Item 1.
Business
Item 1A.
Item 1A.
Risk Factors
Item 1B.
Item 1B.
Unresolved Staff Comments
Item 2.
ITEM 2. PROPERTIES & INTELLECTUAL PROPERTY
We were granted trademark protection from PRC authorities for the names and logo of Tsingda Century and Tsingda Xiaoboshi.
A total of eight patents have been filed with the PRC authorities with respect to various aspects of our business, of which four of the applications have been granted and four applications are pending.
Description Appearance Design
Patent No
Term of the Patent
Date Issued/Filed
Card (all-in-card for entrepreneurship
training)
200730161941.4
July 27, 2007 to July 26, 2017
Issued: June 25, 2008
Card (Tsingda Learning Center)
200730161942.9
July 27, 2007 to July 26, 2017
Issued: July 16, 2008
Card (all-in-card for early education)
200730161943.3
July 27, 2007 to July 26, 2017
Issued: June 25, 2008
Card (all-in-card for China education)
200730161944.8
July 27, 2007 to July 26, 2017
Issued: May 21, 2008
Computer-aided Children Evaluation and
Guiding System
Pending
Filed: February 20 2009
Computer-aided Children Care Pattern
System
Pending
Filed: February 20 2009
Distant Network Education Interactive
Platform
Pending
Filed: February 20 2009
Evaluation and Monitoring Method of
Distant Online Education Platform
Pending
Filed: February 20 2009
We have registered four software applications with the PRC authorities with respect to various aspects of our business. Under PRC Copyright Law, a copyright protects both the design of a software product and the name of the product. Copyrights are granted for a term of 50 years from the date of first publication.
Name of the Software
Date of Filing
Registration No.
Network Baomu Software V1.0
May 20, 2007
2007SR14359
Tsingda Shouhushen Software V2.0
December 1, 2008
2009SR014243
Tsingda Learning Center Software V1.0
April 20, 2007
2009SR014242
Tsingda Internet Classroom Software V1.0
July 15, 2008
2009SR014244
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information. There is currently no market for our ordinary shares.
(b) Record Holders. As of March 29, 2012, there were 2,316 holders of record of our ordinary shares.
(c) Dividends. We have not paid dividends on our ordinary shares in the past and do not anticipate doing so in the foreseeable future. We currently intend to retain future earnings, if any, to fund the development and growth of our business. In addition, the Loan and Security Agreement with Access Capital requires that we obtain their consent prior to paying any dividends.
(d) Sales of Unregistered Securities
During the period covered by this report we did not issue any other securities that were not registered under the Securities Act of 1933, as amended, except previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K.
(f) Securities Authorized for Issuance under Equity Compensation Plans
The following table discloses information as of December 31, 2011 with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.
On April 29, 2011, the Company adopted the 2011 Equity Incentive Plan (the “Plan”) pursuant to which the Board of Directors may grant ordinary shares and stock options to its employees. The Company granted 900,000 ordinary shares to three executives for no cost and granted one executive 100,000 non-qualified stock options to purchase 100,000 of the Company’s ordinary shares at an exercise price of $2 per share. The stock options vest over a term of 5 years. The fair value of the ordinary shares was estimated on the date of issuance. The calculated fair value of the options was $0.63 per share. The amount of compensation cost recognized for the options granted was $8,465 and recorded in the general and administrative expenses for the year ended December 31, 2011. The amount of compensation cost recognized for the shares issued were $1,440,000 and $0, and were recorded in the general and administrative expenses for the years ended December 31, 2011 and 2010, respectively.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
We are a “smaller reporting company” as defined by Regulation S-K and as such, are not providing the information contained in this item pursuant to Regulation S-K.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC. Readers of this Annual Report are strongly encouraged to review the risk factors relating to the Company which are set forth herein.
COMPANY OVERVIEW
On May 24, 2010, Compass Acquisition Corporation and its controlling shareholders entered into a share exchange agreement (“Share Exchange Agreement”) with Tsing Da Century Education Technology Co. Ltd., a British Virgin Islands business company (“ Tsingda Technology ”), and its shareholders. On November 15, 2010, the Company’s shareholders approved the change of the Company’s name from “Compass Acquisition Corporation” to “Tsingda eEDU Corporation” and the name change is effective immediately following the shareholder’s approval.
Tsingda Technology owns 100% of the issued and outstanding capital stock of Beijing Tsingda Century Management Consulting Ltd. (“Tsingda Management ”), a wholly foreign owned enterprise incorporated under the laws of the People’s Republic of China (“ PRC”). On April 26, 2010, Tsingda Management entered into a series of contractual agreements with Beijing Tsingda Century Investment Consultant of Education Co. Ltd (“ Tsingda Education ”), a company incorporated under the laws of the PRC, and its shareholders, in which Tsingda Management effectively assumed management of the business activities of Tsingda Education. Beijing Tsingda Century Network Technology Co. Ltd., a PRC company, is a wholly owned subsidiary of Tsingda Education. The contractual arrangements are comprised of a series of agreements, including a Consulting Services Agreement, Operating Agreement, Proxy Agreement, and Option Agreement, through which Tsingda Management has the right to advise, consult, manage and operate Tsingda Education for a quarterly fee in the amount of 100% of Tsingda Education’s quarterly, after tax net profits. Additionally, Tsingda Education’s shareholders have pledged their rights, titles and equity interest in Tsingda Education as security for Tsingda Management to collect consulting and service fees through an Equity Pledge Agreement. In order to further reinforce Tsingda Management’s rights to control and operate Tsingda Education, Tsingda Education’s shareholders have granted Tsingda Management the exclusive right and option to acquire all of their equity interests in Tsingda Education through the Option Agreement. As all of the companies are under common control, this structure has been accounted for as a reorganization of entities and the financial statements have been prepared as if the reorganization had occurred retroactively.
Tsingda Education, with its subsidiary Tsingda Network, is a leading offline and online provider of educational services in the PRC. It has established the largest chain of education centers in the PRC, known as “Tsingda Learning Centers.” These offline educational centers principally target elementary school students and consist mainly of franchised locations. As of December 31, 2011, it has approximately 2,926 learning centers nationwide. It also has developed a robust, interactive educational platform which allows students to search and subscribe to virtual classrooms offered by a wide range of teachers in the PRC.
We have franchise agreements with each of our franchised locations. These franchise agreements are typically effective for a one year term. The franchised locations must conform to certain operating requirements of the Company, such as the quality of products and services offered and participation of promotional activities. Each franchised location pays an initial franchise licensing fee to the Company as well as an annual management fee at the end of each subsequent year. The Company offers discounted e-cards (used by our students to purchase courses) to the franchised locations. Our franchisees pay an initial franchise licensing fee of between $7,000 and $10,000 per location depending on franchise territory, and thereafter, franchisees pay an annual management fee equal to 10% of their initial franchise licensing fee. A franchisee receives e-cards from the Company with a face value equal to five times the amount
of franchise and management fees paid. Our franchisees also have the option to purchase additional e-cards at the same 80% discount. Franchisees earn revenues from the sale of e-cards to students at face value. In other words, for every dollar spent by our students, our franchisees take eighty cents. Each e-card has a specific serial number, and our IT server tracks the opening and usage of these cards in real time. We use this information in order to accurately allocate revenues among teachers. Beginning August 2010, the Company began to generate revenue via the sale of reference materials and publications.
With respect to the revenues generated from Tsingda Virtual Internet Classroom, if the e-cards are sold to students directly, the teachers and the Company share such revenues (equivalent to the face value of the e-cards sold) at a 70:30 split. If e-cards are sold to students via franchised learning centers, the Company receives 20% of the face value of the e-cards and the remaining 80% is shared by the franchisees and teachers.
Our financial statements are prepared in US Dollars and in accordance with accounting principles generally accepted in the United States. See “Critical Accounting Policies - Foreign Currency Translation” below for information concerning the exchange rates at the Renminbi (“RMB”) were translated into US Dollars (“USD”) at various pertinent dates and for pertinent periods.
Recruitment of Students
The following table shows the change in the number of active students from 2010 to 2011.
No. of active students increased for the specified quarter
Note: We classify students who have provided us with their personal information as “registered.” Registered students who have purchased an e-card or are using an e-card to purchase our courses are classified as “active.” Students who have purchased an e-card and have not used an e-card for more than one year are de-classified from active status and classified as registered. The numbers in the table above are calculated based on the number of newly active students minus (-) the number of active students lost in the specified quarter.
Online Content
The Company has continued to add new courses. For purposes of the following table, “new courses” means (i) newly created courses that were not previously available and (ii) previously available courses which have been revised or updated.
No. of new courses increased for the specified quarter
Sale of e-Cards
The Company has continued to see increased sales of e-cards, which are used by students to purchase our course offerings.
Face value of e-cards sold for the specified quarter
Note: The Company sells e-cards at an average discount rate of 80% to franchised learning centers who then re-sell e-cards to students at face value. The face value of e-cards sold refers to the amount paid by students. With respect to the revenues generated from Tsingda Virtual Internet Classroom, if the e-cards are sold to students directly, the teachers and the Company share such revenues (equivalent to the face value of the e-cards sold) at a 70:30 split. If e-cards are sold to students via franchised learning centers, the Company receives 20% of the face value of the e-cards and the remaining 80% is shared by the franchisees and teachers.
Revenue Breakdown
For the fiscal years 2010 and 2011, the tables below break down the source of our revenues. We generate most of our revenues through franchise licensing fees, management fees, sales of e-cards, and, beginning August 2010, the sale of reference books
and materials. Our franchisees pay an initial franchise licensing fee of between $7,000 and $10,000 per location depending on franchise territory, and thereafter, franchisees pay an annual management fee equal to 10% of their initial franchise licensing fee. A franchisee receives e-cards from the Company with a face value equal to five times the amount of franchise and management fees paid. Our franchisees also have the option to purchase additional e-cards at the same 80% discount. Franchisees earn revenues from the sale of e-cards to students at face value. In other words, for every dollar spent by our students, our franchisees take eighty cents.
With respect to the revenues generated from Tsingda Virtual Internet Classroom, if the e-cards are sold to students directly, the teachers and the Company share such revenues(equivalent to the face value of the e-cards sold) at a 70:30 split. If e-cards are sold to students via franchised learning centers, the Company receives 20% of the face value of the e-cards and the remaining 80% is shared by the franchisees and teachers.
Each e-card has a specific serial number, and our IT server tracks the opening and usage of these cards in real time. We use this information in order to accurately allocate revenues among teachers.
2010 Revenue Breakdown (in Dollars)
2011 Revenue Breakdown (in Dollars)
(1): Materials and publications include reference books and materials, either self-branded or cooperative. Sales of reference books and materials began in August, 2010.
Students must use e-cards to purchase all online content, while the purchase of reference books and materials are transacted in cash. The sales of reference materials and publications began in August, 2010, and it accounts for approximately 18% of total revenue in 2011. While the sale of e-cards continues to be the single biggest source of revenue, franchise licensing fees and sales of reference materials make up a substantial portion of our revenue.
(2) Others mainly refer to the revenues generated from Huanggang Experimental School and Family Baby Club. The revenues from the two business projects are set forth as follows:
PRC Regulation of Franchise Business
We have made all required filings and met all requirements under PRC law to legally operate a franchise business in the PRC. The required filings include (i) copies of the business license or enterprise registration certificate; (ii) a sample franchise contract; (iii) a brochure for franchise operations; (iv) a marketing plan; (v) written commitment and relevant materials proving that the relevant provisions have been followed; and (vi) other documents and materials required by relevant governing authorities.
The legal requirements to operate a franchise business in the PRC under the Regulation on the Administration of Commercial Franchises require the franchisor to possess a mature business model and the ability to provide long-term business guidance, technical support, business training and other services to its franchisees. The franchisor must have at least two direct sales stores, and have been engaged in the business for more than a year. If this franchisor conducts its operations within the scope of a single province, autonomous region, or municipality directly under the PRC Central Government, it is required to file the required legal documents with the relevant governing authorities of the province, autonomous region or municipality directly under the PRC Central Government; and if the franchisor conducts its operations within the scope of two or more provinces, autonomous regions, or municipalities directly under the PRC Central Government, it is required to file the required legal documents with the competent commercial authority of the State Council.
Our Growth Strategy
Our growth and expansion strategy for the next 6 to 12 months includes the following measures, the cost of which is expected to come from our existing revenue stream:
Establish six regional management centers. As of December 31, 2011, we have 32 company owned locations. The new regional management centers will also serve as company-owned learning centers. Due to the size of our company-owned locations, we are able to absorb higher student traffic and generate higher overall revenues compared to franchised locations. We also recognize 100% of the revenue stream from these locations. The aggregate estimated cost to open these locations is $1.4 million. In addition to providing services as learning centers, the regional management centers will be responsible for, among other things, training the staffs of the nearby franchised centers, organizing and holding training seminars, developing new franchised centers, managing and conducting recruitment events for franchised centers, and communicating with and reporting to company headquarters.
Increase the number of franchised learning centers. As of December 31, 2011, we had 2,894 locations with over 1,400 of them located in 2nd and 3rd tier cities. We estimate there are approximately 50,000 2nd and 3rd tier cities in the PRC. Our plan is to establish 1,500 new franchised learning centers by carrying out our advertising and marketing initiatives. We plan on spending approximately $6.2 million on a broad scale brand promotional campaign. This campaign will target a number of media outlets, including advertisements on regional television and in local newspapers in select markets, as well as holding periodic regional events in these markets, all of which will be designed to attract franchisees.
Increase traffic to our virtual classrooms. The Company plans to allocate more capital resources to the marketing and promotion of our virtual classrooms. The Company plans to invest $3.5 million in acquiring competitive third party online learning resources and in developing strategic learning courseware.
Develop the “Deployable Learning Center”. The Company plans to launch its self-branded deployable learning pad which combines Tsingda’s online learning contents and other featured courses in the second half of 2012. Students using the learning pads not only can learn anywhere and anytime but can also have access to the internet to download and update new learning resources. The total investment on this project may reach $10M.
Strengthen our IT infrastructure and capability. The Company will purchase 300 servers and expand its bandwidth to 1020M to satisfy the need of growing data traffic. The total investment in this project may reach $5 million. We believe completion of this project will help the Company to have sufficient on-line capacity to serve up to 10 million registered students, including 2.5 million active students. .
Our marketing efforts target three principal areas, that is, franchisees, students for our Company-owned learning centers, and students for our virtual classrooms. We attract franchisees by conducting regional seminars on a periodic basis in areas that we have targeted
for expansion, as well as advertising on regional television and in local newspapers in these areas. These efforts have produced in excess of 2,800 operating franchisees.
Our company-owned learning centers are in close proximity to schools and large residential areas. We have been able to attract students to our learning centers principally through the distribution of leaflets in the nearby areas.
Traffic to our virtual classrooms has been driven principally by students from our learning centers. We expect to increase traffic to our virtual classrooms commensurate with the numerical increase in our learning centers.
We will continue these marketing measures for the foreseeable future.
Results of Operations for the Twelve Months Ended December 31, 2011 Compared to Twelve Months Ended December 31, 2010
The following table sets forth key components of Tsingda Education’s results of operations for the periods indicated in dollars. The discussion following the table addresses these results.
Tsingda eEDU Corporation
Consolidated Statements of Operations and Comprehensive Income
(Stated in US dollars)
Revenue. For the twelve months ended December 31, 2011, we had revenues of $45,155,225 as compared to revenues of $27,447,545 for the twelve months ended December 31, 2010, an increase of approximately 64.51%. We experienced strong growth in our revenues during the twelve months period ended 2011 due to an increase in the number of franchised locations for the Company’s offline businesses, along with the continued growth of its online learning platform. As of December 31, 2011, we had 2,894 franchise locations and 32 company owned locations, compared with 2,315 franchise locations and 31 company owned locations,respectively, as of December 31, 2010. In addition, online revenues for twelve months ended December 31, 2011 increased to $6,094,871 from $3,365,285 for the comparable period in 2010.
Expenses. For the twelve months ended December 31, 2011, we incurred expenses, composed of selling and general and administrative expenses, of $17,128,164 compared to expenses of $9,405,420 for the twelve months ended December 31, 2010, an increase of approximately 82.11%.
Selling expenses include salaries of the staffs in our sales department, thecompany-owned learning centers, and other departments such as advertising, printing, logo manufacturing, and transportation. For the twelve months ended December 31, 2011, we had selling expenses of $10,526,913 as compared to $6,199,618 for the comparable period of the prior year, an increase of 69.80%. The increase reflected the marketing efforts we spent on two new business projects: the Family Baby Club and Huang Gang Supplementary Education Center, our efforts in attracting new franchise locations, and the continuous promoting efforts for our online education platform. The Family Baby Club targets pre-school children from zero to six years old and Huang Gang Supplementary Education Center provides well-regarded supplementary education to high school students. Huang Gang is an area located in Hubei province and is famous for its nationally top-ranked high schools and excellent academic performance of students. The Education Department of Huang Gang City entered into an agreement with the Company to establish supplemental tutoring programs throughout China, which started in May 2011.
Key components of selling expenses for the twelve month periods ended December 31, 2011 and 2010 were:
-Salaries and wages increased by approximately 248% for the twelve months ended December 31, 2011 from the comparable 2010 period. The increase represents an increase in our sales personnel consistent with our increased franchise sales and the establishment of new business projects.
-Advertising expenses increased by approximately 40% for the twelve months ended December 31, 2011 from the comparable 2010 period. These expenses represent third party print media expenditure spent for company-owned locations and new business projects and online platform as well as our ongoing promotional efforts to attract new franchisees.
-Printing expenses increased by approximately 94% for the twelve months ended December 31, 2011 from the comparable 2010 period. These expenses represent internal costs for printing of our company newsletter and other promotional costs in order to enhance public recognition of our brand name and sales.
-Others increased by approximately 47% for the twelve months ended December 31, 2011 from the comparable 2010 period reflecting the investment in company owned locations and new projects. The overall expenditure in renovations or alterations conducted in our new locations was $20,124 per month on average, compared to $2,167 in 2010.
General and administrative expenses include rent, salaries and wages, insurance, training and related expenses. For the twelve months ended December 31, 2011, we had general and administrative expenses of $6,601,251 as compared to $3,205,802 for the comparable period from the prior year.
Key components of general and administrative expenses for the twelve months ended December 31, 2011 and 2010 were:
-Office supplies increased by 95% for the twelve months ended December 31, 2011 from the comparable 2010 period. The increase was to due to an increase in personnel.
-Salaries and wages increased by 83% for the twelve months ended December 31, 2011 from the comparable 2010 period as the company retained more management personnel during the period.
-Entertainment expenses increased by 197% for the twelve months ended December 31, 2011 from the comparable 2010 period due to the increase in the number of our employees.
-Rent increased by 94% for the twelve months ended December 31, 2011 from the comparable 2010 period. This increase is attributable to the rent payments under the new lease for our newly established Shijingshan Headquarter-Tsingda Century Plaza.
-Consulting expenses decreased by 17% for the twelve months ended December 31, 2011 from the comparable 2010 period. The Company retained more third-party consulting services related to Finance, IT and HR in line with the expansion of our business in 2010. The auditing and legal fees for the consecutive two years are set forth as follows:
-The Company granted 3 executives an aggregate of 900,000 shares for no cost and 100,000 shares on April 29, 2011 pursuant to the 2011 Equity Incentive Plan. The stock options are exercisable at $2 per share and vest over a term of 5 years. The Company valuates the fair value of the shares and stock options granted at the grant date using the Black-Sholes option-pricing model, and the total costs of $1,448,465 and $0 were recorded in the years ended December 31, 2011 and 2010, respectively.
Net Income. For the reasons discussed above, we had net income $13,172,402 for the twelve months ended December 31, 2011 compared with $10,301,196 for the comparable period in 2010.
Other Comprehensive Income. We had other comprehensive income $1,874,495 for the twelve months ended December 31, 2011 compared with $721,997 for the comparable 2010 period as a result of foreign currency translation gain.
Total Comprehensive Income. We had total comprehensive income of $15,046,897 for the twelve months ended December 31, 2011, representing an increase of 36.50% compared to the corresponding 2010 period. The reason for the increase is due to the various reasons stated above.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2011, we had working capital of $17,562,293 compared with working capital of $11,381,531 as of December 31, 2010. Changes in our working capital are summarized as follows:
Our increase in working capital is primarily attributable to the increase in accounts receivables and advances to suppliers of approximately $10,415,544 and $3,637,263 respectively. The increase was due to the expansion of our franchise system and increased sales of our prepaid cards . Accounts receivables will be reduced gradually as the standard term of each receivable is one year. Before the repayment of such prior receivable, a franchise store cannot purchase any new prepaid card from the Company and the Company has the right to shut down the online broadcasting system until the receivables are paid. Further, the Company increased its promotional efforts , which was especially reflected in the prepayment in advertisements and printing by 120% and 70% respectively. In addition, tax payable and accounts payable were increased by 91% and 310% respectively. While tax payable reflects the increase in net income and business tax, accounts payable was increased due to the improvements of the new office building, the updates of our internet infrastructure as well as the purchase of other intangible assets.
Our primary uses of cash have been for selling and marketing expenses, employee compensation, and working capital. The main sources of cash have been revenues from franchisees and from our company owned locations.
We believe the following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
•
An increase in working capital requirements to finance the growth of our company owned locations,
•
Addition of administrative and marketing personnel as the business grows,
•
Increases in advertising, public relations and sales promotions for our franchising efforts in new and existing markets,
•
Software development and the purchase of servers commensurate with student population growth, and
•
The cost of being a public company and the continued increase in costs due to governmental compliance activities.
The Company currently generates cash flow through operations which we believe will be sufficient to sustain current operations for at least the next twelve months.
Cash flows from operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
The following summarizes the key components of our cash flows for the twelve months ended December 31, 2011 and 2010:
The net cash provided by operating activities for the twelve months ended December 31, 2011 were $13,756,928, compared to $10,972,626 for the comparable period in 2010. The increase was primarily due to the increase in our sales revenue during the period.
The net cash consumed by investing activities for the twelve months ended December 31, 2011 were $21,485,968, compared to $16,630,096 for the comparable periods in 2010.
On August 5, 2011, the Company entered into an Investment Agreement (the “Investment Agreement”) with Mr. Guozhen Zhou, an executive of the Company and also the founder of Asia Outstanding Students Admissions Union Ltd. (“AOSA”), a Company
registered in British Columbia, Canada. Under the Investment Agreement, both parties agreed to invest $5,500,000 in total in AOSA, in which Tsingda agreed to invest $3,000,000, representing 55% of the total equity interest of AOSA. As of December 31, 2011, the Company paid $3,000,000 as the prepayment.
On August 10, 2011, the Company entered into a Shares Investment Agreement (the “Acquisition Agreement”) with Beijing YIYING Angel Education Consulting Co., Ltd. (“YIYING Angel”) and Ms. Yitong Chen, the owner of YIYING Angel, to acquire 70% of the equity interest of YIYING Angel from Ms. Chen for consideration of $2,800,000 and 200,000 Company options to purchase ordinary shares at an exercise price of $5 per share. As of December 31, 2011, the Company paid $2,800,000 and the transaction closed as of March 30, 2012. On November 1, 2011, the Company entered into an investment agreement with Beijing ShangXue Educational Technology Co. (“Shangxue”) to purchase 80% of the equity interest of Shangxue for $1,800,000. As of December 31, 2011, the Company has paid $1,000,000 as the deposit. In the event Shangxue generates $1,000,000 of net profit in 2012, the Company has until April 30, 2013 to determine whether or not to pay the balance and purchase the 80% equity interest in Shangxue. If the net profit threshold is not met, the $1,000,000 deposit shall be applied against the purchase by the Company of various online resources from Shangxue.
The net cash provided by financing activities for the twelve months ended December 31, 2011 was $6,518,100 compared with $8,606,327 for the comparable period in 2010.
The Company was engaged in equity financing activities to fuel its fast expansion. On July 12, 2011, the Company entered into a definitive Securities Purchase Agreement with AMI Corporation (“AMI”). Under the Agreement, the Company sold 3,000,000 ordinary shares to AMI at the price of $4.56 per share receiving total cash proceeds of $13,680,000. As part of the private placement, the Company paid a consulting service fee of $1,394,400, which is accounted for as a stock issuance cost and the payment was directly deducted from the cash proceeds received from the private placement.
On August 21, 2011, the Company entered into a Share Purchase Agreement with ZHR Fund, one of the Company’s original shareholders, to buy back 1,875,000 ordinary shares of the Company held by ZHR Fund at a price of $3.30 per share, and the total cash payment was $6,187,500. On the same day, the Company cancelled such repurchased shares. The difference between the closing balance of cash and cash equivalents for the twelve months ended December 31, 2011 and 2010 is primarily attributable to the transactions mentioned above.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed 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. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements
A summary of significant accounting policies is included in Note 2 to the audited consolidated financial statements for the year ended December 31, 2010. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition. Other than as indicated in this quarterly report, there have been no material revisions to the critical accounting policies as filed in our Annual Report on Form 10-K as of and for the year ended December 31, 2010 with the SEC on March 11, 2011.
Variable Interest Entities
Pursuant to Financial Accounting Standards Board Interpretation No. 46 (Revised), “Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51” (“FIN 46R”) we are required to include in our consolidated financial statements the financial statements of variable interest entities. FIN 46R requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss for the variable interest entity or is entitled to receive a majority of the variable interest entity’s residual returns. Variable interest entities are those entities in which we, through contractual arrangements, bear the risk of, and enjoy
the rewards normally associated with ownership of the entity, and therefore we are the primary beneficiary of the entity.
Tsingda Education is considered a variable interest entity (“VIE”), and we are the primary beneficiary. On April 26, 2010, we entered into agreements with Tsingda Education pursuant to which we shall receive a quarterly fee in an amount equal Tsingda Education’s quarterly, after tax net profits. In accordance with these agreements, Tsingda Education shall pay consulting fees equal to 100% of its quarterly, after tax net profits to our wholly-owned subsidiary, Tsingda Management, and Tsingda Management shall supply the technology and administrative services needed to service Tsingda Education.
The accounts of Tsingda Education are consolidated in the accompanying financial statements pursuant to FIN 46R. As a VIE, Tsingda Education’s sales are included in our total sales, its income from operations is consolidated with ours, and our net income includes all of Tsingda Education’s net income. We do not have any non-controlling interest and accordingly, did not subtract any net income in calculating the net income attributable to us. Because of the contractual arrangements, we have pecuniary interest in Tsingda Education that requires consolidation of Tsingda Education’s financial statements with our financial statements.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in accordance with U.S, Generally Accepted Accounting Principles (“US GAAP”). The Company’s functional currency is the Chinese Renminbi (“RMB”); however the accompanying financial statements have been translated and presented in United States Dollars (“$”).
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, (Tsingda Technology, and Tsingda Management), and Tsingda Century and its subsidiaries, Tsingda Network and Tsingda Century Training School. All intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the allowance for doubtful accounts; the fair value determination of financial and equity instruments, the reliability of deferred tax assets; the recoverability of, intangible asset and property, plant and equipment; and accruals for income tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
RISKS AND UNCERTAINTIES
Tsingda Century and Tsingda Network operate under the authority of business licenses which were granted in 2003, and expire in 2023. Renewal of these licenses will depend on the result of government inspections which are made to ensure environmental laws are not breached.
The officers of the Company control through direct ownership of most of the equity interests of the Company. As a result, insiders will be able to control the outcome of all matters requiring approval of equity owners and will be able to elect all of the Company directors.
CASH AND CASH EQUIVALENTS
The Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with original maturity of three months or less, when purchased, to be cash and cash equivalents. The Company maintains cash with various banks and trust companies located in China. Cash accounts are not insured or otherwise protected. Should any bank or trust company holding cash deposits become insolvent, or if the Company is otherwise unable to withdraw funds, the Company would lose the cash on deposit with that particular bank or trust company.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are recognized and carried at the invoiced amount less an allowance for uncollectible accounts, as needed. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and the customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for doubtful accounts monthly. Past due balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
ADVANCE TO SUPPLIERS
Advance to suppliers represents the payments made and recorded in advance for goods and services to be received. The Company makes advances to suppliers for advertising, printing and other services and products.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company’s financial instruments, which include cash, short term investments, accounts receivable and other receivables, advances to suppliers, accounts payable, accrued liabilities, and other liabilities, approximate their fair values at December 31, 2011 and 2010.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation. Depreciation on property and equipment other than leasehold improvements is calculated on the straight-line method over the estimated useful lives of the assets as set out below:
Residual Value
Estimated Useful Life
Office furniture and equipment
%
5 years
Vehicles
%
5 years
INTANGIBLE ASSETS
Intangibles are the cost of computerized video lessons delivered both online and offline developed by the Company and the acquired intangible assets with finite lives consist of courseware. All costs incurred to establish the technological feasibility of a computer software product to be sold, leased, or otherwise marketed are charged to expenses as incurred. Development costs incurred after technological feasibility of a product has been established and before product sales begin are capitalized and amortized over the estimated life of the product, which thus far has been three years, starting when product sales begin. Technological feasibility is deemed to have been achieved when all the planning, designing, coding, and testing activities necessary to establish that the product can be produced to meet its design specifications have been completed, including functions, features, and technical performance requirements. Acquired coursewares with finite lives are carried at cost, less accumulated amortization and impairment. Amortization of acquired coursewares is calculated on a straight-line basis over three years.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment - Overall, long-lived assets, such as property, plant and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
CUSTOMER DEPOSITS
The Company required certain amount of deposits from its customers and franchised locations. The customer deposits are recorded as a liability when the Company receives it and will be recognized as revenue after the service is rendered.
REVENUE RECOGNITION
Online Courses
The Company provides online education programs to its franchisees, agents and individual customers. Revenue is realized through sales to franchisees and other agents of rights to conduct education services. The Company authorized the franchised locations to use its logo, all education programs and products and the Company receives a onetime licensing fee, annual management fee, and 20% of student generated revenue from the franchised location by providing them prepaid e-cards of 5 times the cash amount. All the mentioned fees are revenues or unearned revenues from the sale of e-cards. Revenue is recognized from each e-card sale as that e-card is used by a student to purchase online education courses, and is reported net of business tax. For example, if 10% of the value of an e-card is used, the Company recognizes such 10% as revenue and the remaining value of the e-card is not recognized as revenue until used by the student. The opening of cards is tracked by our IT system automatically and the revenue is proportionally recognized based on the progress of the e-cards usage.
Virtual Internet Classroom
The Company sold prepaid e-cards to the customers. Revenue is recognized from each e-card sale as that e-card is used by a student to purchase online education courses, and is reported net of business tax. For example, if 10% of the value of an e-card is used, the Company recognizes such 10% as revenue and the remaining value of the e-card is not recognized as revenue until used by the student. The opening of cards is tracked by our IT system automatically and the revenue is proportionally recognized based on the progress of the e-cards usage.
Sales of Materials and Publications
The Company started the sales of self-branded reference books and materials from August 2010. The revenue is recognized upon the products are delivered to the customers.
Offline courses
Offline tutorial courses are provided by Tsingda Century Training School (“Training School” or referred as “Huanggang Experimental School”) and by the Company owned learning centers. The revenue is recognized based on the progress of courses the students completed during the period.
ADVERTISING
Advertising is included in selling expenses for financial reporting. The Company incurred advertising costs of $4,442,589 and $3,150,215 for the years ended December 31, 2011 and 2010, respectively.
INCOME TAXES
Income taxes are accounted for under the asset and liability method pursuant to ASC 740 “Income Taxes”. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of income in the period that includes the enactment date. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.
ASC 740-10-25 clarifies the accounting for uncertain tax positions and requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as a component of income tax expense in the consolidated statements of income.
OTHER TAXES
The Company generates its income in China where Business Tax, Income Tax, City Construction and Development Tax, and Education Surcharge taxes are applicable.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period
The Company’s board of directors approved a three-for-one reverse stock split (the “Reverse Stock Split”) of the Company’s outstanding common stock on October 19, 2010. References to shares in the consolidated financial statements and the accompanying notes, including, but not limited to, the number of shares and per share amounts, have been adjusted to reflect the Reverse Stock Split on a retroactive basis.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial position and results of operations of the Company’s subsidiaries in the PRC are measured using the Chinese currency Renminbi as the functional currency, while the Company’s reporting currency is the US dollar. Balance sheet accounts with exception of equity of the subsidiaries are translated at the prevailing exchange rate in effect at each period end, income statement accounts are translated at the average rate of exchange during the period, and equity accounts were stated at their historical exchange rate. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the respective periods. Translation adjustments are included in the accumulated other comprehensive income in the consolidated statements of shareholders’ equity and comprehensive income.
COMPREHENSIVE INCOME
The Company has adopted ASC220, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income, its components, and accumulated balances in a full-set of general-purpose financial statements. The Company’s accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 “Fair Value Measurements and Disclosures”, adopted January 1, 2008, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for current receivables and payables qualify as financial instruments. Management concluded the carrying values are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and if applicable, their stated interest rate approximates current rates available. The three levels are defined as follows:
•
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
•
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value.
It is management’s opinion that as of December 31, 2010 and 2009, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet dates. The carrying amounts of short-term loans approximate their fair values because the applicable interest rates approximate current market rates.
RELATED PARTIES
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
PRODUCTS WARRANTIES
Refunds to students who withdraw from offline tutorial courses are rarely made and are made only at the discretion of the Company. For this reason and, since revenue is recognized only as services are provided, no provision is needed for possible withdrawals.
SEGMENT REPORTING
The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker has been identified as the chief executive officer of the Company who reviews financial information of separate operating segments based on US GAAP. The chief operating decision maker now reviews results analyzed by service line. This analysis is only presented at the revenue level with no allocation of direct or indirect costs. Consequently, the Company has determined that it has only one operating segment.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Management believes that none of the recently adopted accounting pronouncements will have a material effect on the Company financial position, results of operations, or cash flows.
In December 2009, the FASB codified Consolidations - “Improvements to Financial Reporting by Enterprises Involved with VIEs” (ASU 2009-17), guidance which was issued by the FASB in June 2009. The amendments in this Accounting Standards Update replace
the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and has (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The adoption of this standard will have no material impact on the Company’s consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB’s intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The guidance in ASU 2011-05 applies to both annual and interim financial statements and eliminates the option for reporting entities to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This ASU also requires consecutive presentation of the statement of net income and other comprehensive income. Finally, this ASU requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this ASU should be applied retrospectively and are effective for fiscal year, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
RECENT FINANCING
Our primary uses of cash have been for selling and marketing expenses and employee compensation. The main sources of cash flow have been revenues derived from franchisees and from our Company-owned locations. The Company currently generates its cash flow through operations which it believes will be sufficient to sustain current level of operations for at least the next twelve months.
The Company anticipates that expenditures through December, 2012 will consist primarily of establishment of new Company-owned learning centers, advertising and promotions, and other expenditures for general corporate purposes, including salaries and costs associated with further development of our content and product offerings.
The Company does not have any bank loans and is not expected to have any in the next twelve months. This income estimate does not include any potential outside funding.
EMPLOYEE INCENTIVE PLAN
On April 29, 2011, the Company adopted the 2011 Equity Incentive Plan (the “Plan”) pursuant to which the Board of Directors may grant ordinary shares and stock options to its employees. The Company granted 900,000 ordinary shares to three executives for no cost and granted one executive 100,000 non-qualified stock options to purchase 100,000 of the Company’s ordinary shares at an exercise price of $2 per share. The stock options vest over a term of 5 years. The fair value of the ordinary shares was estimated on the date of issuance. The calculated fair value of the options was $0.63 per share. The amount of compensation cost recognized for the options granted was $8,465 and recorded in the general and administrative expenses for the year ended December 31, 2011. The amount of compensation cost recognized for the shares issued were $1,440,000 and $0, and were recorded in the general and administrative expenses for the years ended December 31, 2011 and 2010, respectively.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a “smaller reporting company” as defined by Regulation S-K and as such, are not providing the information contained in this item pursuant to Regulation S-K.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages through comprising a portion of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of controls and procedures
As of the end of the period covered by this Annual Report, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer (“the Certifying Officers”), conducted evaluations of the Company’s disclosure controls and procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosures. Based on this evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were not effective to ensure that material information is recorded, processed, summarized and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act and the rules and regulations promulgated thereunder. The Chief Executive Officer’s and Chief Financial Officer’s conclusion regarding the Company’s disclosure controls and procedures is based solely on management’s conclusion that there is a material weakness in the Company’s internal control over financial reporting.
Management’s Report on Internal Controls Over Financial Reporting
Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Internal control over financial reporting is promulgated under the Exchange Act as a process designed by, or under the supervision of, our CEO and CFO and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition or disposition of our assets that could have a material effect on the financial statements.
Readers are cautioned that internal control over financial reporting, no matter how well designed, has inherent limitations and may not
prevent or detect misstatements. Therefore, even effective internal control over financial reporting can only provide reasonable assurance with respect to the financial statement preparation and presentation.
Our management, under the supervision and with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures and internal controls over financial reporting as defined in Exchange Act Rules 13a-15(e) and (f) and 15d-15(e) and (f) as of the end of the period covered by this Report based upon the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on such evaluation, our management has made an assessment that there is the following material weakness in our internal control over financial reporting as of December 31, 2011:
Currently, none of our employees, including our Chief Financial Officer, who is responsible for preparing and supervising the preparation of our financial statements, have any formal training in U.S. GAAP and SEC rules and regulations. In that regard, we rely exclusively on our independent accountants and our outside counsel for advice with respect to U.S. GAAP and SEC rules and regulations.
Changes in internal control over financial reporting
No significant changes were made in our internal control over financial reporting during the Company’s fourth quarter of 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
MANAGEMENT
Directors and Executive Officers
The following table sets forth the name, age, and position of our executive officers and directors. Executive officers are elected annually by our Board of Directors. Each executive officer holds his office until he resigns, is removed by the Board, or his successor is elected and qualified. Directors are elected annually by our stockholders at the annual meeting. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal.
NAME
AGE
POSITION
Zhang Hui
Chairman of the Board of Directors, Chief Executive Officer and President
Liu Juntao
Executive Vice President and Director
Kang Chungmai
Secretary and Chief Financial Officer
Norm Klein
Director
David Bolocan
Director
Bi Cheng
Director
Zhang Hui established Tsingda Education in 2003, and has been its chairman, chief executive officer since its inception. From 1999 to 2003, he was vice president of Singapore Holding Group, during when he has integrated management methods and cultural diversity under different background efficiently, and then setting up a new branch for Singapore Holding Group-Holding Technology (Shenzhen) Co., Ltd. From 1995 to 1999, Mr. Zhang worked as the newsroom director and vice chief editor of China technology information magazine, successfully hatching the publication of the best choice of Chinese excellently expertise, Chinese diathesis education, Chinese innovation education and China education research. He graduated from Wuhan University of Technology in 1989.
Liu Juntao has been the executive vice-president of Tsingda Education since its inception. Prior to his employ with Tsingda, he had over 10 years of administrative work for government. He also spent 5 years in private industry in the PRC where worked in product development, market exploiting and customer service. Mr. Liu graduated from Huazhong Agriculture University in 1983.
Kang Chungmai has been the chief financial officer and secretary of Tsingda Education since January 2010. From 2004 to 2007, he worked as managing director in Zero2IPO Group in Beijing a financial consulting firm. From 2007 to 2010, Mr. Kang worked as the managing partner of Deal Bed Capital, a consulting company. From 1999 to 2002, he served as CFO in
Optoma Electronics (the largest TFT-LCD backlight and DLP projector producer in the world). From 1996 to 1999, he served as financial manager in Far Eastern Department Stores (the largest chain of department stores in the Greater China Region) based in Taipei. He had broad experiences in general financial management, debt and equity financing, foreign exchange hedging, offshore holding structure design, and investment evaluation. Mr. Kang holds his master degree in International Finance from the University of Westminster, London, UK in 1996. He also expects to receive the PhD degree in Management from the University of Edinburgh, Edinburgh, Scotland in 2010.
Norm Klein, director, has over twenty years of experience working in manufacturing and process controls with major companies. Since 2001, Mr. Klein has acted as the Chief Financial Officer, Chief Operating Officer, and Investor Relations Officer for Eastbridge Investment Group Corporation [OTCBB: EBIG], a consulting firm. Prior to that, Mr. Klein worked with corporations such as Clorox, Honeywell, Dreyers Ice Cream, and Ingersol Rand Corporation, where Mr. Klein provided consulting expertise in strategic planning, financial management, marketing and selling, manufacturing and process controls. Mr. Klein holds a Bachelors Degree in Mechanical Engineering from Rose Hulman Institute and a Masters Degree in Business Administration from the University of Iowa.
David Bolocan, director, is a retail banking and marketing executive who has held positions at Sun Trust, Washington Mutual, JPM Chase and Bank of America. Since 2008, Mr. Bolocan has been a consumer banking products executive at Sun Trust. Previously, Mr. Bolocan was a consumer banking products executive at Washington Mutual (2007 to 2008) and JP Morgan Chase (2006 to 2007). From 2001 to 2006, Mr. Bolocan was an Executive Vice President at Bank of America, and its predecessor, MBNA. Mr. Bolocan is the author of ten books on popular business software packages. Mr. Bolocan holds a Master Degree in management sciences from the Massachusetts Institute of Technology and a Bachelors Degree in Computer Science and Economics from Harvard University.
Bi Cheng director, has been a professor and doctoral advisor at Peking University since 2004. Mr. Bi is also a researcher in the China National Institute for Educational Research and a member of the Academic Committee and vice principal of the China Principal Development School. During his career, Mr. Bi has hosted and participated in more than 40 state level projects, published twelve scholarly treatises, compiled educational documents and dictionaries, and released over 200 thesis papers. Mr. Bi received his Ph.D. from the Education Department of Beijing Normal University in 1988.
We believe that Zhang Hui, as chairman and chief executive officer, and Liu Juntao as executive vice president of our business since its inception in 2003, are each qualified to and should be a director of Tsingda eEDU Corporation. Mr. Zhang and Mr. Liu have both been instrumental in establishing Tsingda Education and overseeing its operations. We also believe Mr. Klein, Mr. Bolocan and Mr. Bi are each qualified and should be on our board of directors. Mr. Klein and Mr. Bolocan bring to the Company valuable expertise and knowledge of United States corporate governance, and Mr. Bi is a respected academic in the field of education that would contribute to the Board’s diversity.
Directors are elected until their successors are duly elected and qualified.
There are no family relationships among our directors or officers.
To the best of our knowledge, none of our directors or executive officers, including Nautilus Global Partners and Mid-Ocean Consulting who were promoters of the Company from the time of our incorporation to the time of its merger with Tsingda Technology, and Eastbridge Investment Group Corporation, who is a promoter of the Company, has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Code of Ethics
We currently do not have a code of ethics that applies to our officers, employees and directors, including our Chief Executive Officer and Chief Financial Officer, however, we intend to adopt one in the near future.
Compliance with Section 16(a) of the Exchange Act
During the fiscal year ended December 31, 2011, not all the directors and officers have filed, on a timely basis, reports required by section 16(a) of the Exchange Act.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officer received total annual salary and bonus compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
(1)
On May 24, 2010, we acquired Tsingda Technology in a reverse acquisition transaction that was structured as a share exchange and in connection with that transaction, Mr. Zhang Hui became our Chief Executive Officer and President and Kang Chungmai became our Chief Financial Officer. Prior to the effective date of the reverse acquisition, Mr. Zhang and Mr. Kang held the same positions with Tsingda Education, respectively. The annual compensation shown in this table includes the amounts Mr. Zhang received from Tsingda Education prior to the consummation of the reverse acquisition. Mr. Kang was hired by Tsingda Education in January 2010 and his annual salary is approximately $46,225. In addition, on April 29, 2011, the Company adopted the 2011 Equity Incentive Plan, pursuant to which the Board of Directors may grant ordinary shares and stock options to its employees. During the fiscal year 2011, the Company granted 300,000 Ordinary Shares to Mr. Kang for no cost and it was valued at $1.60 per share according to the closing price of the most recent equity transaction.
(2)
Mr. Joseph Rozelle resigned from the offices of President and Chief Financial Officer on May 20, 2010, and resigned as Secretary on May 24, 2010.
(3)
Mr. Karl Brenza was appointed as Chief Executive Officer on May 20, 2010, and resigned from such office on May 24, 2010.
Employment Agreements.
Except as noted below, there are no agreements or understandings for any of our executive officers or directors to resign at the request of another person and no officer or director is acting on behalf of nor will any of them act at the direction of any other person.
On January 1, 2010, we entered into an employment agreement with Mr. Zhang, our President and Chairman. Pursuant to the agreement, Mr. Zhang has agreed to work exclusively for the Company during the term and will receive a monthly salary of approximately $4,400. The agreement expires on December 31, 2019.
Grants of Plan-Based Awards
On April 29, 2011, the Company adopted the 2011 Equity Incentive Plan (the “Plan”) pursuant to which the Board of Directors may grant ordinary shares and stock options to its employees. The Company granted 900,000 ordinary shares to three executives for no cost and granted one executive 100,000 non-qualified stock options to purchase 100,000 of the Company’s ordinary shares at an exercise price of $2 per share. The stock options vest over a term of 5 years. The fair value of the ordinary shares was estimated on the date of issuance. The calculated fair value of the options was $0.63 per share. The amount of compensation cost recognized for the options granted was $8,465 and recorded in the general and administrative expenses for the year ended December 31, 2011. The amount of compensation cost recognized for the shares issued were $1,440,000 and $0, and were recorded in the general and administrative expenses for the years ended December 31, 2011 and 2010, respectively.
Outstanding Equity Awards at Fiscal Year End
The Company granted one executive 100,000 non-qualified stock options to purchase 100,000 of the Company’s ordinary shares at an exercise price of $2 per share. The stock options vest over a term of 5 years. The calculated fair value of the options was $0.63 per share.
Option Exercises and Stock Vested
No options to purchase our capital stock were exercised by any of our named executive officers during the fiscal year ended December 31, 2011 and no shares of restricted stock vested.
Pension Benefits
No named executive officers received or held pension benefits during the fiscal year ended December 31, 2011.
Nonqualified Deferred Compensation
No nonqualified deferred compensation was offered or issued to any named executive officer during the fiscal year ended December 31, 2011.
Potential Payments Upon Termination or Change in Control
Our executive officers are not entitled to severance payments upon the termination of their employment agreements or following a change in control.
Compensation of Directors
No member of our Board of Directors received any compensation for his services as a director during the fiscal year ended December 31, 2011.
Compensation Committee Interlocks and Insider Participation
During the fiscal year 2011 we did not have a standing compensation committee. Our Board of Directors was responsible for the functions that would otherwise be handled by the compensation committee. All directors participated in deliberations concerning executive officer compensation, including directors who were also executive officers, however, none of our executive officers received any compensation during the last fiscal year. None of our executive officers has served on the Board of Directors or compensation committee (or other committee serving an equivalent function) of any other entity, any of whose executive officers served on our Board or Compensation Committee.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of the date hereof, with respect to the beneficial ownership of the outstanding Ordinary Shares by (i) any holder of more than five percent (5%); (ii) each of our executive officers and directors; and (iii) our directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned. Unless otherwise stated, the address of the stockholders listed below is No. 39, Block 74, Lugu Rd., Shinjingshan District, Beijing.
(1)
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has ownership of, and voting power and investment power with respect to, our Ordinary Shares. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator.
(2)
Based on 35,754,862 Ordinary Shares issued and outstanding as of the date hereof.
(3)
Tsing Da Century Education Technology Co., Ltd., a Belize corporation, is the record owner of such shares. Mr. Zhang, our Chairman and President, and Mr. Liu, our Executive Vice President and Director, own 81.7% and 18.3%, respectively, of this entity. Accordingly, both Mr. Zhang and Mr. Liu may be deemed to be the beneficial owner of shares owned by such reporting person.
(4)
Includes 300,000 Ordinary Shares granted to Mr. Kang under the 2011 Equity Incentive Plan.
(5)
Includes 1,579,740 Ordinary Shares held by EastBridge Investment Group Corp, of which Norm Klein is Chief Operating Officer, Chief Financial Officer and Investor Relations Officer. Address of the person is: 8040 E. Morgan Trail Unit 18, Scottsdale, Arizona
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Promoters and certain control persons.
On March 12, 2010, Tsingda Education entered into an agreement with Maxim Group, LLC (“Maxim), a FINRA registered broker dealer, to act as a placement agent on a best efforts basis in connection with a proposed private placement offering of Tsingda
Education and its affiliates and subsidiaries. Under the Agreement, Maxim is entitled to receive 8% of the gross proceeds of the offering and stock purchase warrants equal to eight percent of the number of securities sold in the offering. The term of the warrants is five years, although not exercisable for the initial six months, and are exercisable at 110% of the per share offering price. We are required to register the Maxim warrants. Tsingda Education also is obligated to pay reasonable fees and expenses of Maxim not to exceed $50,000. We also agreed to indemnify Maxim against certain liabilities, including liabilities under the Securities Act. As a result of the September 16, 2010 financing, we paid Maxim as full compensation under the agreement, cash commissions of $411,000 (or 4.3% of the proceeds from the offering) and issued a stock purchase warrant to acquire 364,500 Ordinary Shares. The warrant term is five years and is exercisable at any time after six months from closing at an exercise price is $1.76. In addition, we reimbursed Maxim for $25,000 as its reasonable out of pocket expenses.
On May 17, 2010, we issued an aggregate of 915,086 Ordinary Shares (adjusted to reflect the 3 for 1 reverse split) to MJR Holdings, Inc., Christopher Fiore, Clifford Teller and Karl Brenza, our former Chief Executive Officer, for an aggregate purchase price of $30,000. The forgoing parties are affiliates of Maxim.
Pursuant to the Tsingda transaction, and as described elsewhere herein, on May 24, 2010, the Company issued 244,022.78 preferred shares of Compass to the Tsingda shareholders in exchange for 100% of the outstanding shares of Tsingda Technology. The Company also issued 2,079,740 Ordinary Shares to Eastbridge Investment Group Corporation in exchange for certain considerations provided by Eastbridge Investment Group Corporation, who is a promoter of the Company.
Tsingda Transactions
Tsingda Technology owns 100% of the issued and outstanding capital stock of Beijing Tsingda Century Management Consulting Ltd. (“Tsingda Management”), a wholly foreign owned enterprise incorporated under the laws of the People’s Republic of China (“PRC”). On April 26, 2010, Tsingda Management entered into a series of contractual agreements with Beijing Tsingda Century Investment Consultant of Education Co. Ltd (“Tsingda Education”), a company incorporated under the laws of the PRC, and its shareholders, in which Tsingda Management assumed management of the business activities of Tsingda Education and has the right to appoint all executives and senior management and the members of the board of directors. The contractual arrangements are comprised of a Consulting Services Agreement, Operating Agreement, Equity Pledge Agreement, and Option Agreement, through which Tsingda Management has the right to advise, consult, manage and operate Tsingda Education for a quarterly fee in the amount of 100% of Tsingda Education’s quarterly, after tax net profits. Additionally, Tsingda Education’s Shareholders have pledged their rights, titles and equity interest in Tsingda Education as security for Tsingda Management to collect consulting and services fees provided to Tsingda Education through an Equity Pledge Agreement. In order to further reinforce Tsingda Management’s rights to control and operate Tsingda Education, Tsingda Education’s shareholders have granted Tsingda Management the exclusive right and option to acquire all of their equity interests in Tsingda Education through an Option Agreement.
Advances were made during 2008 and 2009 to Mr. Zhang Hui, our chief executive officer and to Mr. Liu Juntao, our executive vice president, both of whom are equity shareholders of Tsing Da Century Education Technology Co., Ltd., a Belize corporation, which is the Company’s largest shareholder. The outstanding balance of such advances was $1,996,821 and $186,747 respectively at December 31, 2008. Additional advances of $299,734 and $6,584 were made during 2009 and repayments of $1,836,257 and $177,864 were received, leaving balances of $460,716 and $15,468 at December 31, 2009. As of March 31, 2010, all advances were paid back to Tsingda Education.
Other than employment, none of the following persons has any direct or indirect material interest in any transaction to which we are a party since our last fiscal year or in any proposed transaction to which we are proposed to be a party:
(A)
Any of our directors or officers;
(B)
Any proposed nominee for election as our director;
(C)
Any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to our Ordinary Shares; or
(D)
Any relative or spouse of any of the foregoing persons, or any relative of such spouse, who has the same house as such person or who is a director or officer of any parent or subsidiary of our company.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth fees billed to us by our independent registered public accounting firms during the fiscal years ended December 31, 2011 and December 31, 2010 for: (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements; (ii) services by our independent registered public accounting firms that are reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees; (iii) services rendered in connection with tax compliance, tax advice and tax planning; and (iv) all other fees for services rendered.
Audit Committee Policies
The Board of Directors is solely responsible for the approval in advance of all audit and permitted non-audit services to be provided by the independent auditors (including the fees and other terms thereof), subject to the de minimus exceptions for non-audit services provided by Section 10A(i)(1)(B) of the Exchange Act, which services are subsequently approved by the Board of Directors prior to the completion of the audit. None of the fees listed above are for services rendered pursuant to such de minimus exceptions.
Part IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT INDEX
(1) Incorporated herein by reference to the Form 10 Registration Statement filed on December 4, 2006.
(2) Incorporated herein by reference to the Form 10-Q Quarterly Report filed on May 15, 2008.
(3) Incorporated herein by reference to the Form 8-K Current Report filed on May 28, 2010.
(4) Incorporated by reference to the Form 8-K/A Current Report filed on June 3, 2010.
(5) Incorporated by reference to the Form 8-K Current Report filed on September 23 2010.
(6) Incorporated herein by reference to the Registration Statement on Form S-1 (Registration No. 333-169877) filed on October 12, 2010.
(7) Incorporated herein by reference to the Registration Statement on Form S-1/A filed on December 28, 2010.
(8) Incorporated herein by reference to the Registration Statement on Form S-1/A (Registration No. 333-169877) filed on December 3, 2010.
(9) Filed Herewith
(10) Incorporated herein by reference to the Registration Statement on Form S-1/A (Registration No. 333-170885) filed on January 4, 2011.
(11) Incorporated herein by reference to the Current Report on Form 8-K filed on July 26, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Tsingda eEDU Corporation
Cayman Islands
We have audited the accompanying consolidated balance sheets of Tsingda eEDU Corporation and its Subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for the years then ended. In connection with our audit for the consolidated financial statements, we have also audited the condensed parent company financial statements for the year ended December 31, 2011 and 2010. These consolidated financial statements and condensed parent company financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related condensed parent company financial statements, when considered in relation to the consolidated financial statements taken a whole, presents fairly, in all material aspects, the information set forth therein.
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
March 30, 2012
TSINGDA EEDU CORPORATION
Consolidated Balance Sheets
(Stated in US dollars)
The accompanying notes are an integral part of these financial statements.
TSINGDA EEDU CORPORATION
Consolidated Statements of Operations and Comprehensive Income
(Stated in US dollars)
The accompanying notes are an integral part of these financial statements.
TSINGDA EEDU CORPORATION
Consolidated Statement of Shareholders’ Equity
(Stated in US dollars)
The accompanying notes are an integral part of these financial statements.
Tsingda eEDU Corporation
Consolidated Statement of Shareholders’ Equity
(Stated in US dollars)
The accompanying notes are an integrated part of these unaudited consolidated financial statements
TSINGDA EEDU CORPORATION
Consolidated Statements of Cash Flows
(Stated in US dollars)
The accompanying notes are an integral part of these financial statements.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2010 and 2011
NOTE 1- ORGANIZATION AND BUSINESS OPERATIONS
Tsingda Century Investment Consultant of Education Co., Ltd. (“Tsingda Century”) was incorporated on October 23, 2003, in Beijing, the People’s Republic of China (the “PRC”). Beijing Tsingda Century Network Technology Co., Ltd. (“Tsingda Network”), the wholly owned subsidiary of Tsingda Century was incorporated in the PRC on February 14, 2004. Tsingda Century and its subsidiary provide high quality offline and online educational services for students ranging from six to eighteen years of age in the PRC. Tsingda eEDU Corporation (“Tsingda eEDU” or “the Company”, formerly “Compass Acquisition Corporation”) was incorporated in the Cayman Islands on September 27, 2006. The Company was originally organized as a “blank check” company to identify and acquire a target company or business seeking the advantages of being a publicly held corporation.
Tsing Da Century Education Technology Co., Ltd. (“Tsingda Technology”) was incorporated on December 11, 2009, in the British Virgin Islands, to serve as the intermediate holding company.
Tsingda Century Beijing Management Consulting Co., Ltd. (“Tsingda Management”) was incorporated on November 26, 2007 and was serving as the wholly owned foreign enterprise (“WOFE”) of Tsingda Technology.
On April 22, 2010, Tsingda Century Training School (“Tsingda School”) was incorporated in Beijing, the PRC, and it is a wholly owned subsidiary of Tsingda Century.
On September 23, 2011, Family Baby Kindergarten (“Family Baby”) was incorporated in Beijing, the PRC, and it is a wholly owned subsidiary of Tsingda Century.
As part of the restructuring, on April 26, 2010, Tsingda Management entered into a series of agreements with Tsingda Century and its shareholders, including an Operating Agreement, Proxy Agreement, Consulting Services Agreement, Equity Pledge Agreement and Option Agreement, which entitled Tsingda Management to receive substantially all of the economic benefits of Tsingda Century in consideration for consulting services provided by Tsingda Management to Tsingda Century. An Option Agreement allows Tsingda Management to acquire the shares of Tsingda Century when permitted by the PRC laws. The Proxy Agreement provides Tsingda Management with the voting rights of Tsingda Century’s shareholder and Equity Pledge Agreement pledges the shares in Tsingda Century to Tsingda Management without transferring legal ownership in Tsingda Century to Tsingda Management. Under the Consulting Services Agreement, Tsingda Management is the exclusive service provider, to Tsingda Century, for services, including general business operation, human resources, business development and Tsingda Century is obligated to make regular payments for such services provided. Under the Operating Agreement, Tsingda Century shall not conduct any transactions which may materially affect the assets, obligations, rights or the operations, without the written consent of Tsingda Management and Tsingda Century accepted Tsingda Management’s corporate policy provide by Tsingda Management in connection with Tsingda Century’s daily operations, financial management and the employment and dismissal of Tsingda Century’s employees. Through those agreements, Tsingda Management has the power to direct the activities that most significantly impact the economic performance of Tsingda Century and Tsingda Century became a variable interest entity (“VIE”) and is included in the consolidated group.
As all of the companies are under common control, this structure has been accounted for as a reorganization of entities under common control and the financial statements have been prepared as if the reorganization had occurred retroactively.
On May 24, 2010, the Company and its controlling shareholders entered into a share exchange agreement (the Agreement) with Tsingda Technology and all of the shareholders of Tsingda Technology. Under the Agreement, the Company acquired 100% of the outstanding equity interests of Tsingda Technology in exchange for 244,022.78 preferred shares of the Company. Each such share of preferred stock was convertible into 100 ordinary shares of the Company at such time as the number of authorized ordinary shares is increased. The transaction was closed in May 2010 and was accounted for as a reverse merger with a shell company and a recapitalization of Tsingda Technology. Tsingda eEDU Corporation is the accounting acquiree. Tsingda Tecknology is the accounting acquirer and the surviving entity
On November 15, 2010, the Company’s shareholders approved the change of the Company’s name from “Compass Acquisition Corporation” to “Tsingda eEDU Corporation” and the name change is effective immediately following the shareholder’s approval.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2010 and 2011
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in accordance with U.S, Generally Accepted Accounting Principles (“US GAAP”).The Company’s functional currency is the Chinese Renminbi (“RMB”); however the accompanying financial statements have been translated and presented in United States Dollars (“$”).
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, (Tsingda Technology, and Tsingda Management), and Tsingda Century and its subsidiaries, Tsingda Network and Tsingda Century Training School. All intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the allowance for doubtful accounts; the fair value determination of financial and equity instruments, the reliability of deferred tax assets; the recoverability of, intangible asset and property, plant and equipment; and accruals for income tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
RISKS AND UNCERTAINTIES
Tsingda Century and Tsingda Network operate under the authority of business licenses which were granted in 2003, and expire in 2023. Renewal of these licenses will depend on the result of government inspections which are made to ensure environmental laws are not breached.
The officers of the Company control through direct ownership of most of the equity interests of the Company. As a result, insiders will be able to control the outcome of all matters requiring approval of equity owners and will be able to elect all of the Company directors.
CASH AND CASH EQUIVALENTS
The Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with original maturity of three months or less, when purchased, to be cash and cash equivalents. The Company maintains cash with various banks and trust companies located in China. Cash accounts are not insured or otherwise protected. Should any bank or trust company holding cash deposits become insolvent, or if the Company is otherwise unable to withdraw funds, the Company would lose the cash on deposit with that particular bank or trust company.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are recognized and carried at the invoiced amount less an allowance for uncollectible accounts, as needed. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and the customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for doubtful accounts monthly. Past due balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
ADVANCE TO SUPPLIERS
Advance to suppliers represents the payments made and recorded in advance for goods and services to be received. The Company makes advances to suppliers for advertising, printing and other services and products.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2010 and 2011
FAIRE VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company’s financial instruments, which include cash, short term investments, accounts receivable and other receivables, advances to suppliers, accounts payable, accrued liabilities, and other liabilities, approximate their fair values at December 31, 2011 and 2010.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation. Depreciation on property and equipment other than leasehold improvements is calculated on the straight-line method over the estimated useful lives of the assets as set out below:
INTANGIBLE ASSETS
Intangibles are the cost of computerized video lessons delivered both online and offline developed by the Company and the acquired intangible assets with finite lives consist of courseware. All costs incurred to establish the technological feasibility of a computer software product to be sold, leased, or otherwise marketed are charged to expenses as incurred. Development costs incurred after technological feasibility of a product has been established and before product sales begin are capitalized and amortized over the estimated life of the product, which thus far has been three years, starting when product sales begin. Technological feasibility is deemed to have been achieved when all the planning, designing, coding, and testing activities necessary to establish that the product can be produced to meet its design specifications have been completed, including functions, features, and technical performance requirements. Acquired coursewares with finite lives are carried at cost, less accumulated amortization and impairment. Amortization of acquired coursewares is calculated on a straight-line basis over three years.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment - Overall, long-lived assets, such as property, plant and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
CUSTOMER DEPOSITS
The Company required certain amount of deposits from its customers and franchised locations. The customer deposits are recorded as a liability when the Company receives it and will be recognized as revenue after the service is rendered.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2010 and 2011
REVENUE RECOGNITION
Online Courses
The Company provides online education programs to its franchisees, agents and individual customers. Revenue is realized through sales to franchisees and other agents of rights to conduct education services. The Company authorized the franchised locations to use its logo, all education programs and products and the Company receives a onetime licensing fee, annual management fee, and 20% of student generated revenue from the franchised location by providing them prepaid e-cards of 5 times the cash amount. All the mentioned fees are revenues or unearned revenues from the sale of e-cards. Revenue is recognized from each e-card sale as that e-card is used by a student to purchase online education courses, and is reported net of business tax. For example, if 10% of the value of an e-card is used, the Company recognizes such 10% as revenue and the remaining value of the e-card is not recognized as revenue until used by the student. The opening of cards is tracked by our IT system automatically and the revenue is proportionally recognized based on the progress of the e-cards usage.
Virtual Internet Classroom
The Company sold prepaid e-cards to the customers. Revenue is recognized from each e-card sale as that e-card is used by a student to purchase online education courses, and is reported net of business tax. For example, if 10% of the value of an e-card is used, the Company recognizes such 10% as revenue and the remaining value of the e-card is not recognized as revenue until used by the student. The opening of cards is tracked by our IT system automatically and the revenue is proportionally recognized based on the progress of the e-cards usage.
Sales of Materials and Publications
The Company started the sales of self-branded reference books and materials from August 2010. The revenue is recognized when the products are delivered to the customers.
Offline courses
Offline tutorial courses are provided by Tsingda Century Training School (“Tsingda School” or referred as “Huanggang Experimental School”) and by the Company owned learning centers. The revenue is recognized based on the progress of courses the students completed during the year
ADVERTISING
The Company expenses advertising costs as incurred. Advertising is included in selling expenses for financial reporting. The Company incurred advertising costs of $4,442,589 and $3,150,215 for the years ended December 31, 2011 and 2010, respectively.
INCOME TAXES
Income taxes are accounted for under the asset and liability method pursuant to ASC 740 “Income Taxes”. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of income in the period that includes the enactment date. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.
ASC 740-10-25 clarifies the accounting for uncertain tax positions and requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as a component of income tax expense in the consolidated statements of income.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2010 and 2011
OTHER TAXES
The Company generates its income in China where Business Tax, Income Tax, City Construction and Development Tax, and Education Surcharge taxes are applicable.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.
The Company’s board of directors approved a three-for-one reverse stock split (the “Reverse Stock Split”) of the Company’s outstanding common stock on October 19, 2010. References to shares in the consolidated financial statements and the accompanying notes, including, but not limited to, the number of shares and per share amounts, have been adjusted to reflect the Reverse Stock Split on a retroactive basis.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial position and results of operations of the Company’s subsidiaries in the PRC are measured using the Chinese currency Renminbi as the functional currency, while the Company’s reporting currency is the US dollar. Balance sheet accounts with exception of equity of the subsidiaries are translated at the prevailing exchange rate in effect at each period end, income statement accounts are translated at the average rate of exchange during the period, and equity accounts were stated at their historical exchange rate. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the respective periods. Translation adjustments are included in the accumulated other comprehensive income in the consolidated statements of shareholders’ equity and comprehensive income.
COMPREHENSIVE INCOME
The Company has adopted ASC220, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income, its components, and accumulated balances in a full-set of general-purpose financial statements. The Company’s accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 “Fair Value Measurements and Disclosures”, adopted January 1, 2008, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for current receivables and payables qualify as financial instruments. Management concluded the carrying values are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and if applicable, their stated interest rate approximates current rates available. The three levels are defined as follows:
•
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
•
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value.
It is management’s opinion that as of December 31, 2011 and 2010, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet dates. The carrying amounts of short-term loans approximate their fair values because the applicable interest rates approximate current market rates.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2010 and 2011
RELATED PARTIES
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
PRODUCTS WARRANTIES
Refunds to students who withdraw from offline tutorial courses are rarely made and are made only at the discretion of the Company. For this reason and, since revenue is recognized only as services are provided, no provision is needed for possible withdrawals.
SEGMENT REPORTING
The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker has been identified as the chief executive officer of the Company who reviews financial information of separate operating segments based on US GAAP. The chief operating decision maker now reviews results analyzed by service line. This analysis is only presented at the revenue level with no allocation of direct or indirect costs. Consequently, the Company has determined that it has only one operating segment.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2010 and 2011
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Management believes that none of the recently adopted accounting pronouncements will have a material effect on the Company financial position, results of operations, or cash flows.
In December 2009, the FASB codified Consolidations - “Improvements to Financial Reporting by Enterprises Involved with VIEs” (ASU 2009-17), guidance which was issued by the FASB in June 2009. The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and has (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The adoption of this standard will have no material impact on the Company’s consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The guidance in ASU 2011-04 changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements, including clarification of the FASB’s intent about the application of existing fair value and disclosure requirements and changing a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU should be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. Early adoption by public entities is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The guidance in ASU 2011-05 applies to both annual and interim financial statements and eliminates the option for reporting entities to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This ASU also requires consecutive presentation of the statement of net income and other comprehensive income. Finally, this ASU requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this ASU should be applied retrospectively and are effective for fiscal year, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
NOTE 3 - ACCOUNTS RECEIVABLE
As of December 31, 2011 and 2010, accounts receivable consisted of the following:
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2010 and 2011
The change in the allowance for doubtful accounts is as follows:
NOTE 4 - ADVANCES TO SUPPLIERS
Advances to suppliers represent amounts prepaid for advertising, network, rent, store construction and decoration:
NOTE 5 - PREPAYMENTS FOR INVESTMENTS AND ACQUISITION
On August 10, 2011, the Company entered into a definitive Shares Investment Agreement (the “Acquisition Agreement”) with Beijing YIYING Angel Education Consulting Co., Ltd. (“YIYING Angel”) and Ms. Yitong Chen, the owner of YIYING Angel, to acquire 70% of the equity interest of YIYING Angel for consideration of $2,800,000 and 200,000 Company options to purchase ordinary shares at an exercise price of $5 per share to be granted to Ms. Yitong Chen. As of December 31, 2011, the Company paid $2,760,000 as the deposit and the options have not been granted.
On November 1, 2011, the Company entered into an investment agreement with Beijing ShangXue Educational Technology Co. (“Shangxue”) to purchase 80% of the equity interest of Shangxue for $1,800,000. As of December 31, 2011, the Company has paid $1,000,000 as the deposit.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2010 and 2011
NOTE 7- PROPERTYAND EQUIPMENT, NET
Property and equipment at December 31, 2011 and 2010 consisted of the following:
Depreciation expense for the years ended December 31, 2011 and 2010 were allocated to the following expense items respectively:
NOTE 8 - INTANGIBLE ASSETS, NET
Intangible assets at December 31, 2011 and 2010 consisted of the following:
The amortization expenses for the years ended December 31, 2011 and 2010 were $ 3,431,450 and $1,610,330 respectively.
NOTE 9 - DUE FROM THE RELATED PARTY
On August 5, 2011, the Company entered into a definitive Investment Agreement (the “Investment Agreement”) with Mr. Guozhen Zhou, an executive of the Company and also the founder of Asia Outstanding Students Admissions Union Ltd. (“AOSA”), a Company registered in British Columbia, Canada. Under the Investment Agreement, Tsingda agreed to pay Mr. Zhou $3,000,000, to acquire 55% of the total outstanding equity interests of AOSA. As of December 31, 2011, the Company paid $3,000,000 to Mr. Gouzhen Zhou. As of March 30, 2012, $2,900,000 has been paid back by Mr. Gouzhen Zhou since the transaction has not been closed.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2010 and 2011
NOTE 10 - PRIVATE PLACEMENT
On September 16, 2010, the Company entered into a Securities Purchase Agreement (“Securities Purchase Agreement”) with certain investors (“Investors”) pursuant to which the Company completed an offering (“Offering”) of units (“Units”) for total gross proceeds of $9,600,000. Each Unit is priced at $1.60 and consists of one (1) ordinary share, par value $0.000384 per share (“Ordinary Shares”), and a Series A Stock Purchase Warrant (“Warrants”) to purchase 0.35 of one Ordinary Share. The initial Warrant exercise price is $2.08 per share on a post split basis. An aggregate of 6,000,000 units were sold, resulted in the sale of 6,000,000 Ordinary Shares and Warrants to purchase 2,100,000 Ordinary Shares at $2.08 per share.
In connection with this private placement, the Company held back and placed in an escrow account an aggregate amount of $520,000, pursuant to the agreement entered with the lead purchaser of the Offering. As of December 31, 2011 and 2010, the receivable from escrow account is $100,000 and $520,000.
On July 12, 2011, the Company entered into a definitive Securities Purchase Agreement (the “Agreement”) with AMI Corporation (“AMI” or the “Purchaser”). Under this Agreement, the Company sold 3,000,000 ordinary shares to the Purchaser at the price of $4.56 per share receiving total cash proceeds of $13,680,000. As part of the private placement, the Company paid a consulting service fee of $1,394,400, which is accounted for as a stock issuance cost and the payment was directly deducted from the cash proceeds received from the private placement.
NOTE 11 - SHAREHOLDER’S EQUITY
On May 17, 2010, the Company issued 915,085 ordinary shares (adjusted to reflect the 3 for 1 reverse split) for $30,000 in cash to a group associated with the firm that is the placement agent of a private placement offering of Company equity securities, which offering is described in the following paragraphs. Also on May 17, 2010, the Company issued 2,079,740 ordinary shares (adjusted to reflect the 3 for 1 reverse split) to Eastbridge Investment Group Corporation, in return for services. The value of these shares, $1,477,000, was charged to expense prior to the reverse merger.
On May 24, 2010, the Company and its controlling shareholders entered into a share exchange agreement (the Agreement) with Tsingda Technology and all of the shareholders of Tsingda Technology. Under the Agreement, the Company acquired 100% of the outstanding equity interests of Tsingda Technology in exchange for 244,022.78 preferred shares of the Company. Each such share of preferred stock was convertible into 100 ordinary shares of the Company at such time as the number of authorized ordinary shares is increased. The transaction was closed in May 2010 and was accounted for as a reverse merger with a shell company and a recapitalization of Tsingda Technology. Tsingda eEDU Corporation is the accounting acquiree. Tsingda Technology is the accounting acquirer and the surviving entity.
On November 15, 2010, the Company’s shareholders approved a three-for-one reverse split of the Company’s issued and outstanding Ordinary Shares (and to increase the amount of the Company’s authorized Ordinary Shares from thirty-nine million sixty-two thousand five hundred shares (39,062,500); to one hundred million (100,000,000) shares.
As result of the reverse split and increase in share capital, the par value of the Company’s Ordinary Shares change from US$0.000128 per share to US$0.000384 per share and the Company’s total number of authorized Ordinary Shares authorized increased to 100,000,000 Ordinary Shares. At the same time, all the preferred stock automatically converted to ordinary shares at the ratio of one share of preferred stock to 100 ordinary shares.
All ordinary share data has been retroactively restated for the periods presented to reflect the Reverse Stock Split.
On August 21, 2011, the Company entered into a Share Purchase Agreement (the “Repurchase Agreement”) with ZHR Fund, one of the Company’s original shareholders, to buy back 1,875,000 ordinary shares of the Company held by ZHR Fund at the price of $3.30 per share, and the total cash payment is $6,187,500. On the same day, the Company cancelled such repurchased shares. As of December 31, 2011, the number of the Company’s outstanding ordinary shares is 35,754,862. Concurrent with the Repurchase Agreement, 656,250 outstanding warrants issued to ZHR Fund were cancelled.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2010 and 2011
NOTE 12 - SHARE BASED COMPENSATION
On April 29, 2011, the Company adopted the 2011 Equity Incentive Plan (the “Plan”) pursuant to which the Board of Directors may grant ordinary shares and stock options to its employees. The Company granted 900,000 ordinary shares to three executives for no cost and granted one executive 100,000 non-qualified stock options to purchase 100,000 of the Company’s ordinary shares at an exercise price of $2 per share. The stock options vest over a term of 5 years.
The fair value of the ordinary shares was estimated on the date of issuance. The amount of compensation cost recognized for the shares issued were $1,440,000 and $0, and were recorded in the general and administrative expenses for the years ended December 31, 2011 and 2010, respectively.
The Company uses the Black-Sholes option-pricing model to estimate the fair value of its stock options. The fair value of stock options was estimated on the date of grant. Valuation assumptions used in the Black-Sholes option-pricing model for stock options granted include (1) discount rate of 2.13% based upon United States 5- year Treasury yields in effect at the time of the grant; (2) expected term of 5 years; (3) expected volatility of 51% and (4) zero expected dividends. The calculated fair value of the options was $0.63 per share. No stock options were exercised during the year ended December 31, 2011. The amount of compensation cost recognized for the options granted were $8,465 and $0, and were recorded in the general and administrative expenses, for the year ended December 31, 2011 and 2010, respectively.
No income tax benefit was recognized in the income statement for the shares and stock options as such compensation expenses were recorded and incurred by Tsingda eEDU Corporation, a Cayman Island incorporated entity.
NOTE 13 - STATUTORY RESERVE
In accordance with the relevant laws and regulations of the PRC, the Company’s PRC subsidiaries are required to transfer 10% of their respective after tax profit, as determined in accordance with PRC accounting standards and regulations, to a general reserve fund until the balance of the fund reaches 50% of the registered capital of the respective subsidiary. The transfer to this general reserve fund must be made before distribution of dividends can be made. As of December 31, 2011, the registered capitals of Tsingda Century and Tsingda Network are $4,421,156 and $588,235, respectively, and both companies have made the required allocations to the general reserves. As of December 31, 2011 and 2010, the PRC subsidiaries had appropriated $1,955,454 and $1,955,454, respectively to the general reserve funds, which are restricted from being distributed to the Company. General reserve funds are restricted for set off against losses, expansion of production and operation or increase in registered capital of the respective company. These reserves are therefore not available for distribution except in liquidation.
Further, the PRC subsidiaries may, at the discretion of the enterprise, make appropriations to a staff welfare and bonus reserve in accordance with the relevant laws and regulations in the PRC. The appropriation to staff welfare and bonus reserve is recognized as an expense as it is a current liability to the employees. For the years ended December 31, 2011 and 2010, the PRC subsidiaries had made appropriations to the staff welfare and bonus reserve of $443,010 and $443,010, respectively.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2010 and 2011
NOTE 14 - INCOME TAXES
The Company is incorporated in the Cayman Islands, and is not subject to tax on income or capital gain under the current laws of the Cayman Islands. In addition, upon payment of dividends by the Company to its shareholders, no Cayman Islands withholding tax is imposed. The Company’s other subsidiaries are subject to income tax as described below.
British Virgin Islands (“BVI”)
Under the current laws of BVI, our BVI subsidiaries are not subject to tax on income or capital gain. In addition, payments of dividends by our BVI subsidiaries to their shareholders are not subject to withholding tax in the BVI.
PRC
Prior to January 1, 2008, the Company was governed by the previous Income Tax Law (the “Previous Tax Law”) of China. Under the Previous Tax Law, the Company’s PRC subsidiaries, Tsingda Management, Tsingda Century and Tsingda network, were entitled various preferential tax treatments.
On March 16, 2007, the National People’s Congress passed the new Enterprise Income Tax law (the “new EIT law”) which imposes a single income tax rate of 25% for most domestic enterprises and foreign investment enterprises. The new EIT law was effective as of January 1, 2008. The new EIT law provides a five-year transition period from its effective date for those enterprises which were established before March 16, 2007 and which were entitled to a preferential lower tax rate under the then effective tax laws or regulations, as well as grandfathering tax holidays. Further, according to the new EIT law, entities that qualify as “High and New Technology Enterprises” are entitled to the preferential EIT rate of 15%. Tsingda Century has received approval for the status as a “High and New Technology Enterprises”. The status is valid for three years starting from June 2009 and will be renewed after evaluation by relevant government authorities every three years. Further, on December 26, 2007, the PRC government passed the detailed implementing rules which allow enterprises to continue to enjoy their unexpired tax holiday under the previous income tax laws and rules. As a result, under the new EIT law, Tsingda Century’s tax rate are 15% for the calendar years from 2010 to 2012 and subject to renewal of the status of “High and New Technology Enterprises” after calendar year 2012; and Tsingda Network and Tsingda School’s tax rates are 25%. Tsingda Management’s tax rates are 22% and 24% for 2010 and 2011 and 25% thereafter. For the year ended December 31, 2010 and 2009, Tsingda Management, Tsingda Network and Tsingda School did not generate any taxable income.
The new EIT Law also provides that an enterprise established under the laws of foreign countries or regions but whose “de facto management body” is located in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for its worldwide income. The Implementing Rules of the new EIT Law merely defines the location of the “de facto management body” as “the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located.” On April 22, 2009, the PRC State Administration of Taxation further issued a notice entitled “Notice Regarding Recognizing Offshore-Established Enterprises Controlled by PRC Shareholders as Resident Enterprises Based on Their Place of Effective Management.” Under this notice, a foreign company controlled by a PRC company or a group of PRC companies shall be deemed as a PRC resident enterprise, if (i) the senior management and the core management departments in charge of its daily operations mainly function in the PRC; (ii) its financial decisions and human resource decisions are subject to decisions or approvals of persons or institutions in the PRC; (iii) its major assets, accounting books, company seals, minutes and files of board meetings and shareholders’ meetings are located or kept in the PRC; and (iv) more than half of the directors or senior management personnel with voting rights reside in the PRC. Based on a review of surrounding facts and circumstances, the Company does not believe that it is likely that its operations outside of the PRC should be considered a resident enterprise for PRC tax purposes. However, due to limited guidance and implementation history of the new EIT Law, should the Company be treated as a resident enterprise for PRC tax purposes, the Company will be subject to PRC tax on worldwide income at a uniform tax rate of 25% retroactive to January 1, 2008.
The new EIT Law also imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Such withholding income tax was exempted under the previous income tax regulations. The Cayman Islands, where the Company is incorporated, does not have such tax treaty with China.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2010 and 2011
The provision for taxes on earnings consisted of:
Income tax expense, which is all incurred in the PRC, consists of:
A reconciliation between the income tax computed at the U.S. statutory rate and the Company’s provision for income tax is as follows:
The tax effect of temporary differences that gives rise to significant portions of the deferred income tax assets are presented below:
Accounting for Uncertainty in Income Taxes
The Company adopted the provisions of Accounting for Uncertainty in Income Taxes on January 1, 2007. The provisions clarify the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with the standard “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of Accounting for Uncertainty in Income Taxes also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on the Company’s evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.
The Company may from time to time be assessed interest or penalties by major tax jurisdictions. In the event it receives an assessment for interest and/or penalties, it will be classified in the financial statements as tax expense.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2010 and 2011
NOTE 15 - EARNINGS PER SHARE
Basic earnings per share (“EPS”) excludes the dilutive effect of common stock equivalents and is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS includes the dilutive effect of common stock equivalents, which consists primarily of stock options and warrants, and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the period.
The following table is a reconciliation of basic and diluted EPS for the years ended December, 2011 and 2010:
NOTE 16 - COMMITMENTS AND CONTINGECIES
Lease Obligations
The Company has entered into multiple lease agreements for the lease of premises for company directly owned learning centers. As of December 31, 2011, the Company’s commitments for minimum lease payments under these un-revocable operating leases for the next five years are as follows:
Tax issues
The tax authority of the PRC Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises had completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings which may lead to additional tax liabilities.
NOTE 17 - CONCENTRATIONS
For the years ended December 31, 2011 and 2010, no individual customers contributed more than 10% of the Company’s revenue.
For the years ended December 31, 2011 and 2010, no purchase (net of VAT) from any individual vendor accounted for more than 10% of the total net purchases of the Company.
NOTE 18 - OPERATING RISKS
Lack of Insurance
The Company could be exposed to liabilities or other claims for which the Company would have no insurance protection. The Company does not currently maintain any business interruption insurance, products liability insurance, or any other comprehensive insurance policy except for property insurance policies with limited coverage. As a result, the Company may incur uninsured liabilities and losses as a result of the conduct of its business. There can be no guarantee that the Company will be able to obtain additional insurance coverage in the future, and even if it can obtain additional coverage, the Company may not carry sufficient insurance coverage to satisfy potential claims. Should uninsured losses occur, any purchasers of the Company’s common stock could lose their entire investments.
Country risk
The Company has significant operating risk in the PRC. The operating results of the Company may be adversely affected by changes in the political and social conditions in the PRC and by changes in Chinese government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The Company can give no assurance that those changes in political and other conditions will not result in have a material adverse effect upon the Company’s business and financial condition.
Exchange risk
The Company cannot guarantee the Renminbi and US dollar exchange rate will remain steady, therefore the Company could post the same profit for two comparable periods and post higher or lower profit depending on exchange rate of Renminbi and US dollar. The exchange rate could fluctuate depending on changes in the political and economic environments without notice.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
for the years ended December 31, 2010 and 2011
Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash, short term investments, accounts receivable and advances to suppliers. However, all of the assets of Tsingda Century, Tsingda Network and Tsingda Century Training School, are located in the PRC and cash balances are on deposit at financial institutions in the PRC, the currency of which is not free trading. Foreign exchange transactions are required to be conducted through institutions authorized by the Chinese government and there is no guarantee that Chinese currency can be converted to U.S. or other currencies.
NOTE 19 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Basis of Presentation
The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X, as the restricted net assets of the subsidiaries of Tsingda eEDU Corporation exceed 25% of the consolidated net assets of Tsingda eEDU Corporation. The ability of the Company’s Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances of the Chinese operating subsidiaries. Because substantially all of the Company’s operations are conducted in China and a substantial majority of its revenues are generated in China, a majority of the Company’s revenue being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict its ability to convert RMB into US Dollars.
The condensed parent company financial statements have been prepared using the same accounting principles and policies described in the notes to the consolidated financial statements, with the only exception being that the parent company accounts for its subsidiaries using the equity method. Refer to the consolidated financial statements and notes presented above for additional information and disclosures with respect to these financial statements.
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
for the years ended December 31, 2010 and 2011
TSINGDA EEDU CORPORATION
Condensed Parent Company Balance Sheets
(Stated in US dollars)
TSINGDA EEDU CORPORATION
Notes to the Consolidated Financial Statements (Continued)
for the years ended December 31, 2010 and 2011
TSINGDA EEDU CORPORATION
Condensed Parent Company Statements of Operations
(Stated in US dollars)
Condensed Parent Company Statements of Cash Flows
(Stated in US Dollars)
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: March 30, 2012
/s/ Zhang Hui
Zhang Hui
Chief Executive 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 and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Zhang Hui
Chief Executive Officer
March 30,
and Chairman of the Board
Zhang Hui
/s/ Kang Chungmai
Chief Financial Officer and
March 30,
Secretary
Kang Chungmai
/s/ Liu Juntao
Executive Vice President and
March 30,
Director
Liu Juntao
/s/ Norm Klein
Director
March 30,
Norm Klein
/s/ David Bolocan
Director
March 30,
David Bolocan
/s/ Bi Cheng
Director
March 30,
Bi Cheng