UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
(Mark
One)
T
|
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended August 31,
2008
|
¨
|
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from _______ to
_______
|
Commission
file number: 333-118259
CHINA
SUN GROUP HIGH-TECH CO.
______________________________________________________
|
(Exact
name of small business issuer as specified in its
charter)
|
Delaware
|
54-2142880
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer identification No.)
|
1
HUTAN STREET, ZHONGSHAN DISTRICT
DALIAN, PEOPLE’S REPUBLIC OF
CHINA
(Address
of principal executive offices)
(86411)
8289-7752
(Issuer's
telephone number, including area code)
Indicate
by check mark whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
T
No □
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
Accelerated
filer
Non-accelerated
filer (Do not check if a smaller reporting
company) Smaller reporting company
T
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes □
No
T
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Check
whether the registrant filed all documents and reports required to be filed by
Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes □ No □
APPLICABLE
ONLY TO CORPORATE ISSUERS:
State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 53,422,971 shares of common stock, $.001 par
value, were outstanding as of October 14, 2008.
TABLE
OF CONTENTS
|
|
Page
|
|
PART
I
|
|
Item
1.
|
Financial
Statements
|
3
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
|
4
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
9
|
Item
4T.
|
Controls
and Procedures
|
9
|
|
PART
II
|
|
Item
1.
|
Legal
Proceedings
|
11
|
Item
1A.
|
Risk
Factors
|
11
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
11
|
Item
3.
|
Defaults
Upon Senior Securities
|
11
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
11
|
Item
5.
|
Other
Information
|
11
|
Item
6.
|
Exhibits
|
11
|
SIGNATURES
|
12
|
|
|
PART
I – FINANCIAL INFORMATION
Item
1.
Financial
Statements.
CHINA
SUN GROUP HIGH-TECH CO.
INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Page
|
|
|
|
Condensed
Consolidated Balance Sheets as of August 31, 2008 and May 31,
2008
|
|
F-2
|
|
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Income for the
three months ended August 31, 2008 and 2007
|
|
F-3
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the three months ended August
31, 2008 and 2007
|
|
F-4
|
|
|
|
Condensed
Consolidated Statements of Stockholders’ Equity for the three months ended
August 31, 2008 and 2007
|
|
F-5
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
F-6
to F-17
|
|
|
|
CHINA
SUN GROUP HIGH-TECH CO.
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS
OF AUGUST 31, 2008 AND MAY 31, 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
(unaudited)
|
|
August
31, 2008
|
|
|
May
31, 2008
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
11,089,007
|
|
|
$
|
3,879,114
|
|
Accounts
receivable
|
|
|
1,097,151
|
|
|
|
1,302,176
|
|
Inventories
|
|
|
2,299,209
|
|
|
|
4,705,189
|
|
Value-added
tax receivable
|
|
|
-
|
|
|
|
447,346
|
|
Deposits
and prepayments
|
|
|
535,655
|
|
|
|
73,235
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
15,021,022
|
|
|
|
10,407,060
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
14,665,048
|
|
|
|
14,598,684
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
29,686,070
|
|
|
$
|
25,005,744
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable, trade
|
|
$
|
978,788
|
|
|
$
|
733,490
|
|
Customers
deposit
|
|
|
598,703
|
|
|
|
338
|
|
Value-added
tax payable
|
|
|
170,406
|
|
|
|
-
|
|
Income
tax payable
|
|
|
1,840,448
|
|
|
|
980,027
|
|
Other
payables and accrued liabilities
|
|
|
478,448
|
|
|
|
448,556
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
4,066,793
|
|
|
|
2,162,411
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares
issued and outstanding as of August 31, 2008 and May 31,
2008
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001 par value; 100,000,000 shares authorized; 53,422,971 shares
and 53,422,971 shares issued and outstanding as of August 31, 2008 and May
31, 2008
|
|
|
53,423
|
|
|
|
53,423
|
|
Additional
paid-in capital
|
|
|
9,585,204
|
|
|
|
9,585,204
|
|
Accumulated
other comprehensive income
|
|
|
2,975,345
|
|
|
|
2,588,188
|
|
Statutory
reserve
|
|
|
899,819
|
|
|
|
899,819
|
|
Retained
earnings
|
|
|
12,105,486
|
|
|
|
9,716,699
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
25,619,277
|
|
|
|
22,843,333
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
29,686,070
|
|
|
$
|
25,005,744
|
|
See
accompanying notes to condensed consolidated financial statements.
CHINA
SUN GROUP HIGH-TECH CO.
CONDENSED
CONSOLIDATED STATEMENTS OF
OPERATIONS
AND COMPREHENSIVE INCOME
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
(unaudited)
|
|
Three
months ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
$
|
10,986,891
|
|
|
$
|
3,735,837
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue (inclusive of depreciation)
|
|
|
6,834,309
|
|
|
|
2,484,194
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,152,582
|
|
|
|
1,251,643
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
369,681
|
|
|
|
7,072
|
|
Research
and development
|
|
|
24,641
|
|
|
|
24,873
|
|
Depreciation
|
|
|
63,793
|
|
|
|
61,719
|
|
General
and administrative
|
|
|
475,306
|
|
|
|
171,162
|
|
Total
operating expenses
|
|
|
933,421
|
|
|
|
264,826
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
3,219,161
|
|
|
|
986,817
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
8,011
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
3,227,172
|
|
|
|
986,817
|
|
|
|
|
|
|
|
|
|
|
Income
tax expenses
|
|
|
(838,385
|
)
|
|
|
(343,624
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
2,388,787
|
|
|
$
|
643,193
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
-
Foreign currency translation gain
|
|
|
387,157
|
|
|
|
664,209
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
2,775,944
|
|
|
$
|
1,307,402
|
|
|
|
|
|
|
|
|
|
|
Net
income per share – basic and diluted
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the period – basic and
diluted
|
|
|
53,422,971
|
|
|
|
53,422,971
|
|
See
accompanying notes to condensed consolidated financial statements.
CHINA
SUN GROUP HIGH-TECH CO.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(unaudited)
|
|
Three
months ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,388,787
|
|
|
$
|
643,193
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
165,331
|
|
|
|
92,697
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, trade
|
|
|
223,770
|
|
|
|
173,593
|
|
Inventories
|
|
|
2,460,702
|
|
|
|
(809
|
)
|
Deposits
and prepayments
|
|
|
(457,664
|
)
|
|
|
(426,870
|
)
|
Accounts
payable, trade
|
|
|
231,921
|
|
|
|
(322,254
|
)
|
Customers
deposits
|
|
|
593,685
|
|
|
|
(686,467
|
)
|
Value-added
tax payable
|
|
|
619,916
|
|
|
|
551,040
|
|
Income
tax payable
|
|
|
838,385
|
|
|
|
343,624
|
|
Other
payables and accrued liabilities
|
|
|
25,436
|
|
|
|
293,570
|
|
Net
cash provided by operating activities
|
|
|
7,090,269
|
|
|
|
661,317
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(3,068
|
)
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(3,068
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
122,692
|
|
|
|
7,459
|
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
7,209,893
|
|
|
|
668,776
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
3,879,114
|
|
|
|
813,163
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
11,089,007
|
|
|
$
|
1,481,939
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash
paid for interest expenses
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial statements.
CHINA
SUN GROUP HIGH-TECH CO.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
(unaudited)
|
Convertible
preferred
stock
|
|
|
Common
stock
|
|
|
Additional
|
|
|
Accumulated
other
comprehensive
|
|
|
Statutory
|
|
|
Retained
|
|
|
Total
stockholders’
|
|
|
No.
of share
|
|
|
Amount
|
|
|
No.
of share
|
|
|
Amount
|
|
|
paid-in
capital
|
|
|
income
|
|
|
reserve
|
|
|
earnings
|
|
|
equity
|
|
Balance
as of June 1, 2007
|
|
-
|
|
|
$
|
-
|
|
|
|
53,422,971
|
|
|
$
|
53,423
|
|
|
$
|
9,585,204
|
|
|
$
|
225,808
|
|
|
$
|
-
|
|
|
$
|
3,876,392
|
|
|
$
|
13,740,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
643,193
|
|
|
|
643,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
664,209
|
|
|
|
-
|
|
|
|
-
|
|
|
|
664,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of August 31, 2007
|
|
-
|
|
|
$
|
-
|
|
|
|
53,422,971
|
|
|
$
|
53,423
|
|
|
$
|
9,585,204
|
|
|
$
|
890,017
|
|
|
$
|
-
|
|
|
$
|
4,519,585
|
|
|
$
|
15,048,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of May 31, 2008
|
|
-
|
|
|
$
|
-
|
|
|
|
53,422,971
|
|
|
$
|
53,423
|
|
|
$
|
9,585,204
|
|
|
$
|
2,588,188
|
|
|
$
|
899,819
|
|
|
$
|
9,716,699
|
|
|
$
|
22,843,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,388,787
|
|
|
|
2,388,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
387,157
|
|
|
|
-
|
|
|
|
-
|
|
|
|
387,157
|
|
Balance
as of August 31, 2008
|
|
-
|
|
|
$
|
-
|
|
|
|
53,422,971
|
|
|
$
|
53,423
|
|
|
$
|
9,585,204
|
|
|
$
|
2,975,345
|
|
|
$
|
899,819
|
|
|
$
|
12,105,486
|
|
|
$
|
25,619,277
|
|
See
accompanying notes to condensed consolidated financial
statements.
CHINA
SUN GROUP HIGH-TECH CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(unaudited)
NOTE
-
1
|
BASIS
OF PRESENTATION
|
The
accompanying unaudited condensed consolidated financial statements have been
prepared by management in accordance with both accounting principles generally
accepted in the United States (“GAAP”), and the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Certain information and note disclosures normally
included in audited financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information not misleading.
In the
opinion of management, the condensed balance sheet as of May 31, 2008 which has
been derived from audited financial statements and these unaudited condensed
consolidated financial statements reflect all normal and recurring adjustments
considered necessary to state fairly the results for the periods presented. The
results for the period ended August 31, 2008 are not necessarily indicative of
the results to be expected for the entire fiscal year ended May 31, 2009 or for
any future period.
These
unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the Management’s Discussion and the audited
financial statements and notes thereto included in the Annual Report on Form
10-K for the year ended May 31, 2008.
NOTE
-
2 ORGANIZATION
AND BUSINESS BACKGROUND
China Sun
Group High-Tech Co. (the “Company” or “CSGH”) was organized under the laws of
the State of North Carolina on February 2, 2004 as a subchapter S-Corporation.
On August 24, 2007, the Company was reincorporated in the State of Delaware and
changed its name from “Capital Resource Funding, Inc.” to “China Sun Group
High-Tech Co.”
The
Company, through its operating subsidiaries in the PRC, mainly engages in the
production and sales of cobaltosic oxide and lithium cobalt oxide, both anode
materials used in lithium ion rechargeable batteries in the PRC. The operation
activity was commenced from April 2006.
Respectively,
on September 6, 2006 and May 30, 2008, CSGH entered a stock exchange transaction
with Da Lian Xin Yang High-Tech Development Co., Ltd (“DLX”), whereby 40,000,000
new shares of common stock of CSGH pursuant to Regulation S under the Securities
Act of 1933, as amended, were issued to the owners of DLX in exchange for 100%
equity interest in DLX. The stock exchange transaction was effectively completed
on February 28, 2007. DLX was incorporated as a limited liability company in the
People’s Republic of China (“PRC”) on August 8, 2000 with its principal place of
business in Da Lian City, Liaoning Province, the PRC. Upon the completion of
this option exercise transaction, DLX became a wholly-owned subsidiary of the
Company.
CHINA
SUN GROUP HIGH-TECH CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(unaudited)
These two
consecutive stock exchange transactions have been accounted for as a reverse
acquisition and recapitalization of the Company whereby DLX is deemed to be the
accounting acquirer (legal acquiree) and the Company to be the accounting
acquiree (legal acquirer). The accompanying consolidated financial statements
are in substance those of DLX, with the assets and liabilities, and revenues and
expenses, of the Company being included effective from the date of stock
exchange transaction. The Company is deemed to be a continuation of the business
of DLX.
CSGH and
its subsidiaries are hereinafter referred to as (the “Company”).
NOTE
-
3 SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying condensed consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying condensed consolidated financial statements and
notes.
In
preparing these consolidated financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheets and revenues and expenses during the period reported. Actual
results may differ from these estimates.
The
unaudited condensed consolidated financial statements include the financial
statements of CSGH and its subsidiaries.
All
significant inter-company balances and transactions among CSGH and its
subsidiaries have been eliminated upon consolidation.
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 the Company’s final test procedures
and the customer’s acceptance.
Revenue
represents the invoiced value of goods, net of a value-added tax (VAT). All of
the Company's products that are sold in the PRC are subject to subject to VAT
which is levied 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 the Company in addition to the invoiced value of purchases to the
extent not refunded for export sales.
CHINA
SUN GROUP HIGH-TECH CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(unaudited)
Cost of
revenue primarily includes the purchase of raw materials, direct labor and
manufacturing overhead.
l
|
Cash
and cash equivalents
|
Cash and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
Accounts
receivable are recorded at the invoiced amount and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and determined based on managements’ assessment of known
requirements, aging of receivables, payment history, the customers’ current
credit worthiness and the economic environment.
Inventories
include material, labor and manufacturing overhead and are stated at lower of
cost or market value, cost being determined on a weighted average method. The
Company periodically reviews historical sales activity to determine excess, slow
moving items and potentially obsolete items and also evaluates the impact of any
anticipated changes in future demand. The Company provides inventory allowances
based on excess and obsolete inventories determined principally by customer
demand. As of August 31, 2008, the Company did not record an allowance for
obsolete inventories, nor have there been any write-offs.
l
|
Property,
plant and equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date on
which they become fully operational and after taking into account their
estimated residual values:
|
Depreciable life
|
|
Residual value
|
Land
and building
|
40
years
|
|
5%
|
|
5-40
years
|
|
5%
|
Office
equipment
|
5
years
|
|
5%
|
Motor
vehicle
|
5
years
|
|
5%
|
Expenditure
for repairs and maintenance is expensed as incurred. When assets have retired or
sold, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the results of
operations.
CHINA
SUN GROUP HIGH-TECH CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(unaudited)
l
|
Valuation
of long-lived assets
|
Long-lived
assets primarily include property, plant and equipment. In accordance with SFAS
No. 144, “
Accounting for the
Impairment or Disposal of Long-Lived Assets
,” the Company periodically
reviews long-lived assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable or that the useful lives are no longer appropriate. Each impairment
test is based on a comparison of the undiscounted cash flows to the recorded
value of the asset. If an impairment is indicated, the asset is written down to
its estimated fair value based on a discounted cash flow analysis. Determining
the fair value of long-lived assets includes significant judgment by management,
and different judgments could yield different results. There has been no
impairment as of August 31, 2008.
SFAS No.
130,
“Reporting Comprehensive
Income”
establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income as defined
includes all changes in equity during the period from non-owner sources.
Accumulated comprehensive income consists of changes in unrealized gains and
losses on foreign currency translation. This comprehensive income is not
included in the computation of income tax expense or benefit.
The
Company accounts 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.
The
Company also adopts the provisions of the Financial Accounting Standards
Interpretation No. 48,
“Accounting for Uncertainty in
Income Taxes” (“
FIN 48
”)
. FIN 48 prescribes a
recognition threshold and measurement process for recording in the financial
statements uncertain tax positions taken or expected to be taken in a tax
return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transitions. The adoption of FIN 48 did not have a significant impact on the
Company’s consolidated financial statements.
The
Company conducts its major business in the PRC and is subject to tax in this
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax
authorities.
CHINA
SUN GROUP HIGH-TECH CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(unaudited)
The
Company calculates net income per share in accordance with SFAS No. 128,
“Earnings per Share.”
Basic
income per share is computed by dividing the net income by the weighted-average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.
l
|
Foreign
currencies translation
|
Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the condensed consolidated statement of
operations.
The
reporting currency of the Company is the United States dollar (“US$”). The
Company's subsidiaries in the PRC, maintain their books and records in its local
currency, Renminbi Yuan (“RMB”), which is functional currency as being the
primary currency of the economic environment in which these entities
operate.
In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with SFAS No. 52 “
Foreign
Currency Translation”
, using the exchange rate on the balance sheet date.
Revenues and expenses are translated at average rates prevailing during the
period. The gains and losses resulting from translation of financial statements
of foreign subsidiaries are recorded as a separate component of accumulated
other comprehensive income within the statement of stockholders’
equity.
Translation
of amounts from RMB into US$ has been made at the following exchange rates for
the respective period:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Months
end RMB: US$ exchange rate
|
|
|
6.8452
|
|
|
|
7.5725
|
|
Average
monthly RMB: US$ exchange rate
|
|
|
6.8991
|
|
|
|
7.5968
|
|
Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and
operating decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.
SFAS No.
131
“Disclosures about
Segments of an Enterprise and Related Information”
establishes standards
for reporting information about operating segments on a basis consistent with
the Company’s internal organization structure as well as information about
geographical areas, business segments and major customers in the financial
statements. The Company operates one reportable business segment.
CHINA
SUN GROUP HIGH-TECH CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(unaudited)
l
|
Fair
value of financial instruments
|
The
Company values its financial instruments as required by SFAS No. 107,
“Disclosures about Fair Value of
Financial Instruments.”
The estimated fair value amounts have been
determined by the Company, using available market information and appropriate
valuation methodologies. The estimates presented herein are not necessarily
indicative of amounts that the Company could realize in a current market
exchange.
The
Company’s financial instruments primarily include cash and cash equivalents,
accounts receivable, deposits and prepayments, accounts payable, customers
deposit, other payables and accrued liabilities, VAT payable and income tax
payable.
As of the
balance sheet date, the estimated fair values of financial instruments were not
materially different from their carrying values as presented due to short
maturities of these instruments.
l
|
Recent
accounting pronouncements
|
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or the
results of its operations.
In May,
2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 162,
"The Hierarchy of Generally
Accepted Accounting Principles,"
("SFAS No. 162"). SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
SFAS No. 162 will be effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board's amendments to AU Section 411,
"The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles."
The FASB has
stated that it does not expect SFAS No. 162 will result in a change in current
practice. The application of SFAS No. 162 will have no effect on the Company's
financial position, results of operations or cash flows.
Also in
May 2008, the FASB issued SFAS No. 163, "
Accounting for Financial Guarantee
Insurance Contracts--an interpretation of FASB Statement No. 60
" ("SFAS
No. 163"). SFAS No. 163 interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of that Statement. SFAS No. 163 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and all interim periods within those fiscal years. As such, the Company is
required to adopt these provisions at the beginning of the fiscal year ended
December 31, 2009. The Company is currently evaluating the impact of SFAS No.
163 on its financial statements but does not expect it to have an effect on the
Company's financial position, results of operations or cash flows.
CHINA
SUN GROUP HIGH-TECH CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(unaudited)
In May
2008, the FASB issued FSP APB 14-1, "
Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (Including Partial Cash
Settlement)"
("FSP APB 14-1"). FSP APB 14-1 applies to
convertible
debt securities that, upon conversion,
may be settled by the issuer fully or partially in cash. FSP APB 14-1 specifies
that issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for financial statements issued for fiscal years after
December 15, 2008, and must be applied on a retrospective basis. Early adoption
is not permitted. The Company is assessing the potential impact of this FSP on
the
convertible
debt
issuances.
In June
2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1,
"Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities"
("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses
whether
instruments granted in share-based payment transactions are participating
securities prior to vesting, and therefore need to be included in the earnings
allocation in computing earnings per share under the two-class method as
described in SFAS No. 128, Earnings per Share. Under the guidance of FSP EITF
03-6-1, unvested share-based payment awards that contain nonforfeitable rights
to dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings-per-share
pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and all
prior-period earnings per share data presented shall be adjusted
retrospectively. Early application is not permitted. The Company is assessing
the potential impact of this FSP on the earnings per share
calculation.
In June
2008, the FASB ratified EITF No. 07-5, "
Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity's Own Stock
" ("EITF
07-5"). EITF 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early
application is not permitted. The Company is assessing the potential impact of
this EITF 07-5 on the financial condition and results of
operations.
NOTE
-
4 ACCOUNTS
RECEIVABLE, NET
The
majority of the Company’s sales are on open credit terms and in accordance with
terms specified in the contracts governing the relevant transactions. The
Company evaluates the need of an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible. If
actual collections experience changes, revisions to the allowance may be
required. Based upon the aforementioned criteria, the Company has determined
that no allowance for doubtful accounts is provided for the three months period
ended August 31, 2008.
NOTE
-
5 PROPERTY,
PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net consisted of:
|
|
As
of
|
|
|
|
August
31, 2008
|
|
|
May
31, 2008
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
|
|
|
|
|
Land
and building
|
|
$
|
7,270,098
|
|
|
$
|
6,308,373
|
|
|
|
|
8,242,702
|
|
|
|
7,358,776
|
|
Office
equipment
|
|
|
185,639
|
|
|
|
159,109
|
|
Motor
vehicle
|
|
|
39,434
|
|
|
|
34,816
|
|
Foreign
translation difference
|
|
|
248,821
|
|
|
|
1,873,731
|
|
|
|
|
15,986,694
|
|
|
|
15,734,805
|
|
Less:
accumulated depreciation
|
|
|
(1,301,455
|
)
|
|
|
(1,029,552
|
)
|
Less:
foreign translation difference
|
|
|
(20,191
|
)
|
|
|
(106,569
|
)
|
Property,
plant and equipment, net
|
|
$
|
14,665,048
|
|
|
$
|
14,598,684
|
|
Depreciation
expenses for the three months ended August 31, 2008 and 2007 were $165,331 and
$92,697 respectively.
NOTE
-
6 OTHER
PAYABLES AND ACCRUED LIABILITIES
Other
payables and accrued liabilities consisted of:
|
|
As
of
|
|
|
|
August
31, 2008
|
|
|
May
31, 2008
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
|
|
|
|
|
Welfare
payable
|
|
$
|
229,986
|
|
|
$
|
216,527
|
|
Government
levy payable
|
|
|
6,201
|
|
|
|
-
|
|
Other
payable
|
|
|
182,000
|
|
|
|
174,500
|
|
Rental
payable
|
|
|
60,261
|
|
|
|
57,529
|
|
Other
payables and accrued liabilities
|
|
$
|
478,448
|
|
|
$
|
448,556
|
|
NOTE
-
7 INCOME
TAXES
The
Company is registered in the United States of America and has operations in two
tax jurisdictions: the United States of America and the PRC. The operation in
the United States of America has incurred net operating losses for income tax
purposes. The Company generated substantially all of its net income from its PRC
operations through DXL, its subsidiary and has recorded income tax expense for
the three months ended August 31, 2008 and 2007.
CHINA
SUN GROUP HIGH-TECH CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(unaudited)
The
components of income before income taxes and current taxes between the local and
foreign operations are as follows:
|
|
Three
months ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Local
|
|
$
|
(127,016
|
)
|
|
$
|
(52,823
|
)
|
Foreign
|
|
|
3,354,188
|
|
|
|
1,039,640
|
|
Income
before income taxes
|
|
$
|
3,227,172
|
|
|
$
|
986,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local
|
|
$
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
838,385
|
|
|
|
343,624
|
|
|
|
|
|
|
|
|
|
|
Current
tax expenses
|
|
$
|
838,385
|
|
|
$
|
343,624
|
|
United
States of America
The
Company is registered in the State of Delaware and is subject to the tax laws of
the United States of America.
As of
August 31, 2008, the operation in the United States of America incurred $838,331
of net operating losses available for federal tax purposes, which are available
to offset future taxable income. The net operating loss carry forwards begin to
expire in 2029, if unutilized. The Company has provided for a full valuation
allowance for any future tax benefits from the net operating loss carryforwards
as the management believes it is more likely than not that these assets will not
be realized in the future.
The
PRC
The
Company’s PRC subsidiaries are subject to the Coporate Income Tax governed
by the Income Tax Law of the People’s Republic of China, at a statutory rate of
25%.
On March
16, 2007, the National People’s Congress approved the Corporate Income Tax Law
of the People’s Republic of China (the “New CIT Law”). The new CIT Law, among
other things, imposes a unified income tax rate of 25% for both domestic and
foreign invested enterprises with effect from January 1, 2008. DLX is
entitled to the tax rate reduction from 33% to 25% that may impact the carrying
value of deferred tax assets as a result of new tax rate.
CHINA
SUN GROUP HIGH-TECH CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(unaudited)
The
reconciliation of income tax rate to the effective income tax rate based on
income before income taxes from foreign operation for the three months ended
August 31, 2008 and 2007 are as follows:
|
|
Three
months ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
3,354,188
|
|
|
$
|
1,039,640
|
|
Income
tax rate
|
|
|
25
|
%
|
|
|
33
|
%
|
|
|
|
838,547
|
|
|
|
343,081
|
|
Add:
items not deductible (taxable) to taxes
|
|
|
|
|
|
|
|
|
-
Provision and accrued expenses
|
|
|
(162
|
)
|
|
|
543
|
|
Income
tax expenses
|
|
$
|
838,385
|
|
|
$
|
343,624
|
|
The
following table sets forth the significant components of the aggregate net
deferred tax assets of the Company as of August 31, 2008 and May 31,
2008:
|
|
August
31, 2008
|
|
|
May
31, 2008
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
-
Net operating loss carryforwards
|
|
$
|
285,033
|
|
|
$
|
211,024
|
|
Less:
valuation allowance
|
|
|
(285,033
|
)
|
|
|
(211,024
|
)
|
Deferred
tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of
August 31, 2008 and 2007, valuation allowance of $285,033 and $211,024 was
provided to the deferred tax assets due to the uncertainty surrounding their
realization.
NOTE
-
8 CONCENTRATIONS
AND RISKS
The
Company is exposed to the followings concentrations of risk:
(a) Major
customers
CHINA
SUN GROUP HIGH-TECH CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(unaudited)
For the
three months ended August 31, 2008, the customer who accounts for 10% or more of
revenues of the Company are presented as follows:
|
|
Revenues
|
|
|
Percentage
of
revenues
|
|
|
Trade
accounts
receivable
|
|
Customer
B
|
|
$
|
7,239,841
|
|
|
|
66
|
%
|
|
$
|
1,097,151
|
|
Customer
D
|
|
|
2,613,066
|
|
|
|
24
|
%
|
|
|
-
|
|
Total:
|
|
$
|
9,852,907
|
|
|
|
90
|
%
|
|
$
|
1,097,151
|
|
For the
three months ended August 31, 2007, the customer who accounts for 10% or more of
revenues of the Company are presented as follows:
|
|
Revenues
|
|
|
Percentage
of
revenues
|
|
|
Trade
accounts
receivable
|
|
Customer
A
|
|
$
|
2,056,669
|
|
|
|
55
|
%
|
|
$
|
1,844,967
|
|
Customer
B
|
|
|
1,182,216
|
|
|
|
32
|
%
|
|
|
61,274
|
|
Customer
C
|
|
|
409,517
|
|
|
|
11
|
%
|
|
|
-
|
|
Total:
|
|
$
|
3,648,402
|
|
|
|
98
|
%
|
|
$
|
1,906,241
|
|
For the
three months ended August 31, 2008 and 2007, 100% of the Company’s revenues were
derived from customers located in the PRC.
For the
three months ended August 31, 2008, the vendor who accounts for 10% or more of
purchases of the Company are presented as follows:
|
|
Purchases
|
|
|
Percentage
of
purchases
|
|
|
Accounts
payable
|
|
Vendor
B
|
|
$
|
2,171,834
|
|
|
|
32
|
%
|
|
$
|
-
|
|
Vendor
C
|
|
|
2,179,175
|
|
|
|
32
|
%
|
|
|
978,788
|
|
Total
|
|
$
|
4,351,009
|
|
|
|
64
|
%
|
|
$
|
978,788
|
|
For the
three months ended August 31, 2007, the vendor who accounts for 10% or more of
purchases of the Company are presented as follows:
|
|
Purchase
|
|
|
Percentage
of
purchases
|
|
|
Accounts
payable
|
|
Vendor
A
|
|
$
|
1,726,298
|
|
|
|
93
|
%
|
|
$
|
276,472
|
|
For the
three months ended August 31, 2008 and 2007, 100% of the Company’s purchases
were derived from vendors located in the PRC.
(c) Credit
risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade accounts receivable. The
Company performs ongoing credit evaluations of its customers' financial
condition, but does not require collateral to support such
receivables.
(d) Exchange
rate risk
The
reporting currency of the Company is US$, to date the majority of the
revenues and costs are denominated in RMB and a significant portion of the
assets and liabilities are denominated in RMB. As a result, the Company is
exposed to foreign exchange risk as its revenues and results of operations may
be affected by fluctuations in the exchange rate between US$ and RMB. If
RMB depreciates against US$, the value of RMB revenues and assets as
expressed in US$ financial statements will decline. The Company does not hold
any derivative or other financial instruments that expose to substantial market
risk.
CHINA
SUN GROUP HIGH-TECH CO.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED AUGUST 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
(unaudited)
NOTE
-
9
|
COMPARATIVE
FIGURES
|
Certain
amounts in the prior periods presented have been reclassified to conform to the
current period financial statement presentation.
NOTE
-
10 COMMITMENTS
(a) Operating
lease commitment
The
Company leases an office premise under a non-cancelable operating lease for a
term of 10 years, due July 25, 2010. Costs incurred under this operating lease
are recorded as rental expense and totaled approximately $1,812 and $1,592 for
the three months ended August 31, 2008 and 2007.
Future
minimum rental payments due under a non-cancelable operating lease are as
follows:
Years
ending August 31:
|
|
|
|
2009
|
|
$
|
7,248
|
|
2010
|
|
|
6,643
|
|
Total:
|
|
$
|
13,891
|
|
(b) Other
commitments
(i)
|
On
June 9, 2007, the Company’s 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 August 31, 2008, the Company 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.
|
(ii)
|
On
September 24, 2008, the Company’s subsidiary, DLX entered into two
separate sales agreements with Shenzhen Haoran Battery Co., Ltd to supply
with lithium cobalt oxide and lithium manganese oxide beginning from
November 2008.
|
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 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “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. We intend such
forward-looking statements to be covered by the safe harbor provisions contained
in Section 27A of the Securities Act of 1933, as amended (the “
Securities Act
”) and in
Section 21E of the Securities Exchange Act of 1934, as amended (the “
Exchange Act
”). 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 SEC should be considered in
evaluating forward-looking statements.
The
nature of our business makes predicting the future trends of our revenue,
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 following:
·
|
the
effect of political, economic, and market conditions and geopolitical
events;
|
·
|
legislative
and regulatory changes that affect our
business;
|
·
|
the
availability of funds and working
capital;
|
·
|
the
actions and initiatives of current and potential
competitors;
|
·
|
investor
sentiment; and
|
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. ("DLXY"), a corporation organized
and existing under the laws of the People’s 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 DLXY, 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.
Through
DLXY, 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. DLXY 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, DLXY has the second largest cobalt series
production capacity in the People’s Republic of China. Through its research and
development group, DLXY 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.
DLXY
provides a comprehensive selection of cobalt products such as battery cobalt
carbonate, nano-level cobaltosic oxide, and high-crystallinity ball lithium
cobalt oxide. DLXY also provides substitute products including lithium iron
phosphate (LiFePO
4
) developed
through our research and development efforts. DLXY’s two main products, however,
are cobaltosic oxide (Co
3
O
4
) and
lithium cobalt oxide (LiCoO
2
), which
are manufactured in its production facilities that span 24,000 square meters.
DLXY has 12 production lines, a research and development facility, and employee
housing. Currently, 8 of the 12 productions lines are dedicated to manufacture
of cobaltosic oxide, which aggregates to a production capacity of 1,500 tons per
year. The remaining 4 production lines are dedicated to manufacturing lithium
cobalt oxide, which aggregates to a capacity of 1000 tons per year.
Highlights
from the Three Months Ended August 31, 2008
In the
three months ended August 31, 2008, we made significant strides in our sales and
manufacturing capabilities. Sales for the three months ended August 31, 2008
increased approximately 194% from the previous year. 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 began taking and filling
orders for it in the first quarter of 2008.
We have
also completed commercial tests on our tri-component anode product (i.e. ternary
anode material, composed of lithium cobalt dioxide, lithium manganate and
lithium nickelate. This material is gradually replacing lithium
cobalt oxide and can be applied as the main anodes of small-sized communication
and power instruments, such as portable power tools, electronic apparatuses,
laptops, and video cameras. It also has good prospects for application in
electric autos and electric bicycles. We are currently looking for customers for
this product.
Results
of Operations
THE
THREE MONTHS ENDED AUGUST 31, 2008 COMPARED TO THE THREE MONTHS ENDED AUGUST 31,
2008
Net
Revenue
Net
revenue for the three months ended August 31, 2008 was $10,986,891, an increase
of $7,251,054 or 194% from $3,735,837 for the comparable period in 2007. The
increase in revenue was primarily attributable to continuing customer demand for
our products and accompanying increased sales volume.
Cost
of Revenue
Cost of
revenue for the three months ended August 31, 2008 was $6,834,309, an increase
of $4,350,115 or 175% from $2,484,194 for the comparable period in 2007. 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 three months ended August 31, 2008 was $4,152,582, an increase of
$2,900,939 or 231% from $1,251,643 for the comparable period in 2007. 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 three months ended August 31, 2008 were
$475,306, an increase of $304,144 or 177% from $171,162 for the comparable
period in 2007. The increase was primarily attributable to one-off
repair and maintenance expenses for our office building.
Research
and Development Expenses
Research
and development expenses for the three months ended August 31, 2008 were
$24,641, a decrease of $232 from $24,873 for the comparable period in 2007. No
material change is noted.
Depreciation
Expenses
Depreciation
expenses for the three months ended August 31, 2008 were $63,793, an increase of
$2,074 or 3% from $61,719 for the comparable period in 2007. The increase in our
depreciation expenses is the addition of fixed assets in 2007.
Income
From Operations
Income
from operations for the three months ended August 31, 2008 was $3,219,161, an
increase of $2,232,344 or 226% from $986,817 for the comparable period in 2007.
The increase resulted primarily from
increased
customer demand for our products and consequently, increased sales.
Other
Income
Interest
income for the three months ended August 31, 2008 was $8,011. We had no interest
income for the comparable period in 2007. The increase resulted primarily from
interest income derived from cash in our bank accounts.
Income
Taxes
Provision
for income tax expenses was $838,385 for the three months ended August 31, 2008,
an increase of $494,761 or 144% from $343,624 for the comparable period in
2007.
Foreign
Currency Translation Gain
Foreign
currency translation gain for the three months ended August 31, 2008 was
$387,157, a decrease of $277,052 or 41% from $664,209 for the comparable period
in 2007. The decreases resulted from the slowdown in appreciation of Renminbi
Yuan against the U.S. dollar.
Net
Income
Net
income for the three months ended August 31, 2008 was $2,388,787, an increase of
$1,745,594 or 271% from $643,193 for the comparable period in 2007. The increase
resulted from the sales growth
during
the period.
Liquidity
and Capital Resources
Cash
and Cash Equivalent
Our cash
and cash equivalents were $3,879,114 at the beginning of the three months ended
August 31, 2008 and increased to $11,089,007 by the end of such period, an
increase of $7,209,893 or 186%. This net change in cash and cash
equivalents represented an increase of 978% or $7,209,893 from $668,776 for the
comparable period in 2007.
Net
cash provided by operating activities
Net cash
provided by our operating activities was $7,090,269 for the three months ended
August 31, 2008, an increase of $6,428,952 or 972% as compared to net cash of
$661,317 for the same period in 2007. This increase resulted primarily from
positive cash flows from operations for the period ended August 31, 2008
,
due primarily to the growth in sales revenues
with the decrease in accounts receivable by $223,770, the decrease in inventory
by $ 2,460,702 and the increase in value-added tax payable by $619,916, income
tax payable by $838,385, other payable and accrued liabilities by $25,436 and
the increase in accounts payable by $231,921 and customer deposits by $593,685,
partially offset by the increase in deposits and prepayments by $457,664 in this
period
Net
cash used in investing activities
Net cash
used in investing activities was $3,068 for the three months ended August 31,
2008, an increase of $3,068 from $0 for the same period in 2007. The increase
was primarily attributable to the purchase of office equipment.
Foreign currency translation
adjustment
Foreign
currency translation adjustment resulted in $122,692 for the three months ended
August 31, 2008, an increase of $115,233 or 1545% compared to $7,459 for the
same period in 2007.
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 obliged to purchase 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
second quarter of the 2009 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 10 years, due July 25, 2010. The annual lease payment is
$6,792.
On June
9, 2007, our subsidiary, DLXY 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,
DLXY 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 August 31, 2008, DLXY 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.
On
September 24, 2008, DLXY entered into two separate one-year purchase and sales
agreements with Shenzhen Haoran Battery Co., Ltd. (“Haoran Battery”)
worth approximately $16.2 million. Under
the terms of the first contact, DLXY will supply Haoran Battery with 20 tons of
lithium cobalt oxide per month beginning in November 2008. Based on the current
market price of lithium cobalt oxide at USD $58,823.50 per ton (400,000
Yuan/ton), which may be adjusted subject to market conditions, DLXY expects to
generate sales of approximately $1,176,470 per month (8,000,000 Yuan/month) or
approximately $14.1 Million per year (96,000,000 Yuan/year). Under the second
contract, DLXY has agreed to supply Haoran Battery with 20 tons of lithium
manganese oxide. At a current price of $8,823.50/ton (60,000 Yuan/ton), which
may be adjusted based on market conditions, DLXY expects to generate sales of
USD$176,470/month (1,200,000 Yuan/month) or approximately USD$2.1 Million per
year (14,400,000 Yuan/year).
Off
Balance Sheet Arrangements
None.
Critical
Accounting Policies and Estimates
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 the Company’s final test procedures
and the customer’s acceptance.
Our
subsidiary, DLXY is subject to valued-added tax (“VAT”) which is levied on the
majority of the products of DLXY at the rate of 17% on the invoiced value of
sales sold in the People’s Republic of China. Output VAT is borne by customers
in addition to the invoiced value of sales and input VAT is borne by the Company
in addition to the invoiced value of purchases to the extent not refunded for
export sales.
Account
receivables and allowance for doubtful accounts
Accounts
receivable are recorded at the invoiced amount and do not bear interest. We
extend unsecured credit to its customers in the ordinary course of business but
mitigates the associated risks by performing credit checks and actively pursuing
past due accounts. An allowance for doubtful accounts is established and
determined based on managements’ assessment of known requirements, aging of
receivables, payment history, the customers’ current credit worthiness and the
economic environment. We write off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.
New
Financial Accounting Pronouncements
In May,
2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 162,
"The Hierarchy of Generally Accepted Accounting Principles," ("SFAS No. 162").
SFAS No. 162 identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
SFAS No. 162 will be effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board's amendments to AU Section 411, "The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles." The FASB has stated that it does not expect SFAS No. 162 will
result in a change in current practice. The application of SFAS No. 162 will
have no effect on the Company's financial position, results of operations or
cash flows.
Also in
May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts--an interpretation of FASB Statement No. 60" ("SFAS No.
163"). SFAS No. 163 interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of that Statement. SFAS No. 163 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and all interim periods within those fiscal years. As such, the Company is
required to adopt these provisions at the beginning of the fiscal year ended
December 31, 2009. The Company is currently evaluating the impact of SFAS No.
163 on its financial statements but does not expect it to have an effect on the
Company's financial position, results of operations or cash flows.
In May
2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments
that may be Settled in Cash upon Conversion (Including Partial Cash Settlement)"
("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt securities that, upon
conversion, may be settled by the issuer fully or partially in cash. FSP APB
14-1 specifies that issuers of such instruments should separately account for
the liability and equity components in a manner that will reflect the entity's
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years after December 15, 2008, and must be applied on a retrospective
basis. Early adoption is not permitted. The Company is assessing the potential
impact of this FSP on the convertible debt issuances.
In June
2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1, "Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting, and therefore need to be included in the earnings
allocation in computing earnings per share under the two-class method as
described in SFAS No. 128, Earnings per Share. Under the guidance of FSP EITF
03-6-1, unvested share-based payment awards that contain nonforfeitable rights
to dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings-per-share
pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and all
prior-period earnings per share data presented shall be adjusted
retrospectively. Early application is not permitted. The Company is assessing
the potential impact of this FSP on the earnings per share
calculation.
In June
2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument (or an
Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5"). EITF 07-5
provides that an entity should use a two-step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument's contingent exercise and settlement
provisions. EITF 07-5 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. Early application is not permitted. The
Company is assessing the potential impact of this EITF 07-5 on the financial
condition and results of operations.
Item 3.
|
Quantitative and Qualitative Disclosures about Market
Risk.
|
N/A.
Item
4T.
|
Controls
and Procedures.
|
Our
management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rule 13a-15(e)) under the
Exchange Act) that is designed to ensure that information required to be
disclosed by the Company in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
specified in the Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer's management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
Pursuant
to Rule 13a-15(b) under the Exchange Act the Company carried out an evaluation
with the participation of the Company’s management, including Bin Wang, the
Company’s President and Chief Executive Officer (“CEO”) and Ming Fen Liu, the
Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s
disclosure controls and procedures (as defined under Rule 13a-15(e) under the
Exchange Act) as of the three months ended August 31, 2008. Based upon that
evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports that the Company files or submits under
the Exchange Act, is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to the Company’s management, including the
Company’s CEO and CFO, as appropriate, to allow timely decisions regarding
required disclosure.
Changes in internal
controls
Our
management, with the participation our Chief Executive Officer and Chief
Financial Officer, performed an evaluation as to whether any change in our
internal controls over financial reporting occurred during the three
months ended August 31, 2008. Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that no change
occurred in the Company's internal controls over financial reporting during the
three months ended August 31, 2008 that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
PART
II –
OTHER INFORMATION
Item
1.
Legal
Proceedings.
To our knowledge, there is no material litigation
pending or threatened against us.
Item
1A.
Risk Factors.
N/A.
Item
2. Unregistered
Sale of Equity Securities and Use of Proceeds.
None.
Item
3. Defaults
Upon Senior Securities.
To
our knowledge, there are no material defaults upon senior
securities..
Item
4. Submission
of Matters to a Vote of Securities Holders.
None.
Item
5. Other
Information.
None.
(a)
Exhibits
31.1
|
|
Certification
Required Under Section 302 of Sarbanes-Oxley Act of 2002
*
|
31.2
|
|
Certification
Required Under Section 302 of Sarbanes-Oxley Act of 2002
*
|
32.1
|
|
Certification
Required Under Section 906 of Sarbanes-Oxley Act of 2002
*
|
32.2
|
|
Certification
Required Under Section 906 of Sarbanes-Oxley Act of 2002
*
|
* Filed
herewith.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
CHINA
SUN GROUP HIGH-TECH CO.
|
|
|
|
|
|
Date:
October 16, 2008
|
By:
|
/s/
Bin Wang
|
|
|
|
Name: Bin
Wang
|
|
|
|
Title: President,
Chief Executive Officer and Chairman
|
|
|
|
(Principle
Executive Officer)
|
|
|
.
|
|
|
|
|
|
Date:
October 16, 2008
|
By:
|
/s/
Ming Fen Liu
|
|
|
|
Name: Ming
Fen Liu
|
|
|
|
Title: Chief
Financial Officer
|
|
|
|
(Principle
Executive Officer)
|
|
|
|
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