30, 2010, to KL’s shareholders in exchange for 100% of the shares of KL. After the closing of the transaction, the Company had a total of 30,000,005 shares of common stock issued and outstanding, with KL’s shareholders owning 87% of the total issued and outstanding shares of the Company’s common stock, and the balance held by those who held shares of the Company’s common stock prior to the closing of the exchange. This transaction resulted in KL’s shareholders obtaining a majority voting interest in the Company. All shares are shown effective of a 2.582781 forward stock split as of July 14, 2010.
The acquisition of KL and the operations of its subsidiaries were accounted for as a reverse merger, whereby KL is the continuing entity for financial reporting purposes and is deemed, for accounting purposes, to be the acquirer of the Company. In accordance with the applicable accounting guidance for accounting for the business combination as a reverse merger, KL is deemed to have undergone a recapitalization, whereby KL is deemed to have issued common stock to the Company’s common equity holders. Accordingly, although the Company, as KL’s parent company, was deemed to have legally acquired KL, in accordance with the applicable accounting guidance for accounting for the transaction as a reverse merger and re-capitalization, KL is the surviving entity for accounting purposes and its assets and liabilities are recorded at their historical carrying amounts with no goodwill or other intangible assets recorded as a result of the accounting merger with the Company.
As part of the acquisition, the Company changed its name to China Bilingual Technology & Education Group Inc. Share and per share amounts stated have been retroactively adjusted to reflect the acquisition. The accompanying financial statements present the historical financial condition, results of operations and cash flows of KL and its operating subsidiaries prior to the recapitalization.
The historical consolidated financial statements of the Company are those of KL, and of the consolidated entities. The consolidated financial statements of the Company presented for the years ended August 31, 2012 and 2011, the eight months ended August 31, 2011 and the year ended December 31, 2010 include the financial statements of China Bilingual, KL, KL’s subsidiary Taiyuan Taiji Industry Development co., Ltd. (“Taiyuan Taiji”), a wholly-foreign owned enterprise (“WFOE”) under the laws of the Peoples Republic of China (“PRC”), which owns 95% of the registered capital of Shanxi Taiji Industry Development Co., Ltd. (“Shanxi Taiji”), an equity joint venture company organized under the laws of the PRC. The remaining 5% ownership of Shanxi Taiji is owned by Ms. Ren Baiv, the sister of the Company's Chairman, Mr. Ren Ziging. The 5% ownership is held by Ms. Ren Baiv on behalf of Taiynan Taiji in accordance with local Chinese regulations, therefor no non-controlling interest is recognized. Shanxi Taiji owns all of the registered capital of Shanxi Modern Bilingual School (“Shanxi North Campus”) and Sichuan Guang’an Experimental High School (“Sichuan Guang’an School”), both private non-enterprise entities incorporated under the laws of the PRC, collectively the “Subsidiaries.”
Since the ownership of KL and its Subsidiaries was substantially the same, the merger with each was accounted for as a transfer of equity interests between entities under common control, whereby the acquirer recognized the assets and liabilities of each Subsidiary transferred at their carrying amounts. The reorganization was treated similar to the pooling of interest method with carry over basis. Accordingly, the financial statements for KL and its Subsidiaries have been combined for all periods presented, similar to a pooling of interest. The reorganization of entities under common control was retrospectively applied to the financial statements of all prior periods when the financial statements are issued for a period that includes the date the transaction occurred. Intercompany transactions and balances are eliminated in consolidations.
On August 31, 2011, the Company’s entered into an Equity Transfer Agreement and purchased all of the outstanding equity of Shanxi Rising Education Investment Company Limited (the “Investment Company”) from the equity holders (the “Sellers”) for a total purchase consideration of RMB 690,000,000 (approximately $108,226,806). The net present value of the total fair value consideration transferred equals RMB 650,000,000 (approximately $102,565,721), of which RMB 370,217,933 (approximately $55,444,697) has been paid. Under the terms of the Equity Transfer Agreement the balance of the purchase price is to be paid over three years in three scheduled payments as follows: (See Note 20 – Business Combination for additional details on the Equity Transfer Agreement.)
|
1)
|
RMB 119,782,067 (approximately $18,900,822) to be paid by August 31, 2012, but was paid on September 3, 2012
|
|
2)
|
RMB 100,000,000 (or RMB 87,589,800, approximately $13,821,094, net of discount) by August 31, 2013, and
|
|
3)
|
RMB 100,000,000 (or RMB 93,849,000, approximately $14,808,754, net of discount) by August 31, 2014.
|
The net present value of the payments is discounted at the Company’s then current financing interest rate of 6.84%.
The Investment Company, a limited liability company established under the laws of the PRC, is an education company that owns and operates a K-12 private boarding school in Jinzhong City, Shanxi Province of the PRC, encompassing kindergarten, primary and secondary education. The Investment Company was established in 2001 and it has share capital of RMB 70,000,000. It is the parent company of Shanxi Rising School (the "Rising School"), founded 2002, which currently serves over 5,400 students from its location in Shanxi Province, PRC. The Rising School is now known by the Company as the “Shanxi South Campus.”
The acquisition of the Investment Company has been accounted for as a business combination under Accounting Standards Codification Topic 805,
Business Combinations
(“ASC 805”). The total purchase consideration of RMB 690,000,000 has been allocated to the net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of August 31, 2011. As of the balance sheet date, August 31, 2011, the exchange rate to the US Dollar was RMB 6.3755.
Prior to closing the Equity Transfer Agreement, the Company became involved in the operations of the Shanxi South Campus in the spring of 2011. With the consent of the Investment Company, the Company assisted in the operations, accounting and promotion of the school to attract more and better students for the 2011-2012 school year. Some of these responsibilities included collecting prepaid tuition, room & board and other school fees (“School Fees”) in advance of the school year, which combined with better operations, higher tuition rates and an increase in enrollment led to an increase in deferred revenue at August 31, 2011. The Company’s involvement at the Shanxi South Campus was under the direction of Investment Company management until it assumed control of the Investment Company on August 31, 2011, in accordance with the Equity Transfer Agreement.
For the purpose of preparing the consolidated financial statement, the total purchase price is allocated to the Company’s net tangible assets acquired and liabilities assumed as of August 31, 2011.
The adjustments record the purchase price allocation entries as of August 31, 2011, including allocation of fair values of the associated tangible assets, intangible assets and acquired liabilities, to eliminate the Company's historical equity balances and to record the estimated use of cash to fund the cash portion of the acquisition. The adjustments also include certain decreases in intercompany balances eliminated in consolidation.
Accordingly, t
he fair value of assets acquired and liabilities assumed may be materially impacted by the results of the Company’s on-going operations after the date of the Equity Transfer Agreement.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of China Bilingual Technology & Education Group Inc. and the following subsidiaries:
Subsidiaries
|
State and Countries Registered In
|
|
% Ownership
|
|
|
|
|
|
100
|
%
|
Taiyuan Taiji Industry Development Co., Ltd.
|
People’s Republic of China
|
|
|
100
|
%
|
Shanxi Taiji Industrial Development Co., Ltd.(i)
|
People’s Republic of China
|
|
|
95
|
%
|
Shanxi Modern Bilingual School (ii)
|
People’s Republic of China
|
|
|
100
|
%
|
Sichuan Guang’an Experimental High School (iii)
|
People’s Republic of China
|
|
|
100
|
%
|
Shanxi Rising Education Investment Company Ltd. (iv)
|
People’s Republic of China
|
|
|
100
|
%
|
|
People’s Republic of China
|
|
|
100
|
%
|
(i) Shanxi Taiji Industrial Development Co., Ltd. was incorporated as a limited liability company on July 25, 1997 under PRC law. It is currently 95% owned by Taiyuan Taiji and 5% owned by Ms. Ren Baiv. On November 25, 2009, KL entered into a share exchange agreement to sell the remaining 5% ownership to Ms. Ren Baiv. Ms. Ren Baiv is the sister of Mr. Ren Zhiqing, the Company’s Chief Executive Officer. At December 31, 2010 Ms. Ren Baiv paid 1 million Renminbi (“RMB”) as part of the capital contribution. The 5% ownership is held by Ms. Ren Baiv on behalf of the Taiyuan Taiji in accordance with local Chinese regulations, therefore no non-controlling interest is recognized. Shanxi Taiji is an equity joint venture under the laws of the PRC. The Shanxi North Campus, Modern Bilingual School and Sichuan Guang’an Experimental High School (the “Schools”) hold the requisite governmental licenses to provide private educational services within their province in China. Each province sets its own licensing criteria and duration following the general guidelines established by the national government for education standards.
(ii) Shanxi Modern Bilingual School (the “Shanxi North School”) was established in 1998 by Shanxi Taiji. It operates as a private K-12 boarding school on a 38 acre campus in Taiyuan City, Shanxi Province. The Shanxi School holds a three year provincial license to be renewed May, 2013.
(iii) Sichuan Guang’an Experimental High School (the “Sichuan Guang’an School”) was established in 2002 by Shanxi Taiji. It operates as a private K-12 boarding school on a 23 acre campus in Guang’an, Sichuan Province. The Sichuan Guang'an School holds a four year provincial license currently submitted for renewal.
(iv) Shanxi Rising Education Investment Company Ltd. (the “Investment Company”) was established in 2001 to own and operate private boarding schools in the PRC. The Investment Company has share capital of RMB 70,000,000. It is the parent company of one school, the Shanxi Rising School, which was acquired by the Company on August 31, 2011. The Investment Company has no operations other than its ownership of the Shanxi Rising School.
(v) Shanxi Rising School (the “Shanxi South School”) was established in 2002 by the Investment Company as a private boarding school encompassing kindergarten, primary and secondary education located in the Shanxi Province of the PRC. The school has been assimilated in the operation of the Company and re-branded as the Shanxi South School operating as a private K-12 boarding school on an 82 acre campus comprised of over 2.3 million square feet of facilities, including 18 dormitories with capacity for 10,000 students, academic classrooms, gymnasium, theatre, natatorium, cafeteria and other administrative and academic buildings. The Shanxi South School holds a four year provincial license to be renewed April 2015.
All significant intercompany accounts and transactions have been eliminated in consolidation.
NOTE 2 –
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Measurement, estimates and assumptions are used for, but not limited to, the selection of the useful lives of property and equipment, impairment of long-lived assets, fair values and revenue recognition. Management makes these estimates using the best information available at the time the estimates are made; however, actual results, when ultimately realized, could differ from those estimates. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
NOTE 3 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to US GAAP and have been consistently applied in the preparation of the consolidated financial statements.
In June 2009, the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification (“ASC”) 105-10 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168,
The FASB Accounting Standards Codification and Hierarchy of Generally Accepted
Accounting Principles, a replacement of ASB
ASC 105-10 establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied in preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“US GAAP”). The adoption of this standard had no impact on the Company’s consolidated financial statements.
(a) Fair Value of Financial Instruments
The Company applies the provisions of accounting guidance, FASB ASC Topic 820 that requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of August 31, 2012 and 2011, the fair value of cash and cash equivalents, other receivables, accounts payable, short term bank loans, and other payables approximated carrying value due to the short maturity of the instruments, quoted market prices or interest rates which fluctuate with market rates except for related party debt or receivables for which it is not practicable to estimate fair value.
Fair Value Measurements
Effective April 1, 2009, the FASB ASC Topic 820,
Fair Value Measurement and Disclosure
, requires disclosures about fair value of financial instruments in quarterly reports as well as in annual reports.
The FASB ASC Topic 820 clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.
Various inputs are considered when determining the fair value of the Company’s financial instruments. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below:
Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risks, etc.).
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair market value of financial instruments).
The Company’s adoption of FASB ASC Topic 820 did not have a material impact on the Company’s consolidated financial statements.
The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a nonrecurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. The Company had no financial assets and/or liabilities carried at fair value on a recurring basis at August 31, 2012 and 2011.
The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.
(b) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. There are no restrictions to cash at August 31, 2012. A substantial amount of the Company’s cash is held in bank accounts in the PRC and is not protected by the Federal Deposit Insurance Corporation (“FDIC”) insurance or any other similar insurance. Given the current economic environment and the financial conditions of the banking industry there is a risk that deposits may not be readily available. Cash held in the PRC amounted to $30,408,830 and $15,088,156 at August 31, 2012 and 2011, respectively. The PRC places limitations on expatriating cash out of the country, which may limit the Company’s ability to pay dividends.
(c) Impairment of Long-Lived Assets
The Company’s long-lived assets and other assets (consisting of property and equipment and purchased land use rights) are reviewed for impairment in accordance with the guidance of the FASB ASC Topic 360-10,
Property, Plant, and Equipment
, and FASB ASC Topic 205,
Presentation of Financial Statements
. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial position. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through August 31, 2012, the Company had not experienced impairment losses on its long-lived assets. However, there can be no assurances that demand for the Company’s services will continue, which could result in an impairment of long-lived assets in the future.
(d) Income taxes
On March 16, 2007, the PRC National People’s Congress passed the PRC Enterprise Income Tax Law (“New EIT Law”) which became effective on January 1, 2008. Pursuant to the New EIT Law, a unified enterprise income tax rate of 25% and unified tax deduction standards will be applied consistently to both domestic-invested enterprises and foreign-invested enterprises.
Shanxi Taiji, Taiyuan Taiji and the Investment Company are taxed pursuant to the New EIT Law with a unified enterprise income tax rate of 25%. Shanxi Taiji, Taiyuan Taiji and the Investment Company did not pay any income taxes during the years ended August 31, 2012 and 2011, the eight months ended August 31, 2011 and for the year ended December 31, 2010 due to net losses experienced in the past reporting periods. The three entities may apply the past periods’ net operating losses to futures years’ profits in order to reduce tax liability. Since Shanxi Taiji, Taiyuan Taiji and Investment Company have minimal business operations, the three entities are unlikely to have profits in future periods. As a result, all deferred tax assets and liabilities are deminimus, and management would have a 100% valuation allowance for all deferred tax assets.
The Company has three subsidiaries registered as private schools (the “school-subsidiaries”), which are not subject to income taxes determined in accordance with the Law for Promoting Private Education (2003) and school-subsidiaries registered as private schools not requiring reasonable returns (similar to a not-for-profit entity) are treated as public schools and are generally not subject to enterprise income taxes. Therefore, the school-subsidiaries are tax exempt, including Shanxi North Campus, Shanxi South Campus and Sichuan Guangan School.
Kahibah Limited is exempt from income tax on all sources of income pursuant to the tax law in the British Virgin Islands. However, pursuant and subsequent to the reverse merger, the parent company in the U.S. may pay tax in future years.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities. The components of the deferred tax assets and liabilities are individually classified as current or non-current based on their characteristics. Deferred tax assets and liabilities are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A provision has not been made at August 31, 2012 and 2011 and December 31, 2010 for U.S. or additional foreign withholding taxes of undistributed earnings of foreign subsidiaries because it is the present intention of management to reinvest the undistributed earnings indefinitely in foreign operations. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.
The Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the government. However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current government officials.
Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of August 31, 2012 and 2011 and December 31, 2010, are not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of August 31, 2012 and 2011 and December 31, 2010, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on the current PRC tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next twelve months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows as of August 31, 2012 and 2011 and December 31, 2010, but the tax years are still open for examination.
(e) Revenue Recognition and Deferred School Fees
Revenues consist primarily of tuition, room & board and other fees (the "School Fees") derived from providing meals and housing for students living on campus. Revenues from School Fees are recognized pro-rata (on a straight-line basis) over the relevant period attended by the student of the applicable grade or program. The school year typically runs September 1 through August 31 and deferred School Fees are recognized over the twelve-month period. If a student withdraws from a course or program within three months after the school year starts, the paid but unearned portion of the student’s School Fees is 67% refunded. If a student withdraws after the first three months in a school year, no School Fees will be refunded. As a result, the Company has recorded deferred School Fees as a current liability on the consolidated balance sheet in the event a student withdraws from school and the Company has to return a portion of the deferred School Fees. In past years there were minimal students who withdrew from a course or program before the end of a school year.
The Company normally receives deferred School Fees from students at their initial admission or before the start of the school year on September 1. As of August 31, 2012, all students at the North and South Campuses are required to fully prepay school fees at the beginning of the school year by September 1, 2012 for the 2012-2013 school year. At the Sichuan Campus students are required to fully prepay school fees for the first semester at the beginning of the school year by September 1, and the second semester must be fully prepaid before the beginning of the second semester by March 1. In prior periods this policy was not fully enforced. Some students will benefit from a discount of fees if they prepay School Fees for two to three years of school term. Deferred School Fees is the portion of payments received but not earned and is reflected as a current liability under deferred School Fees in the accompanying consolidated balance sheets as such amounts are expected to be earned, but may be refundable within the next year.
Below is a schedule of deferred School Fees as of August 31, 2012 expected to be recognized into revenue over twelve months for the next year ended August 31 (corresponds to school year – September 1 through August 31) and thereafter as follows:
Twelve Month Period Ended August 31
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August 31, 2012
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August 31, 2011
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(f) Foreign Currency Translation
The Company’s principal country of operations is The PRC. The financial position and results of operations of the Company are determined using the local currency (“Renminbi or RMB”) as the functional currency. The results of operations denominated in foreign currency are translated at the average rate of exchange during the reporting period.
Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rates prevailing at the balance sheet date. The results of operations are translated from Renminbi to US Dollar at the weighted average rate of exchange during the reporting period. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency (“US Dollars”) are dealt with as a component of accumulated other comprehensive income.
Translation adjustments net of tax totaled $252,324 and $1,699,817, for the year ended August 31, 2012 and 2011, respectively.
Translation adjustments net of tax totaled $1,432,623, for the eight months ended August 31, 2011, translation adjustments net of tax totaled $801,583, for the years ended December 31, 2010, respectively.
As of August 31, 2012 and 2011, the exchange rate to the U.S. Dollar was RMB 6.3374 and RMB 6.3755, respectively. The average exchange rate for the year ended August 31, 2012 and 2011 was RMB 6.3345 and RMB 6.5673, respectively.
As of December 31, 2010, the exchange rate to the U.S. Dollar was RMB 6.6227. The average exchange rate for the eight months ended August 31, 2011 was RMB 6.5106.
(g) Comprehensive Income
The Company reports comprehensive income in accordance with FASB ASC Topic 220,
Comprehensive Income
, which established standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements.
Total comprehensive income is defined as all changes in stockholders' equity during a period, other than those resulting from investments by and distributions to stockholders (i.e., issuance of equity securities and dividends). Generally, for the Company, total comprehensive income equals net income plus or minus adjustments for currency translation. Total comprehensive income represents the activity for a period net of related tax and was $9,897,952 and $15,132,571, for the years ended August 31, 2012 and 2011, respectively. Total comprehensive income was $10,876,683 and $12,767,664, for the eight months ended August 31, 2011 and for the year ended December 31, 2010, respectively.
While total comprehensive income is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income as of the balance sheet date. For the Company, AOCI is primarily the cumulative balance related to the currency adjustments and increased comprehensive income and equaled $2,690,766 and $2,438,442, as of August 31, 2012 and 2011, respectively.
(h) Concentrations, Risks, and Uncertainties
All of the Company’s operations are located in the PRC. There can be no assurance that the Company will be able to successfully continue to provide the services offered and failure to do so would have a material adverse effect on the Company’s financial position, results of operations and cash flows. Also, the success of the Company’s operations is subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general economic conditions, teacher salaries, competition, governmental and political conditions, and changes in regulations. Because the Company is dependent on trade in the PRC, the Company is subject to various additional political, economic and other uncertainties. Among other risks, the Company’s operations will be subject to risk of restrictions on transfer of funds, domestic and international customs, changing taxation policies, foreign exchange restrictions, and political and governmental regulations.
(i) Advertising
The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the years ended August 31, 2012 and 2011, the eight months ended August 31, 2011, and the year ended December 31, 2010 were not significant.
(j) Research and Development
The Company expenses the cost of research and development as incurred. Research and development costs for the years ended August 31, 2012 and 2011, the eight months ended August 31, 2011, and the year ended December 31, 2010 were not significant.
(k) Basic and diluted earnings per share
Earnings per share is calculated in accordance with the ASC Topic 260,
Earnings Per Share
. Basic earnings per share is calculated dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the assumption that all dilutive convertible shares, stock options, warrants and other equity awards were converted or exercised during the period. Dilution is computed by applying the treasury stock method. Under this method, warrants and options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
Basic and diluted earnings per share were $0.32 and $0.32 per share and $0.45 and $0.45 per share, respectively for the year ended August 31, 2012 and 2011.
Basic and diluted earnings per share were $0.31 and $0.31 per share, for the eight months ended August 31, 2011. Basic and diluted earnings per share were $0.43 and $0.43 per share, for the year ended December 31, 2010.
(l) Statement of Cash Flows
In accordance with ASC Topic 230,
Statement of Cash Flows
, cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.
(m) Reclassification
Certain reclassifications have been made to the 2011 and 2010 consolidated financial statements to conform to the 2012 consolidated financial statement presentation. These reclassifications had no effect on net income as previously reported.
(n) Accounting Pronouncements
Accounting Standards Update (“ASU”) ASU No. 2010-09 (ASC Topic 855), which amends
Subsequent Events Recognition and Disclosures
, ASU No. 2009-16 (ASC Topic 860), which amends
Accounting for Transfer of Financial Assets
, ASU No. 2009-05 (ASC Topic 820), which amends
Fair Value Measurements and Disclosures - Overall
, ASU No. 2009-08,
Earnings per Share
, ASU No. 2009-12(ASC Topic 820),
Investments in Certain Entities That Calculate Net Asset Value per Share
, and various other ASU’s No. 2009-2 through ASU No. 2012-07 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant, except for ASU 2011-05 (ASC Topic 220,
Comprehensive Income
) which will affect the presentation of Comprehensive Income and is effective for periods after December 15, 2011 and early adoption is allowed.
Other accounting standards have been issued or proposed by the FASB or other standard-setting bodies that do not require adoption until a future date and are not expected to have a material impact on the Company’s financial statements.
NOTE 4 – INVENTORY
Inventories are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business. The Company’s inventories are typically school supplies used in the normal course of business. When inventories are consumed, their carrying amounts are expensed in the year used. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the year of impairment or loss occurs. Inventories consisted of the following:
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August 31, 2012
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August 31, 2011
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Less: Inventory provision*
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* The inventory provision is an inventory allowance for aged or obsolete inventory items.
NOTE 5 - PREPAYMENT AND OTHER CURRENT ASSETS
Prepayment and other current assets consisted of the following:
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August 31, 2012
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|
August 31, 2011
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Cash – individual bank accounts
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$
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3,216,850
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$
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8,734,422
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|
|
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568,324
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|
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|
737,741
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|
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|
-
|
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66,710
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292,864
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67,809
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$
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4,078,038
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$
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9,606,682
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Cash – individual bank accounts, is for funds advanced to employees for the purchase of school and boarding related materials for the day-to-day operations of the school. Advances to suppliers are primarily advances for travel and other related expenses. The other prepaid and other receivables are primarily for certain operating requirements of the school.
NOTE 6 –
DUE TO RELATED PARTIES
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August 31, 2012
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August 31, 2011
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(i) Ren Zhiqing is the president and a director of the Company, as well as the majority controlling shareholder of the Company. The amounts due to Ren Zhiqing as of August 31, 2012 and 2011, represent loans to the Company, which are unsecured, interest-free and payable to Ren Zhiqing, primarily used for paying the equity holders of the Investment Company as part of the Equity Transfer Agreement dated August 31, 2011.
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NOTE 7 – LAND USE RIGHTS, NET
Land use rights, net consisted of the following:
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August 31, 2012
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August 31, 2011
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Less: Accumulated amortization
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Amortization expense for years ended August 31, 2012 and 2011 was $1,127,377 and $152,319, respectively. Amortization expense for the eight months ended August 31, 2011 was $102,434 and for year ended December 31, 2010 was $148,637, respectively.
Amortization expense for the next five years and thereafter is as follows
NOTE 8 - PROPERTY AND EQUIPMENT, NET
Property and equipment
,
net consisted of the following:
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August 31, 2012
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August 31, 2011
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Furniture & education equipment
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Less: Accumulated depreciation
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Property and equipment, net
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For the years ended August 31, 2012 and 2011, depreciation expense was $3,359,844 and $906,701, respectively. For the eight months ended August 31, 2011 and for the year ended December 31, 2010, depreciation expense was $651,674 and $965,795, respectively.
Property and equipment are located at the Company’s three school locations in Shanxi and Sichuan Provinces in the PRC and are recorded at cost less accumulated depreciation. Depreciation and amortization are calculated using the straight-line method over the expected useful life of the asset, after the asset is placed in service. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are generally expensed as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.
The estimated useful lives for each major category of fixed assets are as follows:
Description
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Useful Lives
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Furniture, Education Equipment, Computers
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NOTE 9 – DEPOSIT PAID FOR LONG-TERM ASSETS
The deposit balance paid for long term assets as of August 31, 2011 was a good-faith, refundable deposit paid to begin preliminary negotiations toward the acquisition of the Investment Company.
NOTE 10 - OTHER PAYABLE
Other payables included traveling and the related expenses incurred by employees on behalf of the Company. These amounts are unsecured, non-interest bearing and generally are short term in nature.
NOTE 11 –
HOME PURCHASE DOWN PAYMENT
According to the Company’s Employee Welfare Policy, the Company may sign a home purchase agreement with teachers which would allow teachers to purchase home property at a discounted market rate. Pursuant to the home purchase agreement between the Company and teachers, teachers were given the right to purchase a home property upon their 8th year of service. There were two payment options:
(1) one-time full payment of the home purchase price based on the signed agreement; or (2) RMB 20,000 down payment with remaining balance to be paid in 8 equal annual installments until their 8th year of service. Those teachers who selected option (2) would be charged an interest of 7% if they do not make payment on time during the 8 year period. If teachers resign or leave the school for any reasons, they will be entitled to a refund based on the terms of the home purchase agreement. There were minimal refunds for the years ended August 31, 2012 and 2011, the eight months ended August 31, 2011 and the year ended December 31, 2010. For accounting purposes, cash received from teachers through payment options (1) and (2) and late interest payments are recorded as deposits at the time of receipt. The Company recognizes profit when the sale is consummated.
The Company records the home purchase transactions in accordance to the deposit method pursuant to FASB ASC Topic 360-20,
Real Estate Sales
. Under the deposit method, the seller does not recognize any profit, does not record notes receivable, and continues to report in its financial statements the property which has been assumed by the buyer. Cash received from the buyer, including the initial investment and subsequent collections of principal and interest, is reported as a deposit. Interest collected that is subject to refund and is included in the deposit account before a sale is consummated is accounted for as part of buyer’s initial investment at the time the sale is consummated. There were no apartments sold for the years ended August 31, 2012 and 2011, the eight months ended August 31, 2011 and the year ended December 31, 2010, and as such the Company recognized no income from selling apartments. As of August 31, 2012 and 2011, December 31, 2010, home deposits were $919,458, $878,668 and $823,095, respectively.
NOTE 12 –
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
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August 31, 2012
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August 31, 2011
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Individual tax withholding
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NOTE 13
– STOCK BASED COMPENSATION
The Chief Financial Officer is entitled to receive $6,000 per month in cash compensation for his services, as well as a stock award of $6,000 per month in shares of the Company’s restricted common stock, which vest on a quarterly basis. During the twelve months ended August 31, 2012, the Chief Financial Officer earned and was vested in 88,240 shares of restricted common stock as part of his consideration. As of August 31, 2012, the Company has accrued 74,067 shares of restricted common stock to be issued to its Chief Financial Officer.
Two of the Company’s independent directors are entitled to each receive $9,000 annually in cash compensation for their services, as well as a stock award of $9,000 annually in shares of the Company’s restricted common stock, which vests on a quarterly basis. During the twelve months ended August 31, 2012, the two independent directors collectively earned and were vested in 20,877 shares of restricted common stock as part of their consideration. As of August 31, 2012, the Company has accrued 18,516 shares of restricted common stock to be issued to two of its independent directors.
The financial controller is entitled to receive RMB 20,000 (approximately USD $3,138) per month in cash compensation for her services, as well as a stock award of 5,000 shares of the Company’s restricted common stock, which vest on a quarterly basis. During the twelve months ended August 31, 2012, the financial controller earned and was vested in 20,000 shares of restricted common stock as part of her consideration. As of August 31, 2012, the Company has accrued 18,333 shares of restricted common stock to be issued to its financial controller.
On June 16, 2012, the Company issued 55,101 shares of previously accrued restricted common stock accounted for as stock based compensation to its Chief Financial Officer, independent directors and financial controller.
The above-mentioned securities were not registered under the Securities Act of 1933. The issuance of these shares was exempt from registration, in part pursuant to Regulation S and Regulation D under the Securities Act of 1933 and in part pursuant to Section 4(2) of the Securities Act of 1933.
NOTE 14 –
REFUNDABLE DEPOSITS
Students were previously required to pay a housing deposit at their initial admissions. The Company has changed this policy and no longer requires a deposit and returns any previous deposit upon graduation. As of August 31, 2012 and 2011, refundable deposits were $134,661 and $795,848, respectively.
NOTE 15 – SHORT-TERM BANK LOAN
The Company’s subsidiary Shanxi Taiji borrowed RMB 100,000,000 (approximately $15,685,044) from a finance company under a one-year term from August 16, 2011 due August 15, 2012 at a 14.0% interest rate, interest-only payable quarterly. The loan was repaid on August 15, 2012.
NOTE 16 – LONG-TERM BANK LOAN
The Company’s subsidiary Shanxi South School borrowed RMB 70,000,000 (approximately $11,045,539) from a bank under a three-year loan from August 16, 2012 due August 15, 2015 at a 7.38% interest rate, interest-only payable quarterly.
NOTE 17 – TAXES
Enterprise Income Tax (“EIT”)
Effective January 1, 2007, the Company adopted ASC 740-10,
Accounting for Uncertainty in Income Taxes
(formerly “FIN 48”, an interpretation of FASB statement No. 109), Accounting for Income Taxes. The interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.
Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of August 31, 2012 and 2011, and December 31, 2010, the Company does not have a liability for unrecognized tax benefits.
The Company’s estimated income tax savings for the years ended August 31, 2012 and 2011 are summarized as follows:
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For the Years Ended August 31,
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|
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2012
|
|
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2011
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|
|
|
|
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Had the Company’s tax exemption not been in the place for the years ended August 31, 2012 and 2011, the Company estimates the following pro-forma financial statement impact:
|
|
For the Years Ended August 31,
|
|
|
|
2012
|
|
|
2011
|
|
Net income before tax provision, as reported
|
|
$
|
9,645,628
|
|
|
$
|
13,432,754
|
|
Less tax provision exempted
|
|
|
(2,411,407
|
)
|
|
|
(3,358,188
|
)
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|
|
|
|
|
|
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The Company’s estimated income tax savings for the eight months ended August 31, 2011 and the year ended December 31, 2010 are summarized as follows:
|
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For the
Eight Months Ended August 31, 2011
|
|
|
For the
Year Ended December 31, 2010
|
|
|
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|
|
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Had the Company’s tax exemption not been in the place for the eight months ended August 31, 2011 and the year ended December 31, 2010, the Company estimates the following pro-forma financial statement impact:
|
|
|
|
|
|
For the
Eight Months Ended August 31, 2011
|
|
|
For the
Year Ended
December 31, 2010
|
|
Net income before tax provision, as reported
|
|
|
9,444,060
|
|
|
|
|
|
Less tax provision exempted
|
|
|
(2,361,015
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The Company’s operating subsidiaries are tax exempt, since primary and secondary education is not subject to income tax in the PRC. As such, the Company and its subsidiaries have no deferred tax asset or liability. The Company does not anticipate any change in the current PRC regulations regarding the tax exemption for its education sector.
NOTE 18 – EARNING PER SHARE
FASB ASC Topic 260,
Earnings Per Share
, requires a reconciliation of the numerator and denominator of the basic earnings per share (EPS) computations.
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There were no potentially dilutive securities for the years ended August 31, 2012 and 2011, the eight months ended August 31, 2011 and the year ended December 31, 2010.
The following table sets forth the computation of basic and diluted net income per share:
|
|
For The Years
Ended August 31,
|
|
|
|
2012
|
|
|
2011
|
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|
|
|
|
|
|
|
|
|
Basic weighted average outstanding shares of common stock
|
|
|
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|
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|
Diluted weighted average common stock and stock equivalents
|
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For The
Eight Months Ended August 31, 2011
|
|
|
For The
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average outstanding shares of common stock
|
|
|
|
|
|
|
|
|
Diluted weighted average common stock and stock equivalents
|
|
|
|
|
|
|
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NOTE 19 – EMPLOYEE RETIREMENT BENEFITS AND POST RETIREMENT BENEFITS
According to the Shanxi and Sichuan Provincial regulations on state pension program, both employees and employers have to contribute toward pensions. The pension contributions range from 2% to 8% that was contributed by individuals (employees) and the Company is required to make contributions to the state retirement plan based on 20% of the employees’ monthly basic salaries. Employees in the PRC are entitled to retirement benefits calculated with reference to their basic salaries on retirement and their length of service in accordance with a government managed benefits plan. The PRC government is responsible for the benefit liability to these retired employees.
During the years ended August 31, 2012 and 2011, the Company contributed $257,418 and $248,647 in pension contributions, respectively. During the eight months ended August 31, 2011 and during the year ended December 31, 2010, the Company contributed $176,981 and $214,997 in pension contributions, respectively.
NOTE 20 – BUSINESS COMBINATION - EQUITY TRANSFER AGREEMENT
On August 31, 2011, the Company completed the acqusition of the equity interests in Shanxi Rising Education Investment Company, Limited (the “Investment Company”) from its equity holders (the “Sellers”) for a total purchase consideration of RMB 690,000,000 (approximately $108,226,806) under the terms of the Equity Transfer Agreement, (the “Acquisition”). The Acquisition has been accounted for as a business combination under Accounting Standards Codification Topic 805,
Business Combinations
(“ASC 805”). The total purchase consideration of RMB 690,000,000 has been discounted to its net present value and allocated to the net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values of August 31, 2011. As of the balance sheet date, August 31, 2011, the exchange rate to the US Dollar was RMB 6.3755.
Description of Acqusition
On August 31, 2011, the Company’s entered into an Equity Transfer Agreement and purchased all of the outstanding equity of Shanxi Rising Education Investment Company Limited (the “Investment Company”) from the equity holders (the “Sellers”) for a total purchase consideration of RMB 690,000,000 (approximately $108,226,806). The net present value of the total fair value consideration transferred equals RMB 650,000,000 (approximately $102,565,721), of which RMB 370,217,933 (approximately $55,444,697) has been paid. Under the terms of the Equity Transfer Agreement the balance of the purchase price is to be paid over three years in three scheduled payments as follows:
|
1)
|
RMB 119,782,067 (approximately $18,900,822) to be paid by August 31, 2012, but was paid on September 3rd, 2012
|
|
2)
|
RMB 100,000,000 (or RMB 87,589,800, approximately $13,821,094, net of discount) by August 31, 2013, and
|
|
3)
|
RMB 100,000,000 (or RMB 93,849,000, approximately $14,808,754, net of discount) by August 31, 2014.
|
The net present value of the payments is discounted at the Company’s then current financing interest rate of 6.84%.
The Investment Company is an education company that owns and operates a K-12 private boarding school in the PRC, encompassing kindergarten, primary and secondary education. The Investment Company was established in 2001 and it has share capital of RMB 70,000,000. It is the parent company of Shanxi Rising School (the "Rising School"), founded 2002, which currently serves over 5,400 students from its location in Shanxi Province, PRC. The Rising School is now known by the Company as the “Shanxi South Campus.”
Prior to closing the Equity Transfer Agreement, the Company became involved in the operations of the Shanxi South Campus in the spring of 2011. With the consent of the Investment Company, the Company assisted in the operations, accounting and promotion of the school to attract more and better students for the 2011-2012 school year. Some of these responsibilities included collecting prepaid School Fees in advance of the school year, which combined with better operations, higher tuition rates and an increase in enrollment led to an increase in deferred revenue at August 31, 2011. Company’s involvement was under the direction of Investment Company management until it assumed control of the Shanxi South Campus on August 31, 2011, in accordance with the Equity Transfer Agreement.
NOTE 21 – UNAUDITED PRO FORMA RESULTS
Unaudited pro forma results of operations after giving effect to certain adjustments resulting from the acquisition of the Investment Company, as described herein, were as follows for the twelve months ended August 31, 2011 as if the business combinations had occurred at the beginning of the period presented.
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For the Year Ended
August 31, 2011
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(in thousands, except for earnings per share data)
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(Unaudited)
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|
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|
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|
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|
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Earnings per share, basic and diluted
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The pro forma data is provided for informational purposes only and does not purport to be indicative of the results which would have actually been obtained if the combinations had been effectuated at the beginning of the period presented, or of those results which may be obtained in the future.
NOTE 22 – CORRECTION OF IMMATERIAL ERRORS
The Company also made an immaterial correction of errors in its consolidated financial statements as of and for the balance sheet ended August 31, 2011. The Company used 14% instead of 6.84% for the fair value discount rate, which resulted in improperly recording fixed assets, land use rights, short-term payable acquisition and long-term payable acquisition. The consolidation of balance sheet resulted in an increase to fixed assets of $2,162,226 and to land use rights of $3,167,081, and an increase to short-term payable acquisition of $1,383,107 and an increase to long-term payable acquisition of $3,946,200. The following is a summary presentation of corrections made to the Company’s consolidated balance sheet as of August 31, 2011 previously filed on Form 10-K.
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|
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August 31, 2011
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August 31, 2011
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As Reported
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Correction
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As Adjusted
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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15,090,521
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$
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-
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$
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15,090,521
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Inventory
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3,489
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-
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3,489
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Due from related parties
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-
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|
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-
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|
|
-
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Other current assets
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9.606,682
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-
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|
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9,606,682
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Total Current Assets
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24,700,692
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-
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24,700,692
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LONG-TERM ASSETS:
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Property, plant and equipment, net
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81,958,342
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2,162,226
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84,120,568
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Land use rights, net
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45,783,579
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3,167,081
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48,950,660
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Deposit paid for long-term assets
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18,778
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-
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18,778
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Total Long-Term Assets
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127,760,699
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5,329,307
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133,090,006
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TOTAL ASSETS
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$
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152,461,391
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$
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5,329,307
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$
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157,790,698
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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CURRENT LIABILITIES:
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Accounts Payable
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$
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48,824
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-
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$
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48,824
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Short-term payable-acquisition
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21,177,319
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|
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1,383,107
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22,560,426
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Due to related parties
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7,842,522
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|
-
|
|
|
|
7,842,522
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Other Payables
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|
|
333,202
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|
|
-
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|
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|
333,202
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Refundable deposits
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795,848
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|
|
-
|
|
|
|
795,848
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Prepaid School Fees
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39,498,972
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|
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-
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|
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39,498,972
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Home purchase down payment
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|
|
878,668
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|
|
-
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|
|
|
878,668
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Short-term bank loan
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|
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15,685,044
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|
-
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|
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15,685,044
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Accrued expenses and other current liabilities
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908,268
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|
|
-
|
|
|
|
908,268
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Total Current Liabilities
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87,168,667
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1,383,107
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88,551,774
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LONG-TERM LIABILITIES:
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|
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|
|
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Long-term bank loan
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$
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|
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$
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|
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$
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-
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Long-term payable-acquisition
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|
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22,656,106
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|
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3,946,200
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|
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26,602,306
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TOTAL LIABILITIES
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109,824,773
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3,946,200
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|
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115,154,080
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STOCKHOLDERS’ EQUITY:
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Common Stock, $0.001par value; 75,000,000 shares authorized; 30,069,624, 30,014,528 issued and outstanding as of August 31, 2012 and 2011
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30,015
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-
|
|
|
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30,015
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Additional paid in capital
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|
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67,421
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|
|
-
|
|
|
|
67,421
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Retained earnings
|
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40,100,740
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|
|
-
|
|
|
|
40,100,740
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Accumulated other comprehensive income
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|
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2,438,442
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|
|
-
|
|
|
|
2,438,442
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|
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|
|
-
|
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TOTAL STOCKHOLDERS’ EQUITY
|
|
|
42,636,618
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|
|
|
-
|
|
|
|
42,636,618
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|
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|
|
|
|
|
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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|
$
|
152,461,391
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|
|
|
5,329,307
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|
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$
|
157,790,698
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NOTE 23–SUBSEQUENT EVENTS
Management has evaluated subsequent events from August 31, 2012 and has concluded no events need to be reported during this period, except the following:
On September 3, 2012 the Company paid RMB 119,782,067 (approximately $18,900,822) under the terms of the Equity Transfer Agreement for the acqusition of the Shanxi South School, which was due on August 31, 2012.
On September 10, 2012, the Company borrowed RMB 50,000,000 (approximately $7,896,275) from a bank under a one-year loan due September 9, 2013 at a 7.2% interest rate, interest only payable quarterly.