Item
2.
Management’s
Discussion and Analysis
or Plan of
Operation
Cautionary
Notice Regarding Forward-Looking Statements
In
this
quarterly report, references to “China Sun Group,” “CSGH,” “the Company,” “we,”
“us,” and “our” refer to China Sun Group High-Tech Co.
We
make
certain forward-looking statements in this report. Statements concerning our
future operations, prospects, strategies, financial condition, future economic
performance (including growth and earnings), demand for our services, and other
statements of our plans, beliefs, or expectations, including the statements
contained under the captions "Risk Factors," "Management's Discussion and
Analysis or Plan of Operation," "Description of Business," as well as captions
elsewhere in this document, are forward-looking statements. In some cases these
statements are identifiable through the use of words such as "anticipate",
"believe", "estimate", "expect", "intend", "plan", "project", "target", "can",
"could", "may", "should", "will", "would" and similar expressions.. The
forward-looking statements we make are not guarantees of future performance
and
are subject to various assumptions, risks, and other factors that could cause
actual results to differ materially from those suggested by these
forward-looking statements. Because such statements are subject to risks and
uncertainties, actual results may differ materially from those expressed or
implied by the forward-looking statements. Indeed, it is likely that some of
our
assumptions will prove to be incorrect. Our actual results and financial
position will vary from those projected or implied in the forward-looking
statements and the variances may be material. You are cautioned not to place
undue reliance on such forward-looking statements. These risks and
uncertainties, together with the other risks described from time to time in
reports and documents that we file with the Securities and Exchange Commission
(“SEC”) should be considered in evaluating forward-looking
statements.
The
nature of our business makes predicting the future trends of our revenues,
expenses, and net income difficult. Thus, our ability to predict results or
the
actual effect of our future plans or strategies is inherently uncertain. The
risks and uncertainties involved in our business could affect the matters
referred to in any forward-looking statements and it is possible that our actual
results may differ materially from the anticipated results indicated in these
forward-looking statements. Important factors that could cause actual results
to
differ from those in the forward-looking statements include, without limitation,
the factors discussed above in the section entitled "Risk Factors" and the
following:
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the
effect of political, economic, and market conditions and geopolitical
events;
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•
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legislative
and regulatory changes that affect our
business;
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•
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the
availability of funds and working
capital;
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•
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the
actions and initiatives of current and potential
competitors;
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investor
sentiment; and
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We
do not
undertake any responsibility to publicly release any revisions to these
forward-looking statements to take into account events or circumstances that
occur after the date of this report. Additionally, we do not undertake any
responsibility to update you on the occurrence of any unanticipated events
which
may cause actual results to differ from those expressed or implied by any
forward-looking statements.
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto as filed with
the SEC and other financial information contained elsewhere in this
Report.
Overview
We
were
incorporated in North Carolina on February 2, 2004 and have since undergone
a
change in business. In February 2007, we acquired a 70% ownership interest
in Da
Lian Xin Yang High-Tech Development Co. Ltd. ("DLX"), a corporation organized
and existing under the laws of the Peoples' Republic of China, through a share
exchange which was consummated on February 28, 2007. In August 2007, our
shareholders approved our reincorporation in the State of Delaware and our
name
change from “Capital Resource Funding, Inc.” to “China Sun Group High-Tech Co.”
Currently, our only operations are conducted through DLX, which engages in
the
business of manufacturing and selling cobaltosic oxide products. These products
are primarily manufactured, marketed, and sold in the People’s Republic of
China, South Korea and Japan..
Through
DLX, we produce anode materials used in lithium ion batteries. Lithium ion
batteries continue to gain in popularity due to their versatility, high energy
density and capacity, high voltage, compact size, light weight, and excellent
energy retention characteristics. They are used in mobile phones, PDAs, laptops,
and digital cameras, as well as electric automobiles and solar and wind energy
storage units. DLX primarily produces cobaltosic oxide and lithium cobalt oxide
and also engages in the research and development of new technologies to be
used
in the lithium ion battery market.
According
to the China Battery Industry Association, which conducts research of and puts
forth reports on the battery industry, DLX has the second largest cobalt series
production capacity in the People’s Republic of China. Through its research and
development group, DLX owns a proprietary series of nanometer technology that
supply state-of-the-art components for advanced lithium ion batteries.
Leveraging its technological leadership in the People’s Republic of China, its
high-quality product line and its scalable production capacity, we plan to
create a fully integrated supply chain from the primary manufacturing of cobalt
ore to finished products, which include lithium ion batteries.
We
recently received preliminary accreditation from the State Intellectual Property
Office of the People's Republic of China of certain of our equipment that we
use
in our cobaltosic oxide and lithium cobalt oxide production process. Meeting
the
State’s production standards is important to securing our technological
leadership position in the People’s Republic of China. The accreditation of the
equipment and the associated production process enables us to provide our
customers with exact specifications, along with superior quality control,
throughout the production process.
Highlights
from the Quarter Ended November 30, 2007
In
calendar year 2007, we made significant strides in our sales and manufacturing
capabilities. Sales for calendar year 2007 increased approximately
300% from the previous year (we began production and sales of cobaltosic oxide
in the PRC only on April 1, 2006). We operate largely on a “just-in-time” basis
where demand exceeds supply. Accordingly, we often do not carry
excess inventory.
Concurrent
with strides in production and sales, we have also made substantial developments
in our research and development endeavors. We have completed our testing and
evaluation of our lithium cobalt oxide product and will be taking and filling
orders for it commencing the first calendar quarter of 2008.
We
have
also completed the preliminary trial phase of our tri-component anode product,
which when completed, will be safer and able to discharge a stronger electrical
current for use with heavier capacity equipment and vehicles.
We
have
made technological improvements to our production line by adding amalgamation
capabilities to it. We have also hired two new research and
development engineers, a graduate researcher and six chemistry graduates to
our
research and development team.
Results
of Operations
The
following table sets forth our statements of operations for the six months
ended
November 30, 2007 and the three months ended November 30, 2007:
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Six-Months
Ended
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Three-Months
Ended
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November
30,
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November
30,
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November
30,
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November
30,
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2007
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2006
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2007
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2006
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(Unaudited)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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Sales
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$
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9,093,027
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$
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3,023,380
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$
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5,357,190
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$
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1,739,287
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Cost
of Sales
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6,001,286
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1,995,431
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3,548,070
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1,196,081
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Gross
Profit
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3,091,741
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1,027,949
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1,809,120
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543,206
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Operating
Expenses
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General
and administrative
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696,999
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430,488
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518,765
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337,023
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Research
and development
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86,400
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72,187
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61,527
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60,712
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Depreciation
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187,640
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135,050
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94,943
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48,533
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Total
operating expenses
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971,039
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637,725
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675,235
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446,268
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Operating
income
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2,120,702
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390,224
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1,133,885
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96,938
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Other
Income (Expenses)
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1,276
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-
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1,276
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-
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Income
Before Income Taxes and Minority Interest
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2,121,978
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390,224
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1,135,161
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96,938
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Provision
for Income Taxes
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(740,303
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(128,774
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(396,679
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(31,989
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Minority
Interest
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(450,032
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(78,435
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(241,227
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(19,485
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Net
Income
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931,643
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183,015
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497,255
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45,464
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Other
Comprehensive Income: Foreign Currency Translation Gain
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1,045,833
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168,438
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381,624
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51,847
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THE
SIX MONTHS ENDED NOVEMBER 30, 2007 COMPARED TO THE SIX MONTHS ENDED NOVEMBER
30,
2006
Net
Revenue
Net
revenue for the six months ended November 30, 2007 was $9,093,027, an increase
of $6,069,647 or 200.76% from net revenue of $3,023,380 for the comparable
period in 2006. The increase in revenue was primarily attributable to increased
customer demand for our products and consequently, increased sales.
Cost
of Revenue
Cost
of
revenue for the six months ended November 30, 2007 was $6,001,286, an increase
of $4,005,855 or 200.76% from $1,995,431 for the comparable period in 2006.
The
increase in cost of revenue was primarily attributable to increased production
of our products which is
in tandem
with increased demand for
them.
Gross
Profit
Gross
profit for the six months ended November 30, 2007 was $3,091,741, an increase
of
$2,063,792 or 200.77% from $1,027,949 for the comparable period in
2006. The increase in gross profit was primarily due to revenue
generated by increased production and sales.
General
and Administrative Expenses
General
and administrative expenses for the six months ended November 30, 2007 were
$696,999, an increase of $266,511 or 61.91% from $430,488 for the comparable
period in 2006. The increase was primarily attributable to the hiring of
additional personnel and the setup of an administrative office in the United
States.
Research
and Development Expenses
Research
and development expenses for the six months ended November 30, 2007 were
$86,400, an increase of $14,213 or 19.69% compared to $72,187 for the comparable
period in 2006. The increase was primarily attributable to the hiring of
additional research and development personnel.
Depreciation
Expenses
Depreciation
expenses for the six months ended November 30, 2007 were $187,640, an
increase of $52,590 or 38.94% compared to $135,050 for the comparable period
in
2006. The increase in our depreciation expenses is primarily attributable to
the
acquisition of additional of equipment for our operations.
Income
(Loss) From Operations
Income
from operations for the six months ended November 30, 2007 was $2,120,702,
an
increase of $1,730,478 or 443.46% compared to $390,224 for the comparable period
in 2006. The increase resulted primarily from the increase in sale of our
productions and consequently, our revenue. Also, we had only begun production
and sales of cobaltosic oxide in the People’s Republic of China on April 1, 2006
and needed lead time to ramp up our production and sales.
Other
Income
Interest
income for the six months ended November 30, 2007 was $1,276. The Company
had no interest income for the comparable period in 2006. The increase resulted
primarily from interest income derived from cash in our bank
accounts.
Income
Taxes
Provision
for income tax expenses was $740,303 for the six months ended November 30,
2007,
an increase of $611,529 or 490.11% as compared to $128,774 for the comparable
period in 2006. The increase resulted primarily from the increase in
our revenue due to increased sales.
Minority
Interest
The
minority interest for the six months ended November 30, 2007 was $450,032,
an
increase of $371,597 or 473.76% as compared to $78,435 for the comparable period
in 2006.
Foreign
Currency Translation Gain
The
foreign currency translation gain for the six months ended November 30, 2007
was
$1,045,833, an increase of $877,395 or 520.90% as compared to $168,438 for
the
comparable period in 2006. The increase resulted from the increase in
value of the Renminbi against the U.S. dollar. This updated Renminbi
valuation of DLX’s assets and liabilities resulted in this gain.
Net
Income
Net
income for the six months ended November 30, 2007 was $931,643, an increase
of
$748,628 or 409.05% as compared to $183,015 for the comparable period in
2006.
THE
THREE MONTHS ENDED NOVEMBER 30, 2007 COMPARED TO THE THREE MONTHS ENDED NOVEMBER
30, 2006
Net
Revenue
Net
revenue for the three months ended November 30, 2007 was $5,357,190, an increase
of $3,617,903 or 208.01% from net revenue of $1,739,287 for the comparable
period in 2006. The increase resulted from increased customer demand
and sales.
Cost
of Revenue
Cost
of
revenue for the three months ended November 30, 2007 was $3,548,070, an increase
of 2,351,989 or 196.64% from $1,196,081 for the comparable period in
2006. The increase resulted directly from increased production of our
products which is
in tandem
with increased demand for
them.
Gross
Profit
Gross
profit for the three months ended November 30, 2007 was $1,809,120, an
increase of $1,265,914 or 233.04% from $543,206 for the comparable period in
2006. The increase in gross profit was primarily due to revenue generated by
increased customer demand and production, and consequently increased sales
of
our products.
General
and Administrative Expenses
General
and administrative expenses for the three months ended November 30, 2007 were
$518,765, an increase of $181,742 or 53.93% from $337,023 for the comparable
period in 2006. The increase was primarily attributable to the hiring
of additional personnel and the costs in setting up an administrative office
in
the United States.
Research
and Development Expenses
Research
and development expenses for the three months ended November 30, 2007 were
$61,527, an increase of $815 or 1.34% compared to $60,712 for the comparable
period in 2006. The increase is primarily the result of hiring of additional
research and development personnel
.
Depreciation
Expenses
Depreciation
expenses for the three months ended November 30, 2007 were $94,943, an increase
of $46,410 or 95.63% compared to $48,533 for the comparable period in
2006. This increase is primarily attributable to our acquisition of
more equipment for our operations.
Income
(Loss) From Operations
Income
from operations for the three months ended November 30, 2007 was $1,133,885,
an
increase of $1,036,947 or 1069.70% compared to $96,938 for the comparable period
in 2006. The increase resulted primarily from the increase in sales
and revenue. Also, we had only begun production and sales of
cobaltosic oxide in the People’s Republic of China on April 1, 2006 and needed
lead time to ramp up our production and sales.
Other
Income
Interest
income for the three months ended November 30, 2007 was $1,276. We had no
interest income for the comparable period in 2006. The increase resulted
primarily from interest income derived from cash in our bank
accounts.
Income
Taxes
Provision
for income tax expenses was $396,679 for the three months ended November 30,
2007, an increase of $364,690 or 1140.05% as compared to $31,989 for the
comparable period in 2006.
Minority
Interest
The
minority interest for the three months ended November 30, 2007 was $241,227,
an
increase of $221,742 or 1138.01% as compared to $19,485 for the comparable
period in 2006.
Foreign
Currency Translation Gain
The
foreign currency translation gain for the three months ended November 30, 2007
was $381,624, an increase of $329,777 or 636.06% as compared to $51,847 for
the
comparable period in 2006. The increases resulted from the increase
in the value of the Renminbi against the U.S. dollar. This updated Renminbi
valuation of DLX’s assets and liabilities resulted in this gain.
Net
Income
Net
income for the three months ended November 30, 2007 was $497,255, an increase
of
$451,791 or 993.73% as compared to $45,464 for the comparable period in
2006.
Liquidity
and Capital Resources
Cash
and Cash Equivalent
Our
cash
and cash equivalent were $813,163 at the beginning of the six months ended
November 30, 2007 and increased to $2,444,688 by the end of such period, an
increase of $2,174,096 or 803.46% from $270,592 for the same period in
2006.
Net
cash provided by operating activities
Net
cash
provided by our operating activities was $1,580,235 for the six months ended
November 30, 2007, an increase of $2,249,079 or 336.26% as compared to net
cash
of $(668,844) for the same period in 2006. This increase was due
primarily to the growth in sales revenue with the decrease in accounts
receivable by $1,673,161, the increase in value-added tax payable by $403,481,
and the increase in other payable and accrued liabilities by $333,774, partially
offset by the decrease in accounts payable by $441,807, decrease in customer
deposits by $693,937, and decrease in income tax payable by $69,359 in this
period.
Net
cash used in investing activities
Net
cash
used in investing activities was $(470) for the six months ended November 30,
2007, an increase of $54,934 or 99.15% from $(55,404) for the same period in
2006. The increase was primarily attributable to the purchase of
equipment.
Net
cash used in financing activities
There
was
no net cash generated from financing activities for the six months ended
November 30, 2007, as compared to $743,621 for the same period in 2006 because
there were no advances from related parties.
Income
Taxes
Income
tax expense was $809,662 for the six months ended November 30, 2007, an increase
of $804,780 or 164.85% compared to $4,882 for the same period in 2006. The
increase resulted primarily from the increase in income from
operations.
Foreign
currency translation adjustment
Foreign
currency translation adjustment resulted in $51,760 for the six months ended
November 30, 2007, an increase of $7,469 or 16.86% compared to $44,291 for
the
same period in 2006.
Trends
Currently,
many companies in the cobalt product industry are looking to directly own cobalt
producing mines which will provide direct access and supply to cobalt ore,
the
primary raw material in the cobalt product industry. In June 2007, we acquired
certain rights to a cobalt mine in Africa. This acquisition will help us avoid
export limitations imposed by the Congo, reduce freight expenses, and help
ensure a stable supply of cobalt ore.
We
are
not aware of any trends, events or uncertainties that have or are reasonably
likely to have a material impact on our short-term or long-term
liquidity.
Inflation
We
believe that inflation has not had a material or significant impact on our
revenue or our results of operations.
Material
Commitments for Capital Expenditures
Currently,
we own the prospecting and mining rights of a cobalt mine in Congo. We plan
to
start the construction of a processing plant in Congo in the third quarter
of
the 2008 fiscal year. We anticipate that the construction of the plant will cost
approximately $2,000,000 to $3,000,000.
General
We
believe that we currently have sufficient income generated from our operations
to meet our operating and/or capital needs.
However,
we will continue to evaluate various sources of capital to meet our growth
requirements. Such sources will include debt financings, the issuance of equity
securities, and entrance into other financing arrangements. There can be no
assurance, however, that any of the contemplated financing arrangements
described herein will be available and, if available, can be obtained on terms
favorable to us.
Contractual
Obligations and Commitments
We
leased
an office premise under a non-cancelable operating lease agreement for a period
of eight years, due July 25, 2010. The annual lease payment is
$6,582.
On
June
9, 2007, our subsidiary, DLX entered into an African Mining Project Contract
of
Cooperation (the “Purchase Agreement”) with Shengbao Group and South African
Shengbao Mining Enterprises (“Shengbao”). Pursuant to the Purchase Agreement,
DLX is obliged to purchase the prospecting and mining rights of a cobalt ore
mine for a purchase price of $2 million over a term of 15 years. As
of November 30, 2007, DLX had the capital commitment of $2 million in the
purchase of the prospecting and mining rights which was contracted for but
not
provided in the financial statements.
Off
Balance Sheet Arrangements
None.
Critical
Accounting Policies and Estimates
We
have
disclosed in Note 3 to our financial statements those accounting policies that
we consider to be significant in determining our results of operations and
our
financial position which are incorporated by reference herein.
Management’s
discussion and analysis of its financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
Our financial statements reflect the selection and application of accounting
policies which require management to make significant estimates and judgments.
Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. We
believe that the following reflect the more critical accounting policies that
currently affect our financial condition and results of operations.
The
significant accounting policies which we believe are the most critical to aid
in
fully understanding and evaluating our reported financial results include the
following:
Revenue
Recognition
Revenue
is recognized when products are delivered to customers. Provisions for discounts
and rebates to customers, estimated returns and allowances, and other
adjustments are provided for in the same period the related sales are recorded.
In instances where products are configured to customer requirements, revenue
is
recorded upon the successful completion of our final test procedures and the
customer’s acceptance.
We
are
subject to Valued Added Tax (“VAT”) which is levied on the majority of the
products of DLX at the rate of 17% on the invoiced value of sales. Output VAT
is
borne by customers in addition to the invoiced value of sales and input VAT
is
borne by us in addition to the invoiced value of purchases to the extent not
refunded for export sales.
Starting
April 1, 2006, we commenced the production and sales of cobaltosic oxide in
the
PRC.
Income
Taxes
We
account for income taxes in interim periods as required by Accounting Principles
Board Opinion No. 28,
“Interim Financial Reporting”
and as interpreted
by FASB Interpretation No. 18,
“Accounting for Income Taxes in Interim
Periods . ”
We have determined an estimated annual effective tax rate. The
rate will be revised, if necessary, as of the end of each successive interim
period during our fiscal year to our best current estimate. The estimated annual
effective tax rate is applied to the year-to-date ordinary income (or loss)
at
the end of the interim period.
We
also
account for income tax using SFAS No. 109
“Accounting for Income
Taxes,
”
which requires the asset and liability approach for
financial accounting and reporting for income taxes. Under this approach,
deferred income taxes are provided for the estimated future tax effects
attributable to temporary differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases, and for the
expected future tax benefits from loss carry-forwards and provisions, if any.
Deferred tax assets and liabilities are measured using the enacted tax rates
expected in the periods of recovery or reversal and the effect from a change
in
tax rates is recognized in the consolidated statement of operations and
comprehensive income in the period of enactment. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is considered more
likely than not that some portion of, or all of the deferred tax assets will
not
be realized.
Foreign
currencies translation
Transactions
denominated in currencies other than the functional currency are translated
into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the condensed consolidated statement of
operations.
The
reporting currency of the Company is the United States dollar ("US
dollars"). Our subsidiary in the PRC, maintains its books and records
in its local currency, the Renminbi (“RMB”), which is the primary currency
of the economic environment in which it operates.
In
general, for consolidation purposes, assets and liabilities of our
subsidiaries whose functional currency is not the US dollar are
translated into US dollars, in accordance with SFAS No 52. “
Foreign Currency
Translation”
, using the exchange rate on the balance sheet date. Revenue
and expenses are translated at average rates prevailing during the period.
The
gains and losses resulting from translation of financial statements of foreign
subsidiaries are recorded as a separate component of accumulated other
comprehensive income within the statement of stockholders’ equity.
Translation
of amounts from RMB into United States dollars (“US$”) has been made at the
following exchange rates for the respective period:
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
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|
Months
end RMB:US$ exchange rate
|
|
|
7.3919
|
|
|
|
7.8400
|
|
|
Average
monthly RMB:US$ exchange rate
|
|
|
7.5065
|
|
|
|
7.9200
|
|
|
|
|
|
|
|
|
|
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Recently
issued accounting standards
In
September 2006, the FASB issued SFAS No. 157, "
Fair Value Measurement
"
("SFAS 157") which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands the
disclosures about fair value measurement. This Statement was developed to
provide guidance for consistency and comparability in fair value measurements
and disclosures and applies under other accounting pronouncements that require
or permit fair value measurements. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. This Statement is not expected to have a
material impact on the Company's consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159,
"The Fair Value Option for Financial Assets and Financial
Liabilities"
("SFAS 159").
This Statement provides
companies with an option to report selected financial assets and liabilities
at
fair value. The Standard's objective is to reduce both the complexity in
accounting for financial instruments and the volatility in earnings caused
by
measuring related assets and liabilities differently. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar
types
of assets and liabilities. This Statement is effective as of the beginning
of an
entity's first fiscal year beginning after November 15, 2007. Early adoption
is
permitted if we make the choice in the first 120 days of that fiscal year and
also elects to apply the provisions of SFAS 157. We do not expect SFAS 159
to
have a material impact on its consolidated financial statements.