Item 1. Business.
Introduction
We operate an educational facility under the name "Blue Tassel School" which provides a comprehensive curriculum required by the government of the Peoples Republic of China, supplemented by a broad range of elective courses which may be chosen from by our students. In addition, as a result of an acquisition completed in March 2009, we also provide recruitment and contract labor services to companies in the Su Zhou region of China. To the present date, we have only operated within the People's Republic of China. As used in this report, the terms "we," "our," "Company" and "China Ivy Schools" refers to China Ivy Schools, Inc. and its wholly-owned subsidiaries. All information in this report gives effect to a 1 for 20 reverse stock split effected in December 2008.
The Company's functional currency is the Renminbi, which had an average exchange rate of $0.13167 and $0.14396 during fiscal year 2007 and 2008 respectively.
BLUE TASSEL SCHOOL
Blue Tassel School ("BTS") is an education center located in Suzhou and organized under the laws of China. BTS is accredited by the Jiangsu Educational Committee as a boarding school comprising grades from kindergarten through senior school, including an international school. The five schools that comprise BTS are kindergarten, primary school, junior high school, senior high school, and international school.
The BTS International School has 15 foreign teachers with international teacher certification. They are primarily responsible for the teaching of English. BTS has built a cooperative relationship with other schools located in the United Kingdom, Australia, New Zealand and Hong Kong. The BTS International School has established preparatory classes with the BATH ACADEMY located in the United Kingdom, as the BLUE TASSEL-BATH ACADEMY. BTS has also established a program for exchange students, providing long- and short-term study abroad program, exchange of teachers, sharing of resources, and collaboration of courses. The BTS Kindergarten has 3 classes for children aged 2-6 years, and has developed appropriate learning programs for such students which include art, music and musical instruments performance, dance, skating, and computer programming. In order to develop the potential abilities of its students, BTS provides diverse options for its students.
The BTS Primary School provides elementary education for children aged 6 - -12 years and has 14 classes and 47 teachers in the six-year school.
The BTS Junior High School is a three-year middle school for children aged 12 - 15 years with 16 classes and 40 teachers.
The BTS Senior High School is a three-year high school for children aged 15 - 18 years with 24 classes and over 1,200 students. The curriculum and program are designed for preparing students to enter top tier universities.
BTS's education program includes compulsory level education, ample elective courses, activity courses, students' societies, clubs, and seminars presented by famous scholars and successful individuals. Large-scale social practices and educational activities compose a highly selective and personal
curriculum, where children can fully develop their personalities and discover their potentials. The comprehensive education system of BTS includes science, art, multi-language, information technology, international understanding, ethics and behavior, adolescence, and ideal seminars. Interaction between students and instructors, an efficient learning environment, and small class teaching are the core ideas for attentive learning and effective study.
BTS possesses facilities for teaching, learning, living, extracurricular activities and health care purposes. Such facilities are at the vanguard of educational platform, including a Chinese-English library, e-reading room, computer lab, multi-functional network system, varieties of labs for group study and experimental use, halls for music rehearsal and scholarly presentations. Other than academic facilities, BTS also has tennis courts, gyms, and other athletic facilities, as well as student apartments.
There were 1,925 students enrolled at BTS as of December 31, 2008.
Our Corporate History
The Company was incorporated on September 14, 1999, in and under the laws of the state of Nevada. At the time of our incorporation we were engaged in the business of developing an internet computer software program known as Clear Switch; a program that processes submission of internet web page information to major internet search engines. Although we attempted to develop this software program, we suspended these efforts due to our insufficient cash flow and inability to obtain financing to conduct further development of this software program.
On August 22, 2003, a share exchange agreement between the Company and the shareholders of Safe Cell Tab, Inc. ("SCT"), was executed whereby the Company acquired 100% of the shares of SCT, making SCT a wholly owned subsidiary. On March 31, 2004, an amendment to the share exchange agreement was entered into by the parties.
The share exchange agreement with SCT was undertaken as a means of complementing, augmenting and extending the early stage activities and business plans of the Company. As a result, the Company focused its resources on further development of SCT's business initiatives, resulting in SCT becoming the sole operating entity of the Company. The company anticipated that revenues resulting from sales of the SCT's product offerings and other complimentary SCT initiatives would provide additional gross revenues to the consolidated balance sheet and benefit of the Company. Complimentary SCT business initiative undertaken by the Company and SCT included the acquisition of, a master distributor Wi-Fi License and an inventory of the Mobius disposable cell phone, together with certain sales, distribution, and marketing rights.
On August 25, 2006, Xu Zuqiang ("Zuqiang"), the Company's former officer and director, and the Company consummated an Amendment to Stock Purchase Agreement (the "Amendment") whereby the parties modified certain provisions of the Stock Purchase Agreement between them dated as of June 1, 2006 (as so amended, the "Purchase Agreement"). Specifically, instead of the fifty thousand (50,000) (on a post-reverse stock split adjusted basis (see below)) shares of the Common Stock of the Company which Zuqiang purported to acquire pursuant to the original Purchase Agreement, Zuqiang acquired thirty seven thousand five hundred (37,500) (on a post-reverse stock split adjusted basis (see below)) shares of Common Stock of the Company and twelve thousand five hundred (12,500) (on a post-reverse stock split adjusted basis (see below)) shares of the preferred stock, par value $.001 per share (the "Preferred Stock"), of the Company for an aggregate purchase price of $550,000 (the "Stock Transaction"). After giving effect to the Stock Transaction, Zuqiang held, on a post-reverse stock split adjusted basis (see below), in addition to twelve thousand five hundred (12,500) shares of the Company's Preferred Stock, thirty seven thousand five hundred (37,500) of the fifty thousand (50,000) shares of our Common Stock, then issued and outstanding, constituting, in the aggregate, 75% of the issued and outstanding shares of Common Stock of the Company (80% after giving effect to the conversion of the Preferred Stock into Common Stock) effecting a change in the controlling interest of the Company.
The Stock Transaction effected a change in control of the Company. Prior to the closing of the Stock Transaction, Mr. Gus Rahim had been Chief Executive Officer, Chief Financial Officer, Secretary and a director of the Company, and William Russell had been a director of the Company. Effective upon the closing of the Stock Transaction and the filing and distribution of such documents as required under the Securities Exchange Act of 1934, as amended, and the expiration of all applicable grace periods, Zuqiang was appointed to, and Messrs. Russell and Rahim resigned from, the Board of Directors of the Company. In addition, Zuqiang was elected to serve as Chief Executive Officer and Secretary of the Company.
On September 5, 2006, the Company's Board of Directors and the then holder of a majority of the Company's then outstanding Common Stock approved the implementation of a one-for-one-hundred (1-for-100) reverse stock split (the "Reverse Stock Split") of the outstanding shares of the Company's Common Stock. The Reverse Stock Split became effective on October 11, 2006, whereby each 100 shares of the Company's issued and outstanding Common Stock was automatically combined into and became one share of Common Stock, thereby reducing the 6,250,000 of shares of Common Stock which were outstanding on a fully diluted basis immediately prior to the effectiveness of the Reverse Stock Split (which consisted of (i) 5,000,000 shares of Common Stock and (ii) 1,250,000 shares of Common Stock automatically issuable upon effectiveness of the Reverse Stock Split in respect of the 1,250,000 shares of Preferred Stock then outstanding) to approximately 62,500 shares of Common Stock.
Upon the effectiveness of the Reverse Stock Split, all issued and outstanding shares of Preferred Stock of the Company automatically converted on a one-for-one basis into shares of Common Stock of the Company. Pursuant to the Company's Certificate of Designation, if the Company effected a reverse stock split, the number of shares of Common Stock issuable upon conversion of the Preferred Stock immediately prior to such reverse stock split are to be proportionately decreased. Therefore, the issued and outstanding shares of Preferred Stock converted into 12,500 shares of Common Stock.
On October 12, 2006 (the "Effective Date"), the Company entered into and consummated a Share Exchange Agreement with Brighter International Limited ("BIL"), Blue Tassel School ("BTS"), and the shareholders of BIL (the "BIL Shareholders"), pursuant to which the Company acquired BIL in exchange for issuance of 2,762,500 shares of Common Stock of the Company to the BIL Shareholders (the "Share Exchange Transaction"), which was divided proportionally among the BIL Shareholders in accordance with their respective ownership interests in BIL immediately before the completion of the Share Exchange Transaction.
As a result of the Share Exchange Transaction, a change of control of the Company occurred as of the Effective Date. Prior to the Effective Date, the controlling shareholder of Company was Zuqiang, who held approximately 80% of the then issued and outstanding shares of Common Stock of the Company. As of the Effective Date, the BIL Shareholders became the controlling shareholders of the Company, owning in the aggregate 98% of the issued and outstanding shares of Common Stock of the Company as of the Effective Date. Yongqi Zhu ("Zhu"), the Company's present Chairman and Chief Executive Officer acquired 1,745,900 shares of the Common Stock of the Company. After giving effect to the Share Exchange Transaction, Zhu held 56.7% of the then-issued and outstanding shares of the Common Stock of the Company.
Prior to the closing of the Share Exchange Transaction, Zuqiang had been Chief Executive Officer, Chief Financial Officer, and sole director of the Company. Effective upon the filing and distribution of such documents as required under the Securities Exchange Act of 1934, as amended, and the expiration of all applicable grace periods, which occurred on November 12, 2006, Zhu (who prior to the Share Exchange Transaction was a shareholder of BIL), Qian Gao, Yipeng Lu, Fugeng Xia and Haiming Zhang were appointed, and Zuqiang resigned from, the Board of Directors of the Company.
Effective upon the close of business of October 27, 2006, Zuqiang resigned from his positions as Chief Executive Officer and Chief Financial Officer of the Company. As Sole Director of the Company, Zuqiang elected Zhu to serve as Chairman and Chief Executive Officer, Qian Gao to serve as Secretary and Jian Xue to serve as Chief Financial Officer; such appointments became effective upon the close of business of October 27, 2006, and continue to the date hereof.
Recent Developments
On March 18, 2008 Blue Tassel School sold the Land Use Right of 91,993.32 square meters and twenty Buildings of 50,113.81 square meters to its former shareholder Minglong Industry Co. Ltd. with the sales price of RMB 38,961,432.00 (approximately $5,563,692) and RMB 72,868,026 (approximately $10,405,554), respectively, totaling RMB 111,829,458.00 (approximately $15,969,246). Blue Tassel School leased back the buildings from Minglong Industry Co., Ltd. from the date of sales.
The lease payments made equal the amounts received from the sale. The leases are of RMB24 per square meter annually (approximately $3.4 per square meter annually), totaling RMB 2,207,840 (approximately $315,280) per year for using the land and RMB180 per square meter annually (approximately $35.6 per square meter annually), totaling RMB9,020,486 (approximately $1,288,125) per year for leasing the buildings. The total annual lease is RMB11, 228,326 (approximately $1,603,405).
On March 6, 2009, Blue Tassel School acquired 90% of the outstanding shares of the capital stock of Youbang Human Resource Company ("Youbang"), a Chinese company, from Jianwei Wu, Wei Li, Surong Gong, Changgen Ma, Yongxia Tan, Junhua Tang, and Xuehui Jiang in exchange for an aggregate of 20,000,000 shares of the Company's common stock pursuant to the Purchase Agreement.
Youbang provides recruitment and contract labor services to domestic and multinational manufacturing corporations in the Su Zhou region of China. It engages in "general labor assignment," in which the client company pays, insures and allocates work to personnel recruited by Youbang, and "special labor assignment," in which Youbang's employees, entirely directed, compensated and insured by Youbang, comprise the entirety of the client's workforce. In either circumstance Youbang's clients benefit from the intensive training it provides to its workers, and the high-quality labor management with which it directs them.
On March 6, 2009, the Board of Directors of the Company appointed Mr. Jianwei Wu, the chief executive officer of Youbang Human Resource Company since 2006, a director. From 1996 to 2006, Mr. Wu worked with Jiang Su Wu Zhong Economic and Technological Development Corporation as a Logistics Office director. From 1993 to 1995, he worked with Wu Zhong Economic Development Zone Materials Corporation as the manager in respect of marketing and sales activities.
Location of our Facilities
Our educational facilities are located in the city of Suzhou, in Jiangsu Province on the eastern coast of China. We are within 2 hours driving distance of Shanghai.
Youbang operates in SuZhou, China, in proximity to SuZhou Industrial Park, which is home to numerous global corporations.
Business Strategy
Through the acquisition of Youbang, we have expanded our operations into the sector of recruitment and contract labor services. We believe the acquisition of Youbang will diversify our operations, reduce our operation risk, and improve the profitability of the Company.
Competition
Our principal competitors in the education sector in our regon are
o Suzhou Foreign Language School(Kindergarten to Senior high)
o Suzhou Zhenhua School(Junior High)
o Suzhou Pingjiang School(Junior High)
Also competing with us are the public schools in our region, examples of which are:
o Suzhou Middle School
o Wuxi Guanghua School.
Government Regulation
We are responsible for compliance with all laws of the relevant to education within the country, as administered by the Ministry of Education of the Peoples Republic of China. These include, in pertinent part, the Education Law of the People's Republic of China, Higher Education Laws of the People's Republic of China, and the Vocational Education Laws of the Peoples Republic of China. Standards of teacher qualification, facilities management and suitability, student assessment and program content are among the most important of the areas which are specified in these regulations.
Because of our arrangements with the Bath Academy, as well as with educational institutions in Hong Kong, Australia, and New Zealand, we are also regulated by the Ministry's Department of International Cooperation and Exchanges.
Item 1A.
Item 1A. Risk Factors.
You should consider carefully each of the following business and investment risk factors and all of the other information in this report. If any of the following risks and uncertainties develops into actual events, the business, financial condition or results of our operations could be materially adversely affected. If that happens, the trading price of our shares of common stock could decline significantly. The risk factors below contain forward-looking statements regarding our business. Actual results could differ materially from those set forth in the forward-looking statements. See "Special Note Regarding Forward-Looking Information."
Risks Relating to Our Business
The unsuccessful integration of a business or business segment we acquire could have a material adverse effect on our results.
As part of our business strategy, we expect to acquire assets and facilities, some of which may not be related to or complementary to our operations. These acquisitions will involve risks commonly encountered in acquisitions. These risks include exposure to unknown liabilities of the acquired facilities, additional acquisition costs and unanticipated expenses. Our quarterly and annual operating results could fluctuate due to the costs and expenses of acquiring and integrating new facilities. We may also experience difficulties in assimilating the operations and personnel of acquired facilities. Our ongoing operations may be disrupted and our management's time and attention diverted from existing operations. Our acquisition strategy will likely require additional equity or debt financing, resulting in additional leverage or dilution of ownership. We cannot assure you that any future acquisition will be consummated, or that if consummated, that we will be able to integrate such acquisition successfully.
We depend on our students for our revenues, and any loss, cancellation, reduction, or interruption in our ability to provide educational services could harm our business.
In general, we have derived a material portion of our revenue from tuition payments from our students. If our student base were to be significantly reduced, our revenues and net income could significantly decline. Our success will depend on our continued ability to enroll significant numbers of new students. Any adverse change in our relationship with our students or employees may have a material adverse effect on our business. Although we are attempting to expand awareness of our services, we expect that our student enrollment will not change significantly in the near future. We cannot be sure that we will be able to retain our students or that we will be able to attract additional students, or that students will continue to enroll in our school in the same amounts as in prior years. Any reduction or interruption in the provision of educational services to our students, our inability to successfully enroll additional students, or future concessions in tuition rates or fees that we may have to make could significantly harm our business.
Attracting and retaining key personnel is an essential element of our future success.
Our future success depends to a significant extent upon the continued service of our executive officers, other key management, and our faculty, and on our ability to continue to attract, retain and motivate executive and other key employees, including those in managerial, technical, marketing and information technology support positions. Experienced teaching and technical, marketing and support personnel are in demand and competition for their talents is intense. The loss of the services of one or more of our key employees or our failure to attract, retain and motivate qualified personnel could have a material adverse effect on our business, financial condition and results of operations.
If we lose the services of our chairman and chief executive officer, our business may suffer.
We are dependent on Mr. Yongqi Zhu, our chairman and chief executive officer. The loss of his services could materially harm our business because of the cost and time necessary to retain and train a replacement. Such a loss would also divert management attention away from operational issues. We do not have key-man term life insurance policy on Mr. Zhu.
The labor assignment industry is relatively new in China and may not be maintained
Youbang, our newly acquired subsidiary, is engaged in recruiting and providing labor to other companies. This is a relatively new industry and there can be can be no assurance it will gain market acceptance.
Our inability to successfully manage the growth of our business may have a material adverse effect on our business, results or operations and financial condition.
We expect to experience growth in the number of employees and the scope of our operations as a result of internal growth and acquisitions. Such activities could result in increased responsibilities for management. Our future success will be highly dependent upon our ability to manage successfully the expansion of operations. Our ability to manage and support our growth effectively will be substantially dependent on our ability to implement adequate improvements to financial, inventory, management controls, reporting, order entry systems and other procedures, and hire sufficient numbers of financial, accounting, administrative, and management personnel.
Our future success depends on our ability to address potential market opportunities and to manage expenses to match our ability to finance operations. The need to control our expenses will place a significant strain on our management and operational resources. If we are unable to control our expenses effectively, our business, results of operations and financial condition may be adversely affected.
Our management is comprised almost entirely of individuals residing in the PRC with very limited English skills
Our management is comprised almost entirely of individuals born and raised in the PRC. As a result of differences in culture, educational background and business experiences, our management may analyze, evaluate and present business opportunities and results of operations differently from the way they are analyzed, evaluated and presented by management teams of public companies in Europe and the United States. In addition, our management has very limited skills in English. Consequently, it is possible that our management team will emphasize or fail to emphasize aspects of our business that might customarily be emphasized in a different manner by comparable public companies from different geographical and political areas.
We will face many of the difficulties that companies in the early stage may face.
We have a limited operating history as an education provider, which may make it difficult for you to assess our ability to identify merger or acquisition candidates and our growth and earnings potential. Therefore, we may face many of the difficulties that companies in the early stages of their development in new and evolving markets often face. We may continue to face these difficulties in the future, some of which may be beyond our control. If we are unable to successfully address these problems, our future growth and earnings will be negatively affected.
We cannot accurately forecast our future revenues and operating results, which may fluctuate.
Our short operating history and the rapidly changing nature of the markets in which we compete make it difficult to accurately forecast our revenues and operating results. Furthermore, our revenues and operating results may fluctuate in the future due to a number of factors, including the following:
o the success of identifying and completing mergers and acquisitions; o the introduction of competitive products by different or new competitors; o reduced demand for any given product; o difficulty in keeping current with changing technologies;
o increased or uneven expenses, whether related to sales and marketing, product development or administration; o deferral of recognition of our revenue in accordance with applicable accounting principles due to the time required to complete projects; and o costs related to possible acquisitions of technology or other educational facilities.
Due to these factors, forecasts may not be achieved, either because expected revenues do not occur or because they occur at lower prices or on terms that are less favorable to us. In addition, these factors increase the chances that our results could be lower than the expectations of investors and analysts. If so, the market price of our stock would likely decline.
Risks Related to Doing Business in the People's Republic of China
Our business operations take place primarily in the People's Republic of China. Because Chinese laws, regulations and policies are changing, our Chinese operations will face several risks summarized below.
- - Limitations on Chinese economic market reforms may discourage foreign investment in Chinese businesses.
The value of investments in Chinese businesses could be adversely affected by political, economic and social uncertainties in China. The economic reforms in China in recent years are regarded by China's central government as a way to introduce economic market forces into China. Given the overriding desire of the central government leadership to maintain stability in China amid rapid social and economic changes in the country, the economic market reforms of recent years could be slowed, or even reversed.
- - Any change in policy by the Chinese government could adversely affect investments in Chinese businesses.
Changes in policy could result in imposition of restrictions on currency conversion, imports or the source of supplies, as well as new laws affecting joint ventures and foreign-owned enterprises doing business in China. Although China has been pursuing economic reforms, events such as a change in leadership or social disruptions that may occur upon the proposed privatization of certain state-owned industries, could significantly affect the government's ability to continue with its reform.
- - We face economic risks in doing business in China.
As a developing nation, China's economy is more volatile than that of developed Western industrial economies. It differs significantly from that of the U.S. or a Western European country in such respects as structure, level of development, capital reinvestment, legal recourse, resource allocation and self-sufficiency. Only in recent years has the Chinese economy moved from what had been a command economy through the 1970s to one that during the 1990s encouraged substantial private economic activity. In 1993, the Constitution of China was amended to reinforce such economic reforms. The trends of the 1990s indicate that future policies of the Chinese government will emphasize greater utilization of market forces. For example, in 1999 the Government announced plans to amend the Chinese Constitution to recognize private property, although private business will officially remain subordinate to state-owned companies, which are the mainstay of the Chinese economy. However, we cannot assure you that, under some circumstances, the government's pursuit of economic reforms will not be restrained or curtailed. Actions by the central government of China could have a significant adverse effect on economic conditions in the country as a whole and on the economic prospects for our Chinese operations.
- - The Chinese legal and judicial system may negatively impact foreign investors.
In 1982, the National People's Congress amended the Constitution of China to authorize foreign investment and guarantee the "lawful rights and interests" of foreign investors in China. However, China's system of laws is not yet comprehensive. The legal and judicial systems in China are still under development, and enforcement of existing laws is inconsistent. Many judges in China lack the depth of legal training and experience that would be expected of a judge in a more developed country. Because the Chinese judiciary is relatively inexperienced in enforcing the laws that exist, anticipation of judicial decision-making is more uncertain than would be expected in a more developed country. It may be impossible to obtain swift and equitable enforcement of laws that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. China's legal system is based on written statutes; a decision by one judge does not set a legal precedent that is required to be followed by judges in other cases. In addition, the interpretation of Chinese laws may shift to reflect domestic political changes.
The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors. However, the trend of legislation over the last 20 years has significantly enhanced the protection of foreign investment and allowed for more control by foreign parties of their investments in Chinese enterprises. We cannot assure you that a change in leadership, social or political disruption, or unforeseen circumstances affecting China's political, economic or social life, will not affect the Chinese government's ability to continue to support and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.
The practical effect of the People's Republic of China's legal system on our business operations in China can be viewed from two separate but intertwined considerations. First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the general corporation laws of the several states. Similarly, the accounting laws and regulations of the People's Republic of China mandate accounting practices which are not consistent with U.S. Generally Accepted Accounting Principles. China's accounting laws require that an annual "statutory audit" be performed in accordance with People's Republic of China's accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the Peoples Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities, at the risk of business license revocation. Second, while the enforcement of substantive rights may appear less clear than United States procedures, Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies, which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Generally, the Articles of Association provide that all business disputes pertaining to Foreign Invested Enterprises are to be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden, applying Chinese substantive law. Any award rendered by this arbitration tribunal is, by the express terms of the respective Articles of Association, enforceable in accordance with the "United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958)." Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.
Because our principal assets are located outside of the United States and some of our directors and all of our executive officers reside outside of the United States, it may be difficult for you to enforce your rights based on the United States Federal securities laws against us and our officers and directors in the United States or to enforce judgments of United States courts against us or them in the People's Republic of China.
In addition, our operating subsidiaries and substantially all of our assets are located outside of the United States. You will find it difficult to enforce your legal rights based on the civil liability provisions of the United States Federal securities laws against us in the courts of either the United States or the People's Republic of China and, even if civil judgments are obtained in courts of the United States, to enforce such judgments in the courts of the People's Republic of China. In addition, it is unclear if extradition treaties in effect between the United States and the People's Republic of China would permit effective enforcement against us or our officers and directors of criminal penalties, under the United States Federal securities laws or otherwise.
- - Economic Reform Issues
Although the Chinese government owns the majority of productive assets in China, during the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, we are unable to assure you that:
o We will be able to capitalize on economic reforms; o The Chinese government will continue its pursuit of economic reform policies; o The economic policies, even if pursued, will be successful; o Economic policies will not be significantly altered from time to time; and o Business operations in China will not become subject to the risk of nationalization.
Since 1979, the Chinese government has reformed its economic systems. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.
Over the last few years, China's economy has registered a high growth rate. Recently, there have been indications that rates of inflation have increased. In response, the Chinese government recently has taken measures to curb this excessively expansive economy. These measures have included revaluations of the Chinese currency, the Renminbi (RMB), restrictions on the availability of domestic credit, and limited re-centralization of the approval process for purchases of some foreign products. These austerity measures alone may not succeed in slowing down the economy's excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy. The Chinese government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets.
To date, reforms to China's economic system have not adversely impacted our operations and are not expected to adversely impact operations in the foreseeable future; however, there can be no assurance that the reforms to China's economic system will continue or that we will not be adversely affected by changes in China's political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions.
Risks Associated with Doing Business in China
We are subject to risks associated with our operations which may affect our results.
The field of education in the PRC has drawbacks that the same industry does not have within the United States. For instance:
o In China, insurance coverage is a relatively new concept compared to that of the United States and for certain aspects of a business operation, insurance coverage is restricted or expensive. Workers compensation for employees in the PRC may be unavailable or, if available, insufficient to adequately cover such employees.
o The laws and regulations in the PRC set various standards regulating certain aspects of health and environmental quality, including, in some cases, the environment in which educational activities and teaching facilities may be located, or what methods, procedures or substances may be used in the conduct of certain classes. Violation of those standards could result in a temporary or permanent restriction by the PRC of our operations.
We cannot assure you that we will be able to adequately address any of these or other limitations.
Our earnings and, therefore our profitability, may be affected by price volatility.
We anticipate that the majority of our future revenues will be derived from the providing of educational services, and, as a result, our earnings are directly related to the prices of these services. There are many factors influencing the price of these services including expectations for inflation; regional demand and our ability to meet it; political and economic conditions; and labor costs. These factors are beyond our control and are impossible for us to predict. As a result, price changes may adversely affect our operating results.
Our educational business operations and related activities are subject to PRC government regulations concerning education.
We may have to make a significant financial commitment to ensure that we remain compliant with the regulations affecting education providers. Compliance with existing and future regulations may increase our operating costs and may adversely affect our operating results.
Risks Relating to our Common Stock and our Status as a Public Company
The price of our common stock may be affected by a limited trading volume and may fluctuate significantly.
There has been a limited public market for our common stock and we cannot assure you that an active trading market for our stock will develop or if developed, will be maintained. The absence of an active trading market may adversely affect our stockholders' ability to sell our common stock in short time periods, or possibly at all. In addition, we cannot assure you that you will be able to sell shares of common stock that you have purchased without incurring a loss. The market price of our common stock may not necessarily bear any relationship to our book value, assets, past operating results, financial
condition or any other established criteria of value, and may not be indicative of the market price for the common stock in the future. In addition, the market price for our common stock may be volatile depending on a number of factors, including business performance, industry dynamics, and news announcements or changes in general economic conditions.
We have not and do not anticipate paying any dividends on our common stock; because of this our securities could face devaluation in the market.
We have paid no dividends on our common stock to date and it is not anticipated that any dividends will be paid to holders of our common stock in the foreseeable future. While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that any earnings will be retained to finance our future expansion and for the implementation of our business plan. As an investor, you should take note of the fact that a lack of a dividend can further affect the market value of our stock, and could significantly affect the value of any investment in our Company.
We will continue to incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance requirements.
As a public company we incur significant legal, accounting and other expenses under the Sarbanes-Oxley Act of 2002, together with rules implemented by the Securities and Exchange Commission and applicable market regulators. These rules impose various requirements on public companies, including requiring certain corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, commencing in 2007, we must perform system and process evaluations and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Compliance with Section 404 may require that we incur substantial accounting expenses and expend significant management efforts. If we are not able to comply with the requirements of Section 404 in a timely manner, or if our accountants later identify deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other applicable regulatory authorities.
Lack of management control by owners of our common stock .
Our Board of Directors has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stock holders and with the ability to adversely affect stockholder voting power and perpetuate the board's control over the Company.
Our certificate of incorporation authorizes the issuance of up to 50,000,000 shares of preferred stock. Our Board of Directors by resolution may authorize the issuance of preferred stock in one or more series with such limitations and restrictions as it may determine, in its sole discretion, with no further authorization by security holders required for the issuance thereof. The Board may determine the specific terms of the preferred stock, including: designations; preferences; conversions rights; cumulative; relative; participating; and optional or other rights, including: voting rights; qualifications; limitations; or restrictions of the preferred stock.
The issuance of preferred stock may adversely affect the voting power and other rights of the holders of common stock. Preferred stock may be issued quickly with terms calculated to discourage, make more difficult, delay or prevent a change in control of our company or make removal of management more difficult. As a result, the Board of Directors' ability to issue preferred stock may discourage the potential hostile acquirer, possibly resulting in beneficial negotiations. Negotiating with an unfriendly acquirer may result in terms more favorable to us and our stockholders. Conversely, the issuance of preferred stock may adversely affect any market price of, and the voting and other rights of the holders of the common stock. We presently have no plans to issue any preferred stock.
We may issue shares of our capital stock or debt securities to complete an acquisition, which would reduce the equity interest of our stockholders or subject our company to risks upon default
We may issue our securities to acquire companies or assets. Most likely, we will issue additional shares of our common stock or preferred stock, or both, to complete acquisitions. If we issue additional shares of our common stock or shares of our preferred stock, the equity interest of our existing stockholders may be reduced significantly, and the market price of our common stock may decrease. The shares of preferred stock we issue are likely to provide holders with dividend, liquidation and voting rights, and may include participation rights, senior to, and more favorable than, the rights and powers of holders of our common stock.
If we issue debt securities as part of an acquisition, and we are unable to generate sufficient operating revenues to pay the principal amount and accrued interest on that debt, we may be forced to sell all or a significant portion of our assets to satisfy our debt service obligations, unless we are able to refinance or negotiate an extension of our payment obligation. Even if we are able to meet our debt service obligations as they become due, the holders of that debt may accelerate payment if we fail to comply with, and/or are unable to obtain waivers of, covenants that require us to maintain certain financial ratios or reserves or satisfy certain other financial restrictions. In addition, financial and other covenants in the agreements we may enter into to secure debt financing may restrict our ability to obtain additional financing and our flexibility in operating our business.
We have significant indebtedness. We are significantly leveraged and our indebtedness is substantial in relation to our stockholders' equity. Our ability to make principal and interest payments will depend on future performance, which is subject to many factors, some of which are outside our control. In the case of a continuing default with respect to this indebtedness, the lender will have the right to foreclose on our assets, which would have a material adverse effect on our business. Payment of principal and interest on this indebtedness may limit our ability to pay cash dividends to stockholders and the documents governing this indebtedness prohibit the payment of cash dividends in certain situations. Our leverage may also adversely affect our ability to finance future operations and capital needs, may limit our ability to pursue business opportunities and may make our results of operations more susceptible to adverse economic conditions.
Future sales of our common stock, or the perception that such sales could occur, could have an adverse effect on the market price of our common stock.
We have approximately 23,082,500 shares of our common stock outstanding. There are a limited number of holders of our common stock. Future sales of our common stock, pursuant to a registration statement or Rule 144 under the Securities Act, or the perception that such sales could occur, could have an adverse effect on the market price of our common stock. The number of our shares available for sale pursuant to registration statements or Rule 144 is very large relative to the trading volume of our shares. Any attempt to sell a substantial number of our shares could severely depress the market price of our common stock. In addition, we may use our capital stock in the future to finance acquisitions and to compensate employees and management, which will further dilute the interests of our existing shareholders and could also depress the trading price of our common stock.
Our business may be adversely affected by conditions in the financial markets and economic conditions generally.
In recent months, economic conditions worldwide and particularly in China have deteriorated significantly, and may remain depressed for the foreseeable future. These conditions make it difficult for us to accurately forecast and plan future business requirements, and could cause us to slow or reduce our business activities. Furthermore, during challenging economic times, we may face issues gaining timely access to financing or capital infusion, which could result in an impairment of our ability to continue our business activities. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, in China, or in our industry.
These and other economic factors could have a material adverse effect on our financial condition and operating results. In addition, further negative market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, lessened demand for our products and services, and increased default rates among our clients . A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in our industry.
Item 2.
Item 2. Properties.
Our educational and principal operating facilities are located at 1 Suhua Road, Shiji Jinrong Building Suite 801, Suzhou Industrial Park, Jiangsu Province, 215020, P.R. China. Our facilities consist of twenty buildings with 50,113 square feet of space housed on approximately 92,000 square meters of land. The term of the lease expires March 2018 and the minimum rent for the next five years is $1,645,735 per annum.
The principal facility from which Youbang operates is located at 105-205 Labor Service Market, Huashan Road, Suzhou New District, Jiangsu Province, P.R. China 215129.
Item 3.
Item 3. Legal Proceedings.
We are not a party to any legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
On September 30, 2008, a majority of the holders of our issued and outstanding stock approved, by written consent of in lieu of a special meeting, a 1-for-20 reverse split of our stock.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Our Common Stock
Our common stock is traded in the over-the-counter market (the OTC Bulletin Board). From December 29, 2008, the date we effected a 1-for-20 reverse stock split of our common stock, to the present, our common stock has been quoted under the symbol "CIVS.OB".
The prices set forth below reflect the quarterly high and low closing price information for shares of our common stock for the periods indicated. These quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions. The prices set forth below have been adjusted to reflect out 1-for-20 reverse stock split effected December 29, 2008.
High Low ---- --- First Quarter $ 4.10 $ 1.60 Second Quarter $ 2.20 $ 0.60 Third Quarter $ 1.06 $ 0.60 Fourth Quarter $ 0.18 $ 0.024
First Quarter $ 22.00 $ 13.00 Second Quarter $ 35.00 $ 10.30 Third Quarter $ 30.00 $ 5.20
Fourth Quarter $ 10.00 $ 4.00
As of March 30, 2009, our common stock was held of record by approximately 27 stockholders, some of whom may hold shares for beneficial owners and have not been polled to determine the extent of beneficial ownership.
We have never paid cash dividends on our common stock. Holders of our common stock are entitled to receive dividends, if any, declared and paid from time to time by the Board of Directors out of funds legally available. We intend to retain any earnings for the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon future earnings, results of operations, capital requirements, our financial condition and other factors that our Board of Directors may consider.
Our Equity Compensation Plans
The following table provides information as of December 31, 2008 about our equity compensation plans and arrangements.
Equity Compensation Plan Information - December 31, 2008
Purchases of Equity Securities by the Company and Affiliated Purchasers
During the fourth quarter of our fiscal year ended December 31, 2008, neither we nor any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Exchange Act) purchased any shares of our common stock, the only class of our equity securities registered pursuant to section 12 of the Exchange Act.
Recent Sales of Unregistered Securities
On March 6, 2009, the Company issued an aggregate of 20,000,000 shares of its common stock to Jianwei Wu, Wei Li, Surong Gong, Changgen Ma,Yongxia Tan, Junhua Tang, and Xuehui Jiang in connection with the acquisition by Su Zhou Blue Tassel School, its wholly-owned subsidiary, of 90% of the outstanding shares of the capital stock of Youbang Human Resource Company, a Chinese company, pursuant to the Purchase Agreement.
Item 6.
Item 6. Selected Financial Data.
Not applicable.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
The following discussion should be read in conjunction with our financial statements and notes thereto included in this report. All information presented herein is based on our fiscal years ended December 31, 2008 and 2007. Because the acquisition of Youbang occurred in March 2009, the financial statements included with this filing and the financial discussion below do not reflect its operations. Financial statements reflecting the operations of Youbang will be filed in an 8-K in accordance with the regulations of the Securities and Exchange Commission.
Results of Operations
Comparison of Revenue for the Years Ended December 31, 2008 and 2007
2008 2007 ----------- ----------- Revenue Tuition fees $ 5,253,656 $ 6,254,262 Accommodation fees 570,454 604,141 Other 256,667 271,112 ----------- ----------- Total Revenue $ 6,080,777 $ 7,129,515 =========== ===========
Net revenue for the year ended December 31, 2008 totaled $6,080,777, a decrease of $1,048,738, or approximately 15% compared to $7,129,515 for the year ended December 31, 2007. The revenue from tuition fees was $5,253,656 for the year ended December 31, 2008, a decrease of $1,000,606, or 16% compared to $6,254,262 for the year ended December 31, 2007. The decrease in tuition fees was primarily contributable to reduced enrollment fees and reduced collections of tuition fees from third parties. Our current enrollment (as of December 31, 2008) was 1,925 students, a decrease of 145 students, or 7%, compared to an enrollment of 2,070 students as of December 31, 2007.
Comparison of Operating Expenses for the Years Ended December 31, 2008 and 2007
2008 2007 ----------- ----------- Operating Expenses Teachers salaries and related expenses $ 1,789,290 $ 1,878,743 Professional and consulting fees 1,897,765 1,928,440 Rental and related expenses 1,481,290 176,017 Depreciation and amortization expenses 1,146,903 983,247 Other general and administrative expenses 1,141,823 1,026,533 ----------- ----------- Total Operating Expenses $ 7,457,071 $ 5,992,980 =========== ===========
Operating expenses for the year ended December 31, 2008 totaled $7,457,071, representing an increase of $1,464,091, compared to $5,992,980 for the year ended December 31, 2007. The increase in operating expenses was mainly due to an increase in rental and related expenses of $1,305,273 as a result of the sale and lease back of our buildings and land use right in March 2008.
Comparison of Other Income and Expenses for the Years Ended December 31, 2008 and 2007
Other income and expense for the year ended December 31, 2008 totaled a net expense of $3,826,275, an increase of $3,055,117, compared to net expense of $771,758 for the year ended December 31, 2007. The increased net expense mainly resulted from the loss on sale and leaseback of real property to a related party. (See note 4 to Financial Statements). The loss represents the difference between the carrying value of the property sold and the fair value of the consideration received - i.e., the present value of future cash inflows (lease payments). The Company recorded a loss of $5,169,294 at the date of the transaction. The discount will be accreted in proportion to the payments received and will be recorded under the caption "accretion of discount" in the other income section. During 2008, the accretion of discount totaled $2,280,191. The net effect is a $2,889,103 increase of other expenses for the year ended December 31, 2008.
Comparison of Income (Loss) from Continuing Operations for the Years Ended December 31, 2008 and 2007
Our loss from continuing operations was $5,203,169 for the year ended December 31, 2008 compared to income from continuing operations of $364,777 for the year ended December 31, 2007. The net loss in 2008 was a consequence of the decrease in revenue and increase in operating expenses and other expenses described above.
Liquidity and Capital Resources
Cash has historically been generated from operations. Operations and liquidity needs are funded primarily through cash flows from operations and short-term borrowings. Cash and cash equivalents were $58,984 and $227,887 at December 31, 2008 and 2007, respectively. The current assets totaled $62,955 and $928,502 at December 31, 2008 and 2007, respectively. The Company's total current liabilities were $13,320,723 and $11,444,022 at December 31, 2008 and 2007, respectively. Working capital deficit was $13,257,768 and $10,515,520 at December 31, 2008 and 2007, respectively.
Net cash provided by operating activities was $2,455,012 and $3,723,962 for the year ended December 31, 2008 and 2007, respectively. The decrease in net cash provided by operating activities was a result of a decrease in our accounts payable and accrued expenses. As of December 31, 2008, our accounts payable and accrued expenses were $938,120, a decrease of $2,042,288, compared to $$2,980,408 at December 31, 2007.
During 2008, repayment of bank borrowings was $4,606,720, compared to $1,975,050 in 2007. Net cash received from related party was $1,641,232 during 2008.
Historically, operations, short term financing and the sale of our company stock have been sufficient to meet our cash needs. Our school is a reputable school in the City of Suzhou. The tuition income will be relatively stable in the foreseeable future. We believe that we will be able to generate enough cash through our school to cover our daily operating needs in the next twelve months, and that the acquisition of Youbang will not require substantial cash infusions in the immediate future. We will focus our efforts on reducing operating costs, especially administrative expenses in the next twelve months. However, our actual working capital needs for the long and short term will depend upon numerous factors, including operating results, competition, and the availability of credit facilities, none of which can be predicted with certainty. Future expansion will be limited by the availability of capital.
Critical Accounting Policies and Estimates
Financial Reporting Release No. 60, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
General
The Company's Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Board of Directors. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
The Company's revenue consists of tuition fees, donated tuition fees, accommodation fees and others. Those fees will usually be paid in advance at the beginning of a semester. Spring semester runs from February to July. Autumn semester runs from August to January. The Company will prorate the fees collected to applicable months during the semester and realize the revenue in the corresponding period and record unrealized fees collected as deferred income. As of December 31, 2008, the deferred income totaled $930,100, which represents fees applied for the month of January 2009 and advance payments for the spring semester.
Fair Value of Financial Instruments
In connection with the determination of accounts receivable from related party (Note 4), the Company used the following assumptions to calculate the present value at the date of the transactions: (1), annual rent payments of $1,603,405; (2), term of ten years; (3), interest rate of 7% per annum.
Foreign Currency Translation
The consolidated financial statements of the Company are translated pursuant to SFAS No. 52, "Foreign Currency Translation." The Company's subsidiary, Blue Tassel School, is located and operated in China. The Chinese Yuan is the functional currency. The financial statements of Blue Tassel School are translated to U.S. dollars using year-end exchange rates (published by the Federal Reserve Bank) for assets and liabilities, and average exchange rates (published by the Federal Reserve Bank) for revenues, costs and expenses. Translation gains and losses are recorded in accumulated other comprehensive income as a component of stockholders' equity. Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations.
Off-Balance Sheet Arrangements
We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Item 8.
Item 8. Financial Information and Supplementary Data.
The financial information required by this item is attached hereto beginning on page.
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
On June 23, 2008 the Company elected to terminate the services of Kabani & Company, Inc. as the Company's independent auditors.
Kabani & Company, Inc. performed the audits for the two year period ended December 31, 2007 and 2006, which did not contain any adverse opinion or a disclaimer of opinion, nor was the opinion as to either audit qualified or modified as to uncertainty, audit scope or accounting principles.
The decision to change accountants was approved by the Company's Board of Directors.
During the Company's two most recent fiscal years and during any subsequent interim period prior to the June 23, 2008, termination as the Company's independent auditors, there were no disagreements with Kabani & Company, Inc, with respect to accounting or auditing issues of the type discussed in Item 304(a)(iv) of Regulation S-K.
On June 23, 2008, the Company's board of directors approved the engagement of the firm of Michael T. Studer CPA, P.C., (the "Studer Group") Suite 311, 18 East Sunrise Highway, Freeport, New York 11520 as the Company's independent auditors. Such appointment was accepted by Michael T. Struder, principal partner of the firm.
During the Company's two most recent fiscal years or any subsequent interim period prior to engaging the Studer Group, neither the Company, nor any other person on the Company's behalf, had consulted with the Studer Group regarding the application of accounting principles to a specified transaction or the type of audit opinion that might be rendered on the Company's financial statements.
On June 24, 2008, Kabani & Company, Inc. was supplied a copy of this disclosure and requested that it furnish a letter to the Company, addressed to the SEC, stating that it agreed with the statements made herein or the reasons why it disagreed.
Item 9A(T).
Item 9A(T). Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, under the supervision and with the participation of our management, including Mr. Yongqi Zhu, our Chairman and Chief Executive Officer and Mr. Jian Xue, our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2008. Based on that evaluation, Mr. Zhu and Mr. Xue concluded that because of the material weakness in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of December 31, 2008.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in the Securities and Exchange Act of 1934 rules. Management, under our supervision, conducted an evaluation of the effectiveness of the company's internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in Internal Control - Integrated Framework, management concluded that the company's internal control over financial reporting was not effective as of December 31, 2008.
Internal control over financial reporting refers to the process designed by, or under the supervision of Mr. Yongqi Zhu, our Chief Executive Officer, and Mr. Jian Xue, our Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with their review of our internal controls over financial reporting for the fiscal year ended December 31, 2008, our management concluded that there were several significant deficiencies that when combined, resulted in a material weakness in our internal controls over our ability to produce financial statements free from material misstatements. The material weakness resulted from a combination of the following significant deficiencies:
o Lack of documentation and review of financial information by our accounting personnel with direct oversight responsibility, and lack of analysis and reconciliation of certain accounts on a periodic basis, and the failure of the accounting system to provide information related to expenditures on a project-by-project basis;
o Lack of timely identification, research and resolution of accounting issues and lack of documentation of consideration of recent accounting pronouncements;
o Absence of documented controls over our related party transactions; and
o Lack of technical accounting expertise among senior financial staff regarding US GAAP and the requirements of the PCAOB, and regarding the preparation of draft financial statements. The above-noted material weaknesses were first noted in management's review for the year ended December 31, 2007. Although the Company has attempted to rectify these deficiencies, certain of them remain, and the Company will continue to seek to rectify them.
These weaknesses, which caused our management to conclude that our internal control over financial reporting was not effective as of December 31, 2007, were however improved upon significantly in 2008, and we expect that these steps, when further implemented in the near term, will correct the material weaknesses described above. We do not believe that the costs of remediation for the above material weaknesses will have a material effect on our financial position, cash flow, or results of operations.
Changes in Internal Control over Financial Reporting
In order to further enhance our internal controls, our management, with the participation of Mr. Zhu and Mr. Xue, has recommended the implementation of the following changes by the end of the second quarter of 2009:
o the restructuring of our relationships with related parties to address our controls over related party transactions;
o the hiring of additional accounting personnel to assist us in the timely identification, research and resolution of accounting issues and with our documentation processes;
o the hiring of additional high-level accounting personnel with experience in US GAAP to monitor all financial and accounting affairs throughout the Company; and
o the engagement of a third-party financial consulting firm to assist management in evaluating complex accounting issues on an as-needed basis, and the implementation of systems to improve control and review procedures over all financial statement and account balances.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
During the fiscal year ended December 31, 2008, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the fiscal year covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except as otherwise noted above.
Item 9B.
Item 9B. Other Information.
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act.
The following table sets forth information with respect to the current directors and executive officers of the Company.
Name of Individual Age Position with the Company ------------------------------------------------------------------- Yongqi Zhu 51 Director, Chief Executive Officer Qian Gao 27 Director, Secretary Jian Xue 39 Chief Financial Officer Yipeng Lu 46 Director Fugeng Xia 68 Director Haiming Zhang 46 Director Jianwei Wu 38 Director
The business experience of each director and executive officer of the Company is set forth below.
Yongqi Zhu -
Mr. Zhu graduated from Zuzhou University and Beijing University and received an MBA degree at Singapore Nanyang Technological University. He previously worked at several governmental departments of Wuxian, Jiangsu Province as office manager, deputy general manager, general manager and Communist Party secretary. His outstanding performance at each of these positions led to a great deal of appreciation from his colleagues and community. With support from the government and with great enthusiasm for contributing to the education industry, Zhu started Blue Tassel School in 2001. Zhu also served as the manager of Brighter International Limited ("BIL").
Qian Gao -
Ms. Gao graduated from Foreign Yangzhou University in 2004, majoring in English. In 2003, while a student at Foreign Yangzhou University, Ms. Gao was chosen to continue her studies at Valdosta State University, located at Valdosta, Georgia, U.S.A. She worked at the Project Promotion Bureau of Suzhou Wuzhong Economic Development Zone, as a project manager and served as a vice director of the department from 2004 to 2006. In October 2006, she joined Brighter International Limited ("BIL").
Jian Xue -
Ms. Xue graduated from Nanjing Institute of Financial, majoring in accounting. Ms. Xue is an experienced accountant and worked at several of China's renowned accounting companies both as an accountant and as an auditor. Ms. Xue has also worked at Suzhou Governmental Chemical Union as an accounting specialist. From 1998 to 2002, she worked at Suzhou Jiatai Union, an accounting company, and served as office manager and deputy director. Ms. Xue has experience in the fields of administration management and financial management. In 2002, Ms. Xue joined BIL.
Yipeng Lu -
Mr. Lu began his teaching career at High School Affiliated to Nanjing Normal University after graduating from Nanjing Normal University in 1983. In 1989, as a representative of China's young teachers, Mr. Lu was chosen by China's Education Commission to continue his studies in Japan. During 1995 Mr. Lu served as the principal of the High School Affiliated to Nanjing Normal University. In July 2001 Mr. Lu, as one of the sponsors, joined BTS. Currently he is the principal of BTS; serves as vice-president of the provincial educational association; is a supervisor of post-graduate master students in the Chemistry Department of Nanjing Normal University; and is a visiting professor at Nanjing Xiaozhuang College. Since 1992 Mr. Lu has been recognized as one of Nanjing's top chemistry teachers and one of the top ten teachers in Nanjing. In 1997 he was recognized as the outstanding education specialist of Jiangsu Province and awarded the gold prize for excellence in education by Hong Kong's Bonington Education Foundation.
Fugeng Xia -
Mr. Xia was chosen as one of China's top educators in 1989. In 1992 he served as vice-principal of Suzhou No. 10 High School. At the same time, he was the director for the Olympic Mathematics Contests. Mr. Xia educated and coached a large number of students who won the first prize in the national and provincial Olympic Mathematics Contests. Mr. Xia has written more than ten theses which were published by important national level journals. Mr. Xia joined BTS in July of 2001. Currently he is not only the vice-principal of BTS, but also serves as a director of Jiangsu Provincial High School Mathematics Association, as well as being the vice-president of Suzhou High School Mathematics Association. In addition to his educational activities, Mr. Xia has been a standing member of the National People's Congress, and served as a representative in the tenth session of the Suzhou Municipal People's Congress.
Haiming Zhang -
Mr. Zhang graduated from Nanjing Normal University in 1983, and began his teaching career at High School Affiliated to Nanjing Normal University in 1992. He was the coach of the International Olympic Physics Contest in Nanjing for 10 years and trained and mentored a large number of students who won the first prize in national and provincial Olympic Physics Contests. Mr. Zhang was the director of the Dean's Office at High School Affiliated to Nanjing Normal University. Mr. Zhang, as one of the sponsors, joined Blue Tassel School in July 2001. Mr. Zhang has written more than ten theses which were published in distinguished national and provincial teaching journals in the fields of management, science and technology education, and physics.
Jianwei Wu -
Mr. Wu, the director of Youbang Human Resource Company since 2006, was appointed as the director of the Company on March 6, 2009. From 1996 to 2006, Mr. Wu worked with Jiang Su Wu Zhong Economic and Technological Development Corporation as a Logistics Office director. From 1993 to 1995, he worked with Wu Zhong Economic Development Zone Materials Corporation as a manager of marketing and sales activities.
DIRECTOR COMPENSATION
Directors of the Company are not compensated in cash for their services but are reimbursed for out-of-pocket expenses incurred in furtherance of our business.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, as amended, requires the Company's executive officers, directors and persons who beneficially own more than 10% of China Ivy's common stock to file reports of their beneficial ownership and changes in ownership (Forms 3, 4 and 5, and any amendment thereto) with the SEC. Executive officers, directors, and greater-than-ten percent holders are required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of such forms received by it, except as provided below, the Company believes that all filing requirements applicable to its directors, executive officers and beneficial owners of 10% or more of the common stock have been complied with since April 14, 2003, the date that the Company registered on Form 8-A its class of common stock under Section 12(g) of the Securities Exchange Act of 1934, as amended.
Code of Ethics
The Company has not yet adopted a code of ethics to apply to its principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions because, until recently, we have not been an operating company. The Company expects to prepare a Code of Ethics in the near future.
Audit Committee
Presently we do not have an Audit Committee. We intend to establish an Audit Committee and such other committees as may be required when sufficient members and resources are available, and at such time the Company's Board of Directors will establish the Audit Committee. The Audit Committee will have a designated Audit Committee Financial Expert who will be responsible for reviewing the results and scope of the audit, and other services provided by the independent auditors, and review and evaluate the system of internal controls. No final determination has yet been made as to the memberships of these committees or when we will have sufficient members to establish the committees.
Item 11.
Item 11. Executive Compensation.
The following sets forth the annual and long-term compensation for the fiscal year ended December 31, 2008 and 2007, paid to the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). No director, officer or employee has a contract or commitment to receive annual compensation in excess of $100,000.
2008 2007 ---- ----
Yongqi Zhu, Chief Executive Officer $ 17,653 $137,100 Jian Xue, Chief Financial Officer $ 11,805 $ 27,420
Summary Compensation Table
Summary Compensation Table
The Company currently has no formal written salary arrangement with its Chief Executive Officer and, while no specific annual salary or length of employment has been determined, the Company anticipates providing an annual salary not to exceed $100,000 commencing with the successful expansion of business. The salary will be paid out of revenues, if any, or accrued if sufficient cash is not available to make payments.
Outstanding Equity Awards at Fiscal Year-End Table
The Company does not currently have a pension plan, stock option plan, non-equity incentive plan or deferred compensation arrangement. We plan to implement a more comprehensive compensation program, which takes into account other elements of compensation, including but not limited to non-cash and other equity-based compensation such as stock options, but did not do so during the year ended December 31, 2008.
NONE
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management Related Stockholder Matters.
We have 23,082,500 shares of common stock outstanding as of March 27, 2009. The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 27, 2009 by: (i) each person who, to our knowledge, beneficially owns more than 5% of our common stock; (ii) each of our current directors and executive officers; and (iii) all of our current directors and executive officers as a group. Unless otherwise noted below, we believe that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. For purposes hereof, a person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date hereof upon the exercise of warrants or options or the conversion of convertible securities. Each beneficial owner's percentage ownership is determined by assuming that any warrants, options or convertible securities that are held by such person (but not those held by any other person) and which are exercisable within 60 days from the date hereof, have been exercised.
The address of each of our current officers and directors is 1 Suhua Road, Shiji Jinrong Building Suite 801, Suzhou Industrial Park, Jiangsu Province, 215020, P.R. China.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Minglong is controlled by Yongqi Zhu, the chief executive officer and a shareholder of the Company. On May 24, 2007 the Company obtained the Property Titles on twenty buildings and accompanying infrastructures located in Suzhou City Wuzhou Economy Development District from its former shareholder Minglong, totaling 50,113.81 square meters, which were and are pledged under bank borrowings. The net historical value of the buildings transferred amounted to approximately $10,441,053 as of December 31, 2007.
On May 24, 2007, the Company obtained the National Land Use Right and house property title for the land, buildings and accompanying infrastructures where Blue Tassel School is operating from the former shareholder Minglong. The piece of land totals 91,993.32 square meters, and was and is pledged under bank borrowings. The land use right will expire on January 17, 2051. The land use right was recorded at $5,516,431 net of accumulated amortization expense of $69,929 as of December 31, 2007.
On March 12, 2008, Blue Tassel School sold the Land Use Right of 91,993.32 square meters and twenty Buildings of 50,113.81 square meters to its former shareholder Minglong with the sales price of $5,563,692 and $10,405,554 respectively, totaling $15,969,246 (RMB111,829,458). Blue Tassel School leased back the buildings from Minglong from the date of sale.
On March 12, 2008, Blue Tassel School sold the Land Use Right of 91,993.32 square meters and twenty Buildings of 50,113.81 square meters to its former shareholder Minglong with the sales price of $5,563,392 and $10,405,554 respectively, totaling $15,933,526 (RMB111,829,458). Blue Tassel School leased back the land use right and buildings from Minglong from the date of sale.
Item 14.
Item 14. Principal Accountant Fees and Services.
The following table sets forth the fees accrued or paid to the Company's independent registered public accounting firms during fiscal years 2008 and 2007. The Company's financial statements for the year ended by December 31, 2008 were audited by Michael T. Studer, CPA, P.C. The Company's financial statements for the year ended by December 31, 2007 were audited by Kabani & Company, Inc.
Fiscal Year Ended December 31, 2008* December 31, 2007 Audit Fees $50,000 $35,000 Audit-Related Fees None None Tax Fees None None All Other Fees None None
*Kabani & Company Inc. received $8,500 for its work during the first quarter of 2008, prior to its replacement by Michael Studer CPA P.C.
Item 15.
Item 15. Exhibits.
Exhibit No. Description - ----------- -----------
LIST OF EXHIBITS
2.2 Share Exchange Agreement between Safe Cell Tab Inc. and Registrant, incorporated herein by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K filed on September 4, 2003. 2.3 Amended Share Exchange Agreement between Safe Cell Tab Inc. and Registrant, incorporated herein by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K/A filed on March 26, 2004. 3.1 Articles of Incorporation, incorporated herein by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form SB-2 filed on January 26, 2001. 3.2 Bylaws, incorporated herein by reference to Exhibit 3.2 (I) to the Registrant's Registration Statement on Form SB-2 filed on January 26, 2001. 3.3 Amended Bylaws, incorporated herein by reference to Exhibit 3.2 (II) to the Registrant's Registration Statement on Form SB-2 filed on January 26, 2001. 3.4 Amended Bylaws, incorporated herein by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-QSB filed on February 2, 2004. Disclosure Statement in favor of Plan of Reorganization, incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed on August 29, 2004. 3.5 Certificate of Correction to the Certificate of Correction to the Articles of Incorporation, incorporated herein by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on August 29, 2006. 3.6 Certificate of Designations to the Articles of Incorporation, designating Series A Convertible Preferred Stock, incorporated herein by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed on August 29, 2006. 3.7 Certificate of Amendment to Articles of Incorporation changing the name from Claremont Technologies Corp. to China Ivy School, Inc., incorporated herein by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on January 8, 2007.
4.1 2007 Equity Incentive Plan, incorporated herein by reference to Exhibit 4.1(I) to the Registrant's Registration Statement on Form S-8 filed on January 22, 2007. 10.3 Stock Purchase Agreement between Xu Zuqiang and Registrant, incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on June 12, 2006. 10.4 Amendment to Stock Purchase Agreement between Xu Zuqiang and Registrant, incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on August 29, 2006. 10.6 Share Exchange Agreement among Brighter International Limited, Blue Tassel School and the shareholders of Brighter International Limited and Registrant, incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on October 13, 2006. 10.7 Standby Fixed Price Equity Distribution Agreement between certain investors and the Registrant, incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed on May 31, 2007. 10.8 Purchase and Sale Agreement dated as of March 6, 2009 by and among Su Zhou Blue Tassel School and Jianwei Wu, Wei Li, Surong Gong, Changgen Ma, Yongxia Tan, Junhua Tang, and Xuehui Jiang. incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on March 9, 2009. 16.1 Kabani & Company, Inc. letter regarding change of accountant, incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on June 26, 2008. 21.1 List of Subsidiaries 31.1 Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 14, 2009
CHINA IVY SCHOOL, INC.
By: /s/ Yongqi Zhu -------------------------------- Yongqi Zhu Chairman and Chief Executive Officer (principal executive officer)
By: /s/ Jian Xue -------------------------------- Jian Xue Chief Financial Officer (principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on April 14, 2009 in the capacities indicated.
Signature Title
/s/ Yongqi Zhu - -------------------- Chairman, Chief Executive Officer (principal executive officer) and a Director /s/ Jian Xue - -------------------- Chief Financial Officer
/s/ Qian Gao - -------------------- Director
/s/ Xipeng Liu - -------------------- Director
/s/ Fuqeng Xia - -------------------- Director
/s/ Haiming Zhang - -------------------- Director
/s/ Jianwei Wu - -------------------- Director
CHINA IVY SCHOOL, INC. AND SUBSIDIARIES
Page
Reports of Independent Registered Public Accounting Firms -
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Operations for the Years ended December 31, 2008 and 2007
Consolidated Statements of Stockholders' Equity for the Years ended December 31, 2008 and 2007
Consolidated Statements of Cash Flows for the Years ended December 31, 2008 and 2007
Notes to Consolidated Financial Statements -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of China Ivy School, Inc.
I have audited the accompanying consolidated balance sheets of China Ivy School, Inc. and subsidiaries (the "Company") as of December 31, 2008 and the related consolidated statements of operations, stockholders'(deficit) equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. The consolidated financial statements of China Ivy School, Inc. and subsidiaries as of December 31, 2007 and for the year then ended were audited by another auditor whose report dated February 25, 2008 expressed an unqualified opinion on those statements.
I conducted my audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Ivy School, Inc. and subsidiaries as of December 31, 2008 and the results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
/s/ Michael T. Studer CPA P.C. ------------------------------ Michael T. Studer CPA P.C.
Freeport, New York April 9, 2009
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders China Ivy School, Inc.,
We have audited the accompanying consolidated balance sheet of China Ivy School (the "Company") and its subsidiaries as of December 31, 2007 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 31, 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We did not audit the financial statements of Safe Cell Tab Inc., a wholly owned subsidiary, whose statements reflect total assets of $11,096 as of December 31, 2007, and total loss of $16,500 for the year ended December 31, 2007. Those statements were audited by another auditor whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Safe Cell Tab Inc., is based solely on the report of the other auditor.
We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditor provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditor, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated balance sheet of China Ivy School, Inc. and its subsidiaries as of December 31, 2007, and the results of its consolidated statements of operations and its cash flows for the year ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.
/s/ KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, California February 25, 2008
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CHINA IVY SCHOOL, INC. AND SUBSIDIARIES (FORMERLY CLAREMONT TECHNOLOGIES CORP.) CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007
The accompanying notes are an integral part of these consolidated financial statements.
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CHINA IVY SCHOOL, INC. AND SUBSIDIARIES (FORMERLY CLAREMONT TECHNOLOGIES CORP.) CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
The accompanying notes are an integral part of these consolidated financials.
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CHINA IVY SCHOOL, INC. AND SUBSIDIARIES (FORMERLY CLAREMONT TECHNOLOGIES CORP.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
The accompanying notes are an integral part of these consolidated financials
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CHINA IVY SCHOOL, INC. AND SUBSIDIARIES (FORMERLY CLAREMONT TECHNOLOGIES CORP.) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
The accompanying notes are an integral part of these consolidated financials.
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CHINA IVY SCHOOL, INC. AND SUBSIDIARIES (FORMERLY CLAREMONT TECHNOLOGIES CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
China Ivy School, Inc. (formerly Claremont Technologies Corp.) ("China Ivy") was incorporated on September 14, 1999 under the laws of the State of Nevada. China Ivy acquired a wholly owned subsidiary Safe Cell Tab Inc. ("Safe Cell") on August 22, 2003. Safe Cell was incorporated on May 9, 1996 under the laws of the Province of British Columbia, Canada and engaged in distributing Wi-Fi License and Mobius disposable cell phones.
On October 12, 2006, China Ivy and the shareholders of Brighter International Limited ("Brighter International") entered into a Share Exchange Agreement in which China Ivy acquired 100% of Brighter International's outstanding common stock. Under the Share Exchange Agreement, the shareholders of Brighter International received 2,762,500 newly issued common shares of the company. This acquisition was accounted for as a reverse acquisition since after the acquisition, the former shareholders of Brighter International held a majority of the outstanding shares of China Ivy. The financial statements of the legal acquirer were not significant.
Brighter International Limited is an education investment enterprise and was incorporated in accordance with the General Corporation Act of the State of Nevada on June 1, 2006. On June 15, 2006, Brighter International entered into an agreement with Blue Tassel School, and pursuant to the agreement, all the shareholders of Blue Tassel School transferred all their ownership interests in Blue Tassel School to Brighter International. Prior to the acquisition, Brighter International and Blue Tassel School had common shareholders owning the same percentage of ownership in both companies. Therefore, the entities were under common control before the acquisition. This acquisition was accounted for at historical cost in a manner similar to the pooling of interests method. After the acquisition, Brighter International owned 100% of the outstanding shares of Blue Tassel School.
Blue Tassel School was established on July 10, 2001 under the laws of the Peoples' Republic of China ("PRC"). Blue Tassel School is an education center located in Suzhou city, accredited by the Jiangsu Province Educational committee as a boarding school comprising grades from kindergarten through senior school, including an international school. The five schools that comprise Blue Tassel School are kindergarten, primary school, junior high school, senior high school, and international school.
On July 31, 2008, the Company spun off its wholly owned subsidiary Safe Cell (now named Cellteck Inc.) to its stockholders. The distribution was completed on August 21, 2008. Accordingly, the operations of Safe Cell have been presented as "discontinued operations" in the accompanying consolidated financial statements.
Effective January 14, 2009, the Company effectuated a 1 for 20 reverse stock split (thereby reducing the issued and outstanding shares from 61,650,001shares to 3,082,500 shares). The financial statements have been retroactively adjusted to reflect this stock split.
On March 6, 2009 (see NOTE 17), the Company through Blue Tassel School acquired 90% of the issued and outstanding shares of capital stock of Youbang Human Resource Company ("YOUBANG"), a PRC corporation, in exchange for 20,000,000 shares of common stock of China Ivy, or approximately 86.6% of the issued and outstanding shares of common stock of China Ivy after the transaction. YOUBANG provides recruitment and contract labor services to businesses in the Su Zhou region of China.
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of China Ivy and its subsidiaries Safe Cell, Brighter International, and Blue Tassel School (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company's reporting currency is the United States dollar.
Going Concern
The financial statements have been prepared on a "going concern" basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, as of December 31,2008, the Company had cash of $58,984 and negative working capital of $13,257,768. Further, for the year ended December 31, 2008, the Company incurred a loss from operations of $1,376,294. These factors create substantial doubt as to the Company's ability to continue as a going concern. The Company plans to improve its financial condition through its acquisition of YOUBANG on March 6, 2009 (see NOTE 17). However, there is no assurance that the Company will be successful in accomplishing this objective. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
Foreign currency transactions and comprehensive income (loss)
The accounts of Blue Tassel School were maintained, and its financial statements were expressed, in Chinese Yuan (RMB). Such financial statements were translated into U.S. Dollars (USD) in accordance with Statement of Financial Accounts Standards ("SFAS") No. 52, "Foreign Currency Translation," with the RMB as the functional currency. According to the Statement, all assets and liabilities are translated at the current exchange rate, stockholders' equity items are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income" as a component of shareholders' equity.
Exchange and transaction gains and losses that arise from exchange rate fluctuations on balances and transactions denominated in a currency other than the functional currency are included in the results of operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and such differences may be material to the financial statements. Certain prior year amounts have been reclassified to conform to the current year presentation.
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Revenue Recognition
The revenues of the Company are tuition fees, accommodation fees and others. Tuition fees and accommodation fees are collected in advance on or before the new semester. Tuition fees are recognized as revenue proportionately as the instructions are delivered, and are reported net of scholarships and tuition refunds. Accommodation fees are recognized as revenue in proportion to semester progressed through the end of the reporting period. Tuition and accommodation fees paid in advance are recorded as deferred revenue.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with SFAS No. 123(R), "Share - Based Payment". As of December 31, 2008, the Company has not issued any stock options or warrants.
Advertising
Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2008 and 2007 were $83,272 and $71,748, respectively.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Blue Tassel School is governed by the Income Tax Laws of the PRC. Pursuant to the PRC relevant laws and regulations and tax law, Blue Tassel School is exempt from income tax.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
Property, Plant and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
Buildings 20 years Infrastructure and leasehold improvements 10 years Equipment 10 years Automobiles 10 years Furniture and fixtures 5 years Computer hardware and software 5 years
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Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, other receivables, receivable from related party, accounts payable and accrued expenses, payables to related parties, and bank borrowings. The fair value of these financial instruments approximate their carrying amounts reported in the consolidated balance sheets due to the short term maturity of these instruments or based upon market quotations of instruments with similar interest rates and maturities.
Long-Lived Assets
The Company has adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business." The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of December 31, 2008, there were no significant impairments of its long-lived assets.
Basic and Diluted Earnings Per Share
Earnings per share are calculated in accordance with the SFAS No. 128, "Earnings per share". SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Basic net income (loss) per share is based upon the weighted average number of common shares outstanding. Diluted net income (loss) per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Basic and diluted earnings or (loss) per share were ($1.69) and $0.11 for the years ended December 31, 2008 and 2007, respectively.
Recent Accounting Pronouncements
Certain accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the company. The impact on the Company's consolidated financial position and results of operations from adoption of these standards is not expected to be material.
NOTE 3 - OTHER RECEIVABLES
As of December 31, 2008 and 2007, the Company had $0 and $2,174, respectively in other receivables which represents advances made to employees and vendors. These receivables are interest free, unsecured, and due on demand.
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NOTE 4 - RECEIVABLE FROM RELATED PARTY AND SALE AND LEASEBACK OF REAL PROPERTY
On March 12, 2008 Blue Tassel School sold the Land Use Right of 91,993.32 square meters and twenty Buildings of 50,113.81 square meters to its former shareholder Minglong Industry Co. Ltd. ("Minglong") with the sales price of $5,563,692 and $10,405,554 respectively, totaling $15,969,247 (RMB 111,829,458). Blue Tassel School leased back the land use right and the buildings from Minglong from the date of sale. Minglong is controlled by the chief executive officer and major shareholder of the Company.
The lease payments equal the total sales price of $15,969,247 (RMB 111,829,458). The leases approximate $3.4 (RMB 24) per square meter annually, totaling approximately $315,280 (RMB 2,207,840) per year for using the land and $35.6 (RMB 180) per square meter annually, totaling approximately $1,288,125 (RMB 9,020,486) per year for leasing the buildings. The total annual lease will be approximately $1,603,405 (RMB 11,228,326) until a total of approximately $15,969,247 (RMB 111,829,458) has been offset against the amount receivable from related party over the 10 year term of the lease.
The total receivable from related party on the date of sale and lease back was $11,228,703. This amount represents the present value of future cash inflows (our lease payments) at the date of transactions. Assumptions used for the present value calculation were: (1), annual rent payments of $1,603,405; (2), term of ten years; (3), interest rate of 7% per annum.
The purpose of the sale and leaseback of the land use right and buildings was to comply with the new regulation from the government of Suzhou City, Jiangsu Province, China. According to the new regulation, "Public institutions like Schools, kindergartens, hospitals etc., educational facilities and health facilities of social organizations and other lands for the use of other social welfare cannot be used as collateral for bank loans." As in 2007 the land use right and buildings were pledged for bank loans, the management of the Company decided to sell the Land Use Right and buildings to Minglong and then lease back for the school use.
For the year ended December 31, 2008, the receivable from related party changed as follows:
Balance due from Minglong at March 12, 2008 in connection with the sale and leaseback of real property, noninterest bearing (discounted) $ 11,228,703
Amounts collected (7,681,172) Accretion of discount on receivable 2,280,191 Foreign exchange translation adjustment 198,524 ------------ Balance at December 31, 2008 $ 6,026,246 ============
The loss on the March 12, 2008 sale of real property was $5,169,294, as follows:
Fair value of consideration received - $15,969,247 noninterest bearing receivable from Minglong due in annual installments of $1,603,405 until repaid (discounted at 7% interest rate) $ 11,228,703
Effect of change in exchange rate 45,893
Net carrying value of land use right and buildings (less $113,057 foreign exchange translation adjustment) (16,443,890) ------------ Loss on sale of real property $ (5,169,294) ============
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NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
As of December 31, 2008 and 2007, property, plant and equipment consist of the following:
December 31, December 31, 2008 2007 ------------ ------------ Buildings $ -- $ 10,468,473 Infrastructure and leasehold improvements 11,065,511 10,342,056 Educational equipment 544,394 468,509 Automobiles 28,848 26,983 ------------ ------------ Total property and equipment 11,638,753 21,306,021 Accumulated depreciation (3,167,114) (2,073,537) ------------ ------------ Property and equipment, net $ 8,471,639 $ 19,232,484 ============ ============
The Company had depreciation expense of $1,146,903 and $983,247 for the years ended December 31, 2008 and 2007, respectively.
On May 24, 2007 the Company obtained the Property Titles on twenty buildings and accompanying infrastructures located in Suzhou City Wuzhou Economy Development District from its former shareholder Minglong, totaling 50,113.81 square meters, which were and are pledged under bank borrowings. The net historical value of the buildings transferred amounted to approximately $10,441,053 as of December 31, 2007.
In October 2007, the management of Blue Tassel School revised its estimate of useful lives of buildings from 40 years to 20 years. In accordance with SFAS No. 154, "Accounting Changes and Error Corrections", this change of useful lives is deemed as a change in accounting estimate and has been accounted for in the period of change and future periods as the change affects both, without a restatement or retrospective adjustment of the amounts reported in financial statements of prior periods or by reporting pro forma amounts for prior periods. The change in estimate resulted in a decrease of $126,917 of income from continuing operations and net income and $0.04 on the related per share amounts for the year ended December 31, 2007.
On March 12, 2008, Blue Tassel School sold the Land Use Right of 91,993.32 square meters and twenty Buildings of 50,113.81 square meters to its former shareholder Minglong with the sales price of $5,563,692 and $10,405,554 respectively, totaling $15,969,246 (RMB111,829,458). Blue Tassel School leased back the buildings from Minglong from the date of sale.
NOTE 6 - LAND USE RIGHT
On May 24, 2007, the Company obtained the National Land Use Right and house property title for the land, buildings and accompanying infrastructures where Blue Tassel School is operating from the former shareholder Minglong. The piece of land totals 91,993.32 square meters, and was and is pledged under bank borrowings. The land use right will expire on January 17, 2051. The land use right was recorded at $5,516,431 net of accumulated amortization expense of $69,929 as of December 31, 2007.
On March 12, 2008, Blue Tassel School sold the Land Use Right of 91,993.32 square meters and twenty Buildings of 50,113.81 square meters to its former shareholder Minglong with the sales price of $5,563,392 and $10,405,554 respectively, totaling $15,933,526 (RMB111,829,458). Blue Tassel School leased back the land use right and buildings from Minglong from the date of sale.
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NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The Company's accounts payable and accrued expenses as of December 31, 2008 and 2007 are summarized as follows:
December 31, December 31, 2008 2007 ----------- ----------- Accounts payable $ 563,312 $ 870,928 Accrued consulting fees -- 1,604,070 Accrued wages 109,903 -- Other accrued expenses 264,905 505,410 ----------- ----------- Total accounts payable and accrued expenses $ 938,120 $ 2,980,408 =========== ===========
NOTE 8 - PAYABLES TO RELATED PARTIES
Payables to related parties consist of the following:
December 31, --------------------------- 2008 2007 ----------- ----------- Due to Minglong $ 73,372 $ 1,219,350 Bonuses payable to officers -- 411,300 Due to Mr. Yongqi Zhu 679,521 -- ----------- ----------- Total $ 752,893 $ 1,630,650 =========== ===========
Due to Minglong in the amounts of $73,372 and $1,219,350 as of December 31, 2008 and 2007, respectively, represent the net balance of payments made by Minglong on behalf of the Company since inception. The loan is interest free and due on demand.
During 2008, the Company received funds from and advanced funds to Mr. Yongqi Zhu, the Chief Executive Officer of the Company. The balance due to Mr. Zhu is interest free and due on demand.
NOTE 9 - DEFERRED REVENUE
Tuition and accommodation revenue received from students are recognized proportionately as the courses and accommodation services in the semesters are delivered. Tuition and accommodation fees paid at the beginning of semesters are recorded as deferred revenue. Tuition fees are recognized as revenue proportionately as the instructions are delivered, and are reported net of scholarships and tuition refunds. Accommodation fees are recognized as revenue in proportion to semester progressed through the end of the reporting period. The Company has recorded deferred revenue of $930,100 and $481,229 as of December 31, 2008 and 2007, respectively.
NOTE 10 - BANK BORROWINGS
The Company has borrowed $10,699,610 and $14,395,500 from a number of banks located in China under credit agreements as of December 31, 2008 and 2007, respectively. Borrowings under credit lines consist of the following:
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NOTE 10 - BANK BORROWINGS (Continued)
On June 17, 2008, the Company entered into a credit agreement with Jiangsu Dongwu Rural Commercial Bank. The Company acquired a 2,000,000 RMB (approximately $293,140) credit line from June 17, 2008 to June 17, 2011. This credit line has collateralized a 234 square meter residential unit and 62 square meter land use right owned by Ti Yin and Yan Hong, the third party assigned by the bank.
On June 17, 2008, the Company entered into a credit agreement with Jiangsu Dongwu Rural Commercial Bank. The Company acquired a 11,000,000 RMB (approximately $1,612,270) credit line from June 17, 2008 to June 17, 2011. This credit line has collateralized a 477 square meter residential unit and 837 square meter land use right owned by the Chief Executive Officer of the Company.
The loans of $2,784,830 and $2,604,900 as of December 31, 2008 and as of December 31, 2007, respectively, were secured by the land use right of Blue Tassel School. The loan of $6,009,370 and $5,621,100 as of December 31, 2008 and December 31, 2007, respectively, were secured by four buildings totaling 20,926.86 square meters of the School. The loan of $2,742,000 as of December 31, 2007 was guaranteed by the private properties of Blue Tassel School's former shareholder.
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NOTE 11 - STOCKHOLDERS' EQUITY
On January 22, 2007, for services rendered, the Company awarded eight individual consultants a total of 250,000 shares of common stock valued at $13.00 per share or $3,250,000, based upon the market price at the date of issuance, for consultant services that were provided under the China Ivy School, Inc. 2007 Equity Incentive Plan. The consultants were engaged to provide various services to the Company during the period from October 13, 2006 to December 31, 2006 for market research, strategic planning and to identify investment bankers.
On May 30, 2007, the Company issued 7,500 shares of common stock to the officer of Safe Cell to settle a loan owned to the officer before the reverse merger. The stock issuance was valued at the par value and treated as consideration for the acquisition accounted for as the reverse acquisition.
Prior to the acquisition by Brighter International, the former shareholders of Blue Tassel School contributed a land use right, buildings and other facilities to Blue Tassel School as capital contribution and long-term payable. However, the titles of the land use right, buildings and attached infrastructures were not transferred to Blue Tassel School until May 24, 2007. The transfer of titles of these tangible and intangible assets to Blue Tassel School increased the capital of Blue Tassel School by $608,724 in 2007.
NOTE 12 - STATUTORY RESERVES
Statutory reserves consist of the following:
December 31, --------------------------- 2008 2007 ----------- ----------- Statutory surplus reserve $ 307,853 $ 307,853 Statutory common welfare fund 172,960 172,960 ----------- ----------- $ 480,813 $ 480,813 =========== ===========
As stipulated by the Company Law of the People's Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following: i. Making up cumulative prior years' losses, if any; ii. Allocations to the "Statutory surplus reserve" of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of Blue Tassel School's registered capital; iii. Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to Blue Tassel School's "Statutory common welfare fund", which is established for the purpose of providing employee facilities and other collective benefits to the School's employees; and iv. Allocations to the discretionary surplus reserve, if approved in the stockholders' general meeting.
As an educational institution, the Blue Tassel School has an option not to make these appropriations.
In accordance with the Chinese Company Law, Blue Tassel School allocated 10% of its PRC net income to the statutory surplus reserve in 2007 and 2006, and 5% of its PRC net income to the welfare fund in 2006. In 2008, no transfers to statutory reserves were made.
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NOTE 13 - OTHER COMPREHENSIVE INCOME
Balances of related after-tax components comprising accumulated other comprehensive income (loss), included in stockholders' equity at December 31, 2008 and 2007, are as follows:
Foreign Currency Translation Adjustments -----------------------
Balance at December 31, 2007 $ 500,352 Change during 2008 253,656 ------------------- Balance at December 31, 2008 $ 754,008 ===================
NOTE 14 - RELATED PARTY TRANSACTIONS
During 2008, the Company received funds from and advanced funds to Mr. Yongqi Zhu, one of its significant shareholders and the Chief Executive Officer of the Company. As of December 31, 2008, the balance due to Mr. Zhu was $679,520, which was included in the payables to related parties. The balance due to Mr. Zhu is interest free and due on demand.
Minglong is a former shareholder of Blue Tassel School. It is controlled by Mr. Zhu, the chief executive officer of the Company. On March 12, 2008, the Company sold a 91,933 square meters land use right and twenty buildings of 50,114 square meters to Minglong. The Company leased back the land use right and buildings in a ten years term with Minglong at the date of sale.
During 2008, the Company recorded rent expense of $1,296,466 to offset the scheduled amount due from related party in connection with the sale and leaseback of real property. Also, the Company received net cash inflow of $2,518,989 from Minglong. Also, Company expenses of $2,181,385 and consulting fees of $1,684,322 were paid by Minglong. The Company agreed to apply and treat the above items totaling $7,681,172 as collections of the receivable from related party in connection with the sale and lease back of real property.
In addition, expenses of $73,372 paid by Minglong on behalf of China Ivy were included under the caption "Payables to Related Parties".
NOTE 15 - COMMITMENTS
Operating Lease Obligations
Blue Tassel School leases a land use right and 20 buildings located in Suzhou City Wuzhong Economy Development District from Minglong, the former shareholder of Blue Tassel School (Note 4). The term of the lease agreement is 10 years starting March 12, 2008. The lease is considered an operating lease. Rent expense and related maintenance expenses for the period March 12, 2008 to December 31, 2008 was $1,481,290.
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Operating Lease Obligations (Continued)
Aggregate minimum future lease payments under operating leases as of December 31, 2008 for each of the next five years and thereafter, are as follows:
Year ending Minimum lease December 31, payments ------------ ------------ 2009 $ 1,645,735 2010 1,645,735 2011 1,645,735 2012 1,645,735 2013 1,645,735 Thereafter 6,994,374 ------------ Total $ 15,223,049 ============
Consulting Agreements
In 2007 and 2008, the Company engaged over 50 individuals (the "Consultants") to provide various education consulting services for the Company. The agreements for 2008 provided for the payment of minimum consulting fees to the Consultants totaling $1,684,332 ((Y)11,700,000) for the service period January 1, 2008 to December 31, 2008. The payments were made by Minglong on behalf of the Company in 2008. The Company has recorded $1,684,332 in consulting fees and reduced the receivable from related party (see Note 4) by the same amount.
The $1,604,070 (RMB11,700,000) accrued at December 31, 2007 for services provided in 2007 were paid in June 2008 by Minglong on behalf of the Company. The payments made by Minglong were reflected as a Company collection of the receivable from related party (see Note 4).
On June 13, 2008, the Company executed a 18 month consulting agreement with Beijing JP Investment Advisors Limited (the "Advisors"). For consideration of 30,000 RMB ($4,397) per month, the Advisors are to provide services related to business development, marketing research, and prospective acquisitions. Minglong paid these fees in 2008 on behalf of the Company.
For the years ended December 31, 2008 and 2007, consulting fees expense was $1,722,877 and $1,604,070, respectively.
NOTE 16 - DISCONTINUED OPERATIONS
On July 31, 2008, the Company spun off its wholly owned subsidiary Safe Cell (now named Cellteck Inc.) to its stockholders. Accordingly, the operating results of Safe Cell before the spinoff on July 31, 2008 is reported as discontinued operations in the accompanying consolidated financial statements. The $189,461 negative stockholders' equity of Safe Cell at July 31, 2008 has been added to additional paid-in capital.
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NOTE 16 - DISCONTINUED OPERATIONS (Continued)
At July 31, 2008, the assets and liabilities of Safe Cell consisted of:
Assets: Cash $ 272 Inventory 10,300 --------- Total Assets $ 10,572 =========
Liabilities: Accounts payable $ 350 Due to related parties 199,683 --------- Total liabilities 200,033 Stockholders' deficiency (189,461) --------- Total Liabilities and Stockholders' Equity $ 10,572 =========
Loss from discontinued operations consisted of:
December 31, 2008 2007 -------- --------
Sales $ 6,771 $ 6,833 Cost of sales -- -- -------- -------- Gross profit 6,771 6,833 Selling, general and administrative expenses (13,997) (23,333) -------- -------- Net Loss $ (7,226) $(16,500) ======== ========
NOTE 17 - SUBSEQUENT EVENTS
Effective January 14, 2009, the Company effectuated a 1 for 20 reverse stock split (thereby reducing the issued and outstanding shares from 61,650,001 shares to 3,082,500 shares). The financial statements have been retroactively adjusted to reflect this stock split.
On March 6, 2009, the Company through Blue Tassel School acquired 90% of the issued and outstanding shares of capital stock of Youbang Human Resource Company ("YOUBANG"), a PRC corporation, in exchange for 20,000,000 shares of common stock of China Ivy, or approximately 86.6% of the issued and outstanding shares of common stock of China Ivy after the transaction. YOUBANG provides recruitment and contract labor services to businesses in the Su Zhou region of China.
According to unaudited financial statements provided the Company, YOUBANG has assets and stockholders' equity at December 31, 2008 $4,353,145 and $1,590,466, respectively. For the year ended December 31, 2008, total revenue and net income were $21,130,725 and $1,445,539, respectively.