UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 30, 2010
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 333-150385
HQ GLOBAL EDUCATION INC.
(Exact name of registrant as specified in its charter)
Delaware 26-1806348
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27th Floor, BOBO Fortune Center, No.368, South Furong Road,
Changsha City, Hunan Province, 410007
People's Republic of China
(Address of principal executive offices)
Tel: (86 731) 87828601
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. [ ]
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of January 14, 2011, 33,000,000 shares of the Company's common stock, $0.0001
par value, were issued and outstanding.
HQ GLOBAL EDUCATION INC.
FORM 10-Q
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets as of November 30, 2010 and
August 31, 2010 3
Condensed Consolidated Statements of Income and Comprehensive
Income for the three months ended November 30, 2010 and 2009 4
Condensed Consolidated Statements of Cash Flows for the three months
ended November 30, 2010 and 2009 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. (REMOVED AND RESERVED) 28
Item 5. Other Information 28
Item 6. Exhibits 29
SIGNATURES 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
HQ GLOBAL EDUCATION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
November 30, August 31,
2010 2010
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,798,855 $ 5,225,764
Accounts receivable 10,524,328 9,023,824
Other receivables 1,339,009 40,972
Inventory 460,959 674,200
Advances to vendors 1,874,313 552,344
------------ ------------
Total current assets 23,997,464 15,517,104
PROPERTY AND EQUIPMENT, NET 31,618,255 29,009,794
INTANGIBLE ASSETS, NET 2,059,593 2,029,519
------------ ------------
TOTAL ASSETS $ 57,675,312 $ 46,556,417
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans $ 1,342,427 $ 1,314,744
Long-term loans - current portion 652,465 235,038
Accounts payable 2,057,023 2,278,346
Payroll tax payable 14,277 3,232
Payroll payable 571,056 341,098
Unearned revenues 4,718,248 --
Due to shareholder - current portion 46,666 --
Other payables and accrued liabilities 855,961 850,905
------------ ------------
Total current liabilities 10,258,123 5,023,363
Long-term loans, less current portion -- 477,421
------------ ------------
Due to shareholder, net of current portion 310,000 310,000
------------ ------------
Other long-term payables 98,310 96,757
------------ ------------
TOTAL LIABILITIES 10,666,433 5,907,541
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $0.001 par value, 40,000,000 shares authorized,
none issued and outstanding -- --
Common Stock, $0.0001 par value 100,000,000 shares authorized,
33,000,000 shares issued and outstanding
at November 30, 2010 and August 31, 2010 3,300 3,300
Additional paid-in capital 1,226,674 1,226,674
Accumulated other comprehensive income 2,661,151 1,785,928
Statutory reserve 11,720,727 10,339,551
Retained earnings 31,397,027 27,293,423
------------ ------------
Total shareholders' equity 47,008,879 40,648,876
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 57,675,312 $ 46,556,417
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
HQ GLOBAL EDUCATION INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
For the three months ended
November 30,
2010 2009
------------ ------------
Revenues
Fee based $ 12,198,708 $ 8,798,076
Service based 4,443,050 4,211,002
------------ ------------
16,641,758 13,009,078
------------ ------------
Cost of revenues
Fee based (6,177,728) (4,293,119)
Service based (3,970,014) (3,565,373)
------------ ------------
(10,147,742) (7,858,492)
------------ ------------
Gross profit 6,494,016 5,150,586
Selling expenses (169,225) (136,094)
General and administrative expenses (780,402) (451,564)
------------ ------------
Income from operations 5,544,389 4,562,928
Other expenses
Interest expenses (30,574) (19,361)
Other expenses (29,035) (969,397)
------------ ------------
Total other expenses (59,609) (988,758)
------------ ------------
Income before income taxes 5,484,780 3,574,170
Provision for income taxes -- --
------------ ------------
Net income 5,484,780 3,574,170
------------ ------------
Other comprehensive income
Foreign currency translation income 875,223 13,865
------------ ------------
Comprehensive Income $ 6,360,003 $ 3,588,035
============ ============
Basic and diluted income per common share $ 0.17 $ 0.17
============ ============
Basic and diluted weighted average
common shares outstanding 33,000,000 20,500,000
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
HQ GLOBAL EDUCATION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended
November 30,
2010 2009
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,484,780 $ 3,574,170
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 576,556 391,099
Loss on retirement of property & equipment -- 969,397
Changes in assets and liabilities
(Increase) decrease in -
Accounts receivable (1,306,289) (2,503,233)
Other receivables (1,288,187) (53,285)
Inventory 226,707 1,452,210
Increase (decrease) in -
Accounts payable (268,430) (129,549)
Payroll Payable 222,059 192,497
Taxes payable 10,942 8,777
Unearned revenues 4,703,089 3,349,022
Other payables and accrued liabilities (13,302) 113,781
------------ ------------
Net cash provided by operating activities 8,347,925 7,364,886
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of intangible assets -- (30,758)
Acquisition of property & equipment (2,555,154) (6,395,032)
Advances to vendors - construction in progress (1,306,128) --
------------ ------------
Net cash used in investing activities (3,861,282) (6,425,790)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on long term loan (74,755) (58,586)
Proceeds from loans to related party -- 878,789
Due to shareholder 46,666 --
------------ ------------
Net cash provided by (used in) financing activities (28,089) 820,203
------------ ------------
EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS 114,537 2,060
NET INCREASE IN CASH & CASH EQUIVALENTS 4,573,091 1,761,359
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 5,225,764 3,848,040
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 9,798,855 $ 5,609,399
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 30,665 $ 27,155
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
HQ GLOBAL EDUCATION INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
HQ Global Education Inc. ("the Company"), provides a wide range of educational
programs and services through vocational schools, consisting primarily of
customized education programs for various vocational skills and vocational
training services to a varied student population throughout the People's
Republic of China.
The Company, formerly known as Green Star Mining Corp., was incorporated under
the laws of the State of Delaware on January 22, 2008. On February 8, 2010, the
Company acquired all of the outstanding capital stock of Risetime Group Limited
("Risetime"), a BVI business company incorporated in British Virgin Islands on
December 17, 2007. Risetime owns 100% of the equity of Xiangtan Nicestar
Business Administration Co., Ltd. ("Xiangtan Nicestar") through its 100%
subsidiary, Global Education International Ltd. ("GEI"), an investment holding
company incorporated in Hong Kong on November 15, 2007. Xiangtan Nicestar is a
wholly foreign-owned enterprise incorporated in Xiangtan City, Hunan Province,
People's Republic of China ("PRC") on September 30, 2009 and is primarily
engaged in providing business administration, planning and consulting services.
Substantially all Risetime and GEI's operations are conducted in China through
Xiangtan Nicestar, and through contractual arrangements with Xiangtan Nicestar's
consolidated affiliated entities in China, including Hunan Oya Education
Technology Co., Ltd. ("Oya") and Oya's subsidiaries and variable interest
entities ("VIEs"). Oya is a company incorporated in Changsha City, Hunan
Province, PRC on November 20, 2008 and is primarily engaged in providing
vocational education service and vocational skills training service.
In connection with the acquisition, the Company issued 20,500,000 shares of
common stock to the shareholder of Risetime in exchange for all of the capital
stock of Risetime (the "Share Exchange" or "Merger"). Upon the completion of the
Merger, the shareholders of Risetime own 62.12% of the issued and outstanding
capital stock of the Company and consequently control the business and operation
of the Company.
The acquisition was accounted for as a reverse acquisition under the purchase
method of accounting since there was a change of control. Accordingly, Risetime
and its subsidiaries will be treated as the continuing entity for accounting
purposes.
In March 2010, subsequent to the end of the second quarter of fiscal year 2010,
Green Star Mining Corp. changed its name to HQ Global Education Inc. to more
effectively reflect the Company's business and communicate the Company's brand
identity to customers.
On July 28, 2009, Oya entered into certain exclusive agreements with Changsha
Huanqiu Vocational Secondary School ("Changsha Huanqiu") and Shaoshan Huanqiu
Vocational Technical Secondary School ("Shaoshan Huanqiu") and their
shareholders. Pursuant to these agreements, Oya provides exclusive consulting
and other general business operation services to Changsha Huanqiu and Shaoshan
Huanqiu in exchange for substantially all net income of Changsha Huanqiu and
Shaoshan Huanqiu. Oya has the right to appoint all senior management personnel
of Changsha Huanqiu and Shaoshan Huanqiu.
On November 28, 2009, Xiangtan Nicestar entered into certain exclusive
agreements with Oya and its shareholders. Pursuant to these agreements, Xiangtan
Nicestar provides exclusive consulting and other general business operation
services to Oya in exchange for all net income of Oya. All voting rights of Oya
are assigned to Xiangtan Nicestar and Xiangtan Nicestar has the right to appoint
all directors and senior management personnel of Oya. In addition, Oya's
shareholders have pledged their equity interest in Oya to Xiangtan Nicestar as
collateral for the fees for consulting and other services due to Xiangtan
Nicestar.
As a result of these contractual arrangements, which obligate Oya to absorb a
majority of the risk of loss from Changsha Huanqiu and Shaoshan Huanqiu's
activities and enable Oya to receive a majority of its expected residual
returns, Oya accounts for Changsha Huanqiu and Shaoshan Huanqiu as variable
interest entities under ASC 810-10, "Consolidation". Accordingly, Oya has
included the accounts of Changsha Huanqiu and Shaoshan Huanqiu in its
consolidated financial statements. For the same reason, Xiangtan Nicestar
accounts for Oya as a VIE and includes Oya's accounts in its consolidated
financial statements.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. These condensed consolidated financial
6
statements and notes should be read in conjunction with the consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K filed with the Securities and Exchange Commission on November 29, 2010.
Operating results for the three months ended November 30, 2010 are not
necessarily indicative of the results that may be expected for the full year.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles in the United States
of America ("U.S. GAAP"). The condensed consolidated financial statements
include the financial statements of the Company, Risetime, GEI, Xiangtan
Nicestar, Oya, as well as Oya's subsidiaries and VIEs. All significant
inter-company balances and transactions are eliminated in consolidation.
The Company has 11 VIEs in total including Oya. Oya operates four private
secondary vocational schools (Changsha Huanqiu, Shaoshan Huanqiu, Hunan New HQ
Technical School and Tianzhen Huanqiu Technical Secondary School) and a public
secondary vocational school (Shaoshan Vocational School) in China. Through
Changsha Huanqiu, the Company operates five public secondary vocational schools,
Yingjing Vocational School, Tianquan Vocational School, Shimian Vocational
School, Lushan Vocational School and Shaoyang Vocational School.
USE OF ESTIMATES
The preparation of condensed consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying
notes, and disclosure of contingent liabilities at the date of the consolidated
financial statements. Estimates are used for, but not limited to, the selection
of the useful lives and residual values of property and equipment and intangible
assets, provision necessary for contingent liabilities, fair values, revenue
recognition, and other similar charges. Management believes that the estimates
utilized in preparing its consolidated financial statements are reasonable and
prudent. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents. The Company
maintains uninsured cash and cash equivalents with various banks in the PRC. The
Company has not experienced any losses to date as a result of this policy.
ACCOUNTS RECEIVABLE
Accounts receivable consist of balances receivable for the charges of education
services provided and for tuition revenues. Accounts receivable are recorded at
net realizable value consisting of the carrying amount less an allowance for
uncollectible amounts. As of November 30, 2010 and August 31, 2010, total
accounts receivable were $10,524,328 and $9,023,824 respectively, of which,
$8,339,334 and $6,946,895 were tuition fees due from governmental organizations
and associations under the impoverished student aid programs for the periods
ended November 30, 2010 and August 31, 2010.
According to the Company's policy, accounts receivable over 90 days are
considered overdue. The Company does periodical reviews as to whether the
carrying values of accounts have become impaired. The assets are considered to
be impaired if the collectability of the balances become doubtful, accordingly,
the management estimates the allowance for anticipated uncollectible receivable
balances. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be recorded
as a change in allowance for doubtful accounts. As of November 30, 2010 and
August 31, 2010, the allowance for doubtful accounts was $-0-.
INVENTORIES
Inventories are stated at the lower of cost and market value. Cost is calculated
using the weighted average method. The Company estimates the write-down of
excessive, slow moving and obsolete inventory as well as inventory whose
carrying value is in excess of net realizable value. As of November 30, 2010 and
August 31, 2010, no reserve was considered necessary.
ADVANCES TO VENDORS
Advances to vendors consist of balances paid for materials for construction of
classrooms and related teaching facilities that have not been provided to or
received by the Company. Advances to vendors are reviewed periodically to
determine whether their carrying value has become impaired. The Company
considers the assets to be impaired if facts and circumstances indicate that the
collectability of the services and materials become doubtful. The Company has
7
determined that no reserve is necessary as of November 30, 2010 and August 31,
2010.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation and
any impairment losses. The cost of an asset is comprised of its purchase price
and any directly attributable costs of bringing the asset to its working
condition and location for its intended use. Expenditures incurred after the
property and equipment have been put into operation, such as repairs and
maintenance and overhaul costs, are charged to operations in the period in which
they are incurred.
In situations where it can be clearly demonstrated that the expenditure has
resulted in an increase in the future economic benefit expected to be obtained
from the use of the asset beyond its originally assessed standard of
performances, the expenditure is capitalized as an additional cost of the asset.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, less any estimated residual value. Estimated useful
lives of the assets are as follows:
Teaching and dormitory facilities 10-30 years
Educational equipments and books 5 years
Office equipments and other equipments 5 years
Automobiles 5 years
Any gain or loss on disposal or retirement of property and equipment represents
the difference between the net sales proceeds and the carrying amount of the
asset, and is recognized in the statements of incomes in the period it occurred.
CONSTRUCTION-IN-PROGRESS
The Company constructs certain properties and equipment to be used in its
operations. External costs directly related to the construction of such assets,
including equipment installation and shipping costs, are also capitalized.
Depreciation expense is not recorded on construction-in-progress until such
assets are placed in service.
INTANGIBLE ASSETS
Intangible assets are accounted for in accordance with the provisions of ASC
350, "Goodwill and Other Intangible Assets". Under ASC 350, intangible assets
deemed to have indefinite useful lives are not amortized. Indefinite-lived
intangible assets are assessed for impairment at least annually based on
comparisons of their respective fair values to their carrying values. Intangible
assets with a finite useful life are amortized over their useful lives.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with ASC 360, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company is required to review its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through the estimated
undiscounted cash flows expected to result from the use and eventual disposition
of the assets. Whenever any such impairment exists, an impairment loss will be
recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including property, plant and equipment and
other assets, for recoverability when events or circumstances indicate that the
net carrying amount is greater than its fair value. Assets are grouped and
evaluated at the lowest level for their identifiable cash flows that are largely
independent of the cash flows of other groups of assets. The Company considers
historical performance and future estimated results in its evaluation of
potential impairment and then compares the carrying amount of the asset to the
future estimated cash flows expected to result from the use of the asset. If the
carrying amount of the asset exceeds estimated expected undiscounted future cash
flows, the Company measures the amount of impairment by comparing the carrying
amount of the asset to its fair value. The estimation of fair value is generally
determined by using the asset's expected future discounted cash flows or market
value. The Company estimates fair value of the assets based on certain
assumptions such as budgets, internal projections, and other available
information as considered necessary. There was no impairment of long-lived
assets during the three months ended November 30, 2010 and 2009.
UNEARNED REVENUES
Unearned revenues represent amounts received in advance for tuition and service
fees. The Company recognizes these funds as a current liability until the
revenue can be recognized. The balance of unearned revenues is not refundable.
8
REVENUE RECOGNITION
The Company recognizes revenues in accordance ASC 605 "Revenue Recognition when
the following criteria are met: (i) persuasive evidence of an arrangement
exists, (ii) the services have been rendered, (iii) the fees are fixed or
determinable and (iv) collection of the resulting receivable is reasonably
assured.
(a) Tuition revenue received for educational programs and services is
recognized proportionately according to the progress the students
completing the educational programs in the school. Tuition paid in advance
is recorded as unearned revenues.
(b) The Company provides off-campus internship programs for students. The
Company has arrangements with certain regional corporations in which these
entities are the sponsors for off-campus internship programs which last two
to three months. The Company collects a fixed amount of fees from both the
internship sponsor and the student after the student is admitted into the
programs. Revenue is recognized upon completion of the internship program.
(c) The Company provides other services mainly cafeteria and laundry services
for students and the revenue from such services is recognized upon
completion of the service.
COST OF REVENUES
Fee based cost of revenues for educational programs and services primarily
consists of teaching fees and performance-based teaching fees paid to our
teachers, depreciation and amortization of property and equipment used in the
provision of educational services, and rental payments for one of our schools,
as well as costs of course materials and other expenses.
Service based cost of revenues primarily consists of salaries of related
employees, cost of materials and water and electricity fees used by canteens,
depreciation and amortization of property and equipment used by related
departments, and other expenses.
Above mentioned cost is expensed as incurred.
INCOME TAXES
The Company did not generate any taxable income outside of the PRC for the three
months ended November 30, 2010 and 2009 and the Company is governed by the
Income Tax Law of the PRC. The Company accounts for income taxes using an asset
and liability approach which allows for the recognition and measurement of
deferred tax assets based upon the likelihood of realization of tax benefits in
future years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future
deductibility is uncertain.
The Company had no deferred tax items as of November 30, 2010 and August 31,
2010.
COMPREHENSIVE INCOME
ASC 220, "Comprehensive Income" requires disclosure of all components of
comprehensive income and loss on an annual and interim basis. Comprehensive
income and loss is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Other comprehensive income represents income that arose from
the changes in foreign currency exchange rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows the provisions of Accounting Standards Codification ("ASC")
820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition
of fair value, prescribes methods for measuring fair value, and establishes a
fair value hierarchy to classify the inputs used in measuring fair value as
follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical
assets or liabilities available at the measurement date.
Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities
in active markets, quoted prices for identical or similar assets and liabilities
in markets that are not active, inputs other then quoted prices that are
observable, and inputs derived from or corroborated by observable market data.
9
Level 3 - Inputs are unobservable inputs which reflect the reporting entity's
own assumptions on what assumptions the market participants would use in pricing
the asset or liability based on the best available information.
The Company's financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, taxes payable, notes payable, other payables and accrued liabilities,
unearned revenues, and short-term loans payable. Management has estimated that
the fair value of these financial instruments approximate their carrying amounts
due to the short-term nature. The fair value of long-term loans also approximate
their recorded value because the interest rates charged under the loan terms are
not substantially different than current interest rates.
EARNINGS PER SHARE
Basic earnings per share is measured as net income divided by the weighted
average common shares outstanding for the period. Diluted EPS includes the
dilutive effect on a per share basis of potential common shares as if they had
been converted at the beginning of the periods presented. Potential common
shares that have an anti-dilutive effect (i.e., those that increase income per
share or decrease loss per share) are excluded from the calculation of diluted
EPS. The Company does not have any potential diluted shares outstanding as of
November 30, 2010 and August 31, 2010.
In February 2010, the Company entered into a share exchange transaction which
has been accounted for as a reverse acquisition under the purchase method of
accounting since there has been a change of control. The Company computes the
weighted-average number of common shares outstanding in accordance with ASC 805,
Business Combinations, which states that in calculating the weighted average
shares when a reverse acquisition takes place in the middle of the year, the
number of common shares outstanding from the beginning of that period to the
acquisition date shall be computed on the basis of the weighted-average number
of common shares of the legal acquiree (the accounting acquirer) outstanding
during the period multiplied by the exchange ratio established in the merger
agreement. The number of common shares outstanding from the acquisition date to
the end of that period shall be the actual number of common shares of the legal
acquirer (the accounting acquiree) outstanding during that period.
FOREIGN CURRENCY TRANSLATION
The Company's condensed consolidated financial statements are presented in US
dollars. In accordance with ASC 830, "Foreign Currency Matters", an entity's
functional currency is the currency of the primary economic environment in which
the entity operates; normally, that is the currency of the environment in which
an entity primarily generates and expends cash. Since substantially all
operations of the Company are conducted in the PRC, the functional currency of
the Company is Renminbi ("RMB"). The condensed consolidated financial statements
of the Company have been translated into U.S. dollars. The financial statements
are first prepared in RMB and then are translated into U.S. dollars at
period-end exchange rates as to assets and liabilities and average exchange
rates as to revenue and expenses. Capital accounts are translated at their
historical exchange rates when the capital transactions occurred. The effects of
foreign currency translation adjustments are included as a component of
accumulated other comprehensive income in shareholders' equity.
November 30, August 31, November 30,
2010 2010 2009
------ ------ ------
Period end exchange
rate (RMB: US$) 6.6670 6.8074 6.8271
Average exchange rate
for the period (RMB: US$) 6.6885 6.8178 6.8276
The RMB is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US
dollars at the rates used in translation.
ADVERTISING
Advertising is expensed as incurred. Advertising expenses which were included in
selling expenses amounted to $2,007 and $3,723 for the three months ended
November 30, 2010 and 2009, respectively.
OPERATING LEASES
The Company leases offices, classrooms, and warehouse facilities under operating
leases. Leases where substantially all the rewards and risks of ownership of
assets remain with the lesser are accounted for as operating leases. Rental
payables under operating lease are recognized as expense on a straight-line
basis over the lease term.
10
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2010, ASC Update No. 2010-19 Foreign Currency (Topic 830): Foreign
Currency Issues: Multiple Foreign Currency Exchange Rates (SEC Update). In this
update the staff clarifies that upon application of highly inflationary
accounting registrants must follow the accounting outlined in paragraph ASC
830-10-45-11, which states that "the financial statements of a foreign entity in
a highly inflationary economy shall be remeasured as if the functional currency
were the reporting currency. Specifically, the disclosure requirements at year
end and interim period when the reported balances in an entity's financial
statements that are differ from their underlying U.S. Dollar denominated values.
This update is effective on March 18, 2010, the date of the announcement by the
Staff of the SEC . This update does not have a material effect on the Company's
unaudited condensed consolidated financial statements.
In March 2010, ASC Update No. 2010-13, Compensation--Stock Compensation (Topic
718): "Effect of Denominating the Exercise Price of a Share-Based Payment Award
in the Currency of the Market in Which the Underlying Equity Security Trades--a
consensus of the FASB Emerging Issues Task Force." This is an update regarding
the effect of denominating the exercise price of a share-based payment awards in
the currency of the market in which the underlying equity securities trades and
that currency is different from (1) entity's functional currency, (2) functional
currency of the foreign operation for which the employee provides services, and
(3) payroll currency of the employee. The update clarifies that an employee
share-based payment award with an exercise price denominated in the currency of
a market in which a substantial portion of the entity's equity securities trades
should be considered an equity award assuming all other criteria for equity
classification are met. The update will be effective for interim and annual
periods beginning on or after December 15, 2010, and will be applied
prospectively. Affected entities will be required to record a cumulative
catch-up adjustment for all awards outstanding as of the beginning of the annual
period in which the guidance is adopted. This update is not expected to have a
material impact on the Company's unaudited condensed consolidated financial
statements.
NOTE 3. INVENTORY
Inventory consists of the following:
As of As of
November 30, August 31,
2010 2010
-------- --------
Course materials $ 74,212 $ 6,052
Logistic supplies 60,534 193,172
Office supplies 15,313 7,683
Other materials and supplies 93,265 244,275
Textbooks (1) 217,635 223,018
-------- --------
Total $460,959 $674,200
======== ========
(1) Textbooks sold to students at the beginning of each semester are recognized
as inventory, and books which belong to each school and stored in libraries
are long-lived assets and are recognized as property and equipment.
NOTE 4. RELATED PARTY TRANSACTIONS
The balance due to shareholder consists of the following:
As of As of
November 30, August 31,
2010 2010
-------- --------
Loan from Mr. He Guangwen (1) $310,000 $310,000
Rental and other expenses payable to
Mr. He Guangwen (2) 46,666 --
-------- --------
Total 356,666 310,000
Less current portion 46,666 --
-------- --------
Long-term portion $310,000 $310,000
======== ========
(1) The loan from Mr. He Guangwen, a major shareholder of the Company, is
unsecured, bears no interest, with term of two years and is payable on
February 28, 2012.
(2) The Company rents office facilities from Mr. He Guangwen under a
fifteen-year agreement for annual rental of US$ 74,996.
11
NOTE 5. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
As of As of
November 30, August 31,
2010 2010
------------ ------------
Teaching and dormitory facilities $ 14,515,396 $ 14,216,065
Educational equipment and books 3,972,396 3,777,296
Office equipment and other equipment 5,579,055 3,923,700
Automobiles 300,379 294,185
Leasehold improvement 107,095 --
------------ ------------
24,474,321 22,211,246
Less: accumulated depreciation (7,394,152) (6,686,419)
Add: Construction in progress 14,538,086 13,484,967
------------ ------------
$ 31,618,255 $ 29,009,794
============ ============
Depreciation expense for the three months ended November 30, 2010 and 2009 was
$563,937 and $385,423, respectively.
NOTE 6. INTANGIBLE ASSETS, NET
As of November 30, 2010 and August 31, 2010, intangible assets consist of land
use rights, which are recorded at cost less accumulated amortization.
Amortization is on a straight-line basis over the estimated useful lives, which
is generally 50 years and represents the shorter of the estimated usage periods
or the terms of the agreements. The details of land use rights are as follows:
As of As of
November 30, August 31,
2010 2010
------------ ------------
Land use rights $ 2,189,009 $ 2,143,868
Less: accumulated amortization (129,416) (114,349)
------------ ------------
Land use rights, net $ 2,059,593 $ 2,029,519
============ ============
Amortization expenses for the land use rights totaled $12,619 and $5,676 for the
three months ended November 30, 2010 and 2009, respectively.
NOTE 7. SHORT-TERM LOANS
As at November 30, 2010, the short-term borrowings consisted of four loans. Two
loans of $299,984 (RMB 2,000,000) and $449,975 (RMB 3,000,000) were borrowed
from Changsha Foundation for Education. The two loans were unsecured and bore
interest at 5% and 6% per annum, and are repayable on March 17, 2011 and July
15, 2011, respectively.
In addition to the loans mentioned above, the Company entered into two
short-term bank loan arrangements. One loan in the amount of $292,484
(RMB1,950,000) was borrowed from Ningxiang Rural Credit Cooperative Union. The
loan bears an interest at 8.50% per annum due on December 13, 2010. This loan
was secured by a land use right of the Company with the cost of $433,254, and
was repaid on December 28, 2010. Another loan amounted to $299,984
(RMB2,000,000) was borrowed from China Construction Bank Shaoshan Branch, bears
an interest at 5.84% per annum and due on March 23, 2011 and was secured by a
land use right of the Company with cost of $561,963.
NOTE 8. LONG-TERM LOANS
The details of long-term loans outstanding as at November 30, 2010, which are
borrowed as operating funds, are as follows:
12
Interest
Lender Term rate Principal
------ ---- ---- ---------
From To RMB US$
---- -- --- ---
LONG-TERM LOAN - CURRENT PORTION
Ningxiang Rural Credit Cooperative Union Sep 1, 2009 Aug 21, 2011 8.64% 1,600,000 239,987
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 13, 2011 10.80% 1,350,000 202,489
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 13, 2011 10.80% 1,400,000 209,989
--------- -------
4,350,000 652,465
The details of long-term loans outstanding as at August 31, 2010 are as follows:
Interest
Lender Term rate Principal
------ ---- ---- ---------
From To RMB US$
---- -- --- ---
LONG-TERM LOAN - CURRENT PORTION
Ningxiang Rural Credit Cooperative Union Sep 1, 2009 Aug 21, 2011 8.64% 1,600,000 235,038
--------- -------
1,600,000 235,038
Long-term loan - Non-Current Portion
Changsha Foundation for Education Jul 26, 2010 Oct 25, 2011 8.40% 500,000 73,450
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 13, 2011 10.80% 1,350,000 198,313
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 13, 2011 10.80% 1,400,000 205,658
--------- -------
3,250,000 477,421
The loans borrowed from Ningxiang Rural Credit Cooperative Union were
collateralized by the buildings with an aggregate cost of $1,071,163 and land
use rights with an aggregate cost of $46,768.
The $73,450 loan was repaid in October 2010. For the three months ended November
30, 2010 and 2009, the Company incurred $35,766 and $24,381 interest on the
above loans respectively.
NOTE 9. OTHER PAYABLES AND ACCRUED LIABILITIES
Other payables and accrued liabilities consist of the following:
As of As of
November 31, August 31,
2010 2010
-------- --------
Staff welfare payable $ 77,910 $ 67,713
Deposit as guarantee of performance for
campus construction 543,022 531,824
Others 235,029 251,368
-------- --------
Total $855,961 $850,905
======== ========
NOTE 10. TAXES
CORPORATION INCOME TAX ("CIT") AND BUSINESS TAX
The Company is governed by the Income Tax Law of the People's Republic of China
("PRC") concerning the private-run enterprises, which are generally subject to
tax at a statutory rate of 25% on income reported in the statutory financial
statements after appropriate tax adjustments. The applicable business tax rate
for educational service is currently 5%.
The PRC government also provides various incentives to companies that engage in
the development of vocational education. Such incentives include reduced tax
rates, tax exemptions and other measures. According to Law of the PRC on
Promotion of Privately-run Schools, implemented from September 1, 2003, and the
Notice of Tax Policy for Education Activities, issued and became effective on
February 5, 2004, some specific enterprises, organizations and schools could
enjoy the same tax incentives as the schools run by the government, and could be
exempt from business tax and income tax accordingly. As long as the operation of
the Company meets the requirements of these regulations, the Company is
therefore exempt from business tax and income tax.
No income tax and business tax were provided for the reporting period in
accordance with the regulations of the relevant taxing authorities.
13
The Company was incorporated in the United States and, accordingly, is governed
by the income tax laws of the United States. The Company incurred a net
operating loss for U.S. income tax purposes. This loss carry forward, which may
be available to reduce future periods' taxable income, will expire, if not
utilized, in twenty years from the date the loss was incurred. The net operating
loss gives rise to a deferred tax asset. However, management believes that the
realization of the benefits arising from this loss appear to be uncertain due to
Company's limited operating history and continuing losses for United States
income tax purposes. Accordingly, the Company has provided a 100% valuation
allowance at the balance sheet dates against its deferred tax asset. Management
reviews this valuation allowance periodically and makes adjustments as
warranted. The valuation allowance at November 30, 2010 was the same as August
31, 2010. There was no valuation allowance set up for the three months ended
November 30 2009.
NOTE 11. SHAREHOLDERS' EQUITY
(A) COMMON STOCK
HQ Global Education Inc. ("the Company"), formerly Green Star Mining Corp., was
incorporated in the State of Delaware on January 22, 2008, with 100,000,000
shares of common stock authorized at par value of US$0.0001. On January 25,
2008, the Company issued a total of 1,500,000 shares of common stock to Nan E.
Weaver for cash in the amount of $0.01 per share for a total of $15,000. On July
22, 2008 the Company issued a total of 1,000,000 shares of common stock to
individuals for cash in the amount of $0.025 per share for a total of $25,000.
On July 22, 2008 the Company issued a total of 1,000,000 shares of common stock
to individuals for cash in the amount of $0.025 per share for a total of $
25,000.
On November 23, 2009, the Company approved a 5-for-1 forward stock split of all
issued and outstanding shares of common stock of the Company. On November 25,
2009, the Financial Industry Regulatory Authority ("FINRA") approved the
Company's application for forward stock split applicant. As a result, effective
on December 7, 2009 and prior to the Share Exchange consummated on February 8,
2010, the Company had a total of 12,500,000 shares of common stock issued and
outstanding, and the accompany financial statements have been retroactively
restated to reflect the stock split as of November 30, 2009.
On February 8, 2010, the Company entered into a share exchange agreement with
Risetime and its sole shareholder, Nicestar International Ltd. ("Nicestar"), a
British Virgin Islands company. Pursuant to the Share Exchange Agreement, the
Company issued 20,500,000 shares of its common stock, par value $0.0001 per
share, to Nicestar, representing 62.12% of the Company's issued and outstanding
common stock, in exchange for all of the outstanding shares of Risetime held by
Nicestar. Immediately after this share exchange, the Company had 33,000,000
shares of common stock issued and outstanding.
(B) PREFERRED STOCK
On December 31, 2009, the Board of Directors of the Company authorized
40,000,000 shares of preferred stock at par value of $0.001. As of November 30,
2010 and August 31, 2010, there was no preferred stock issued and outstanding.
(C) STATUTORY RESERVE
According to Law of the PRC on Promotion of Privately-run Schools, implemented
from September 1, 2003, the Company and the related subsidiaries are required to
set aside at least 25% of their after-tax net profits each year, if any, to fund
the statutory reserves for the future development of educational activities. The
statutory reserves are not distributable in the form of cash dividends to the
shareholders.
14
For the three months ended November 30, 2010 and 2009, the Company has made
appropriations in the amount of $1,381,176 and $893,542 to this statutory
reserve, respectively. As of November 30, 2010 and August 31, 2010, the balances
of the statutory reserve were $11,720,727 and $10,339,551, respectively.
NOTE 12. SEGMENT INFORMATION
In accordance with ASC 280, "Segment Reporting", establishes standards for
reporting information about operating segments on a basis consistent with the
Company's internal organizational structure as well as information about
geographical areas, business segments and major customers in financial
statements for details on the Company's business segments.
The Company is mainly engaged in providing vocational education service and
vocational skills training service. The Company's chief operating decision maker
("CODM") has been identified as the CEO who reviews the financial information of
separate operating segments when making decisions about allocating resources and
assessing performance of the group. Based on management's assessment, the
Company has determined that it has three operating segments which are Vocational
Education, Order-oriented Service, and Campus services. These three operating
segments are also identified as reportable segments. The Company adjusted its
operating segments and has reclassified results of all periods presented to
conform to the revised operating segments disclosures as of November 30, 2010
and 2009.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The CODM evaluates performance based
on each reporting segment's revenues, cost of revenues, and gross profit, and
selling expenses and G&A expenses are not separated to each segment. The CODM
does not review balance sheet information to measure the performance of the
reportable segments, nor is this part of the segment information regularly
provided to the CODM. Revenues, cost of revenues, gross profit, total capital
expenditure and total depreciation and amortization by segment were as follows:
For the three months ended November 30, 2010
Vocational Order-oriented Campus Unallocated
Education Service Services Amounts Consolidated
--------- ------- -------- ------- ------------
Net revenues 10,191,687 2,007,021 4,443,050 -- 16,641,758
Cost of revenues 6,059,548 118,180 3,970,014 -- 10,147,742
---------- ---------- ---------- ---------- ----------
Gross profit 4,132,139 1,888,841 473,036 -- 6,494,016
Depreciation and amortization 354,133 11 175,131 47,281 576,556
Total capital expenditures 124,633 -- 26,585 3,710,064 3,861,282
For the three months ended November 30, 2009
Vocational Order-oriented Campus Unallocated
Education Service Services Amounts Consolidated
--------- ------- -------- ------- ------------
Net revenues 7,882,440 915,636 4,211,002 -- 13,009,078
Cost of revenues 4,256,897 36,222 3,565,373 -- 7,858,492
---------- ---------- ---------- ---------- ----------
Gross profit 3,625,543 879,414 645,629 -- 5,150,586
Depreciation and amortization 318,284 17 52,060 20,738 391,099
Total capital expenditures 1,492,887 -- 42,101 4,890,802 6,425,790
NOTE 13. MAINLAND CHINA CONTRIBUTION PLAN AND PROFIT APPROPRIATION
Full time employees of the Group in the PRC participate in a government-mandated
multiemployer defined contribution plan pursuant to which certain social welfare
benefits are provided to qualified employees. PRC labor regulations require the
Group to accrue for these benefits based on certain percentages of the
employees' salaries. The relevant local labor bureau is responsible for meeting
all retirement benefit obligations; hence, the Group has no further commitments
beyond its monthly contributions. The total contributions for such employee
benefits were $111,263 and $82,415 for the three months ended November 30, 2010
and 2009, respectively.
15
NOTE 14. SUBSEQUENT EVENT
The Company paid down the short-term portion of the long-term loans in the
amount of $292,484 (RMB $1,950,000) on December 28, 2010. Concurrently, the
Company entered into another short-term loan arrangement in an amount of RMB
$1,550,000 bearing an annual interest rate of 7.47% with a term from December
28, 2010 to December 27, 2011.
On January 5, 2011, the Company entered into a loan agreement with the Chief
Executive Officer of the Company, whereby the Company will obtain an interest
free loan with a 3 year term for the purpose of business expansion. The total
loan amount has not yet been determined as of the date of this report.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in Management's Discussion and Analysis ("MD&A"), 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 "believe," "project," "expect," "anticipate,""estimate,"
"intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will
continue," "will likely result," and similar expressions. 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. A detailed discussion of risks and
uncertainties that could cause actual results and events to differ materially
from such forward-looking statements is included in this report or other reports
or documents we file with the Securities and Exchange Commission from time to
time. We undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events, or otherwise. The condensed consolidated financial statements and notes
should be read in conjunction with the consolidated financial statements and
notes thereto included in Form 10-K filed with Securities and Exchange
Commission on November 29, 2010.
Management's discussion and analysis is intended to help the reader understand
the results of operations and financial condition of the Company. The following
discussion should be read in conjunction with the Consolidated Financial
Statements and accompanying notes ("Notes") included in this Form 10-Q.
OVERVIEW
HQ Global Education Inc. (the "Company", "we", "us" or "our") is a Delaware
corporation incorporated on January 22, 2008 and we are headquartered in Hunan
Province, China. Currently, the Company's common stock is trading on the
Over-the Counter Bulletin Board under the ticker HQGE.OB.
We are a leading vocational education service provider in China. We offer a wide
range of educational programs and services through vocational secondary schools
under "Customized Education" mode. Our business mainly focuses on various
vocational skills training programs, remote network education, school logistic
services, human resource services and development of educational materials. Our
students come from 25 provinces and 26 ethic groups, including graduates from
junior high schools, senior high schools and junior colleges, unemployed people
and rural labor force.
Since becoming a member of the World Trade Organization, China has become one of
the top destinations for foreign direct investments. As the growth of the
domestic economy accelerates, demand for skilled workers and technicians has
increased dramatically. To facilitate the training and education to meet such a
growing demand, the Chinese government has issued several laws and regulations
such as "Vocational Education Law of the People's Republic of China",
"Regulations of the People's Republic of China on Sino-Foreign Joint Ventures
and Cooperation in School Education", "Law of the People's Republic of China on
the Promotion of School Education" and "State Guidelines for Medium-to-long-term
Education Reform and Development Plan" to enhance the development of the
vocational education industry. Under these preferential policies, we have
experienced significant and stable growth in our business in recent years. We
have established cooperative relationship with 128 enterprises. We supply our
trained students to these enterprises and make various training courses
available to their employees. These cooperative enterprises are mainly located
in the economic centers of China, which cover, Yangtze River Delta, the Pearl
River Delta, and many inland provinces in China. HQ Global has become
increasingly renowned throughout China for its superior training to meet
employer needs and its successful production of outstanding skilled workers who
are highly sought after in the market place. As of November 30, 2010, the
placement rate remained 100% for the students who graduated from our vocational
programs and the supply is still inadequate to meet the demand.
OPERATIONS
Mr. Guangwen He is the founder and CEO of Oya Education Technology Co., Ltd.,
Changsha HQ Global Vocational School and Shaoshan HQ Global Technical School. He
has been engaged in vocational education and related investments since 1994. In
China, "Order-oriented Education", or customized education, was initially
created by Mr. Guangwen He and currently is our main operation mode.
Order-oriented Education refers to the vocational training that is tailor made
to meet the requirements of the prospective employers. Under Order-oriented
Education, we combine the cultivation targets with the specific needs of
enterprises, curriculums with industry production process, vocational training
with position requirements. We create qualified students in compliance with the
requirements of the industry. At this stage, our revenue is mostly derived from
the students' tuition and is recognized proportionately within the semester.
17
We divide our teaching calendar into two semesters per year. The first and
second semester for fiscal year 2010 lasted from September 2009 to January 2010
and from March 2010 to August 2010 (including two-month summer break),
respectively. Our most recent teaching semester is from September 2010 to
January 2011. During this semester, we offer approximately 60 programs under 17
categories to 37,408 students.
During the winter and summer breaks, off-campus internships are provided to
students. Our teachers work as the team leaders for these students who are sent
to different enterprises in groups. Such field practice help students understand
the business, the production process, management model and position
requirements. As a result, students are prepared for their position without
further training once they are placed with the enterprise clients.
We receive commissions from the enterprise clients for placing intern students
with them. The amount of the commission is based on the number of students an
enterprise client receives. We also receive management fees from the intern
students at a monthly fixed rate based on the duration of their internship. Such
revenue is recognized upon the completion of the internship arrangement. Upon
graduation, eligible students are usually hired by the same enterprise client
with which they interned. In such instances, we will receive placement fees from
the students and service fees from enterprise clients. Such revenue is
recognized upon the completion of all the services related to the job placement.
"Order-oriented Education" reflects the resource sharing between schools and
enterprises. It benefits our students in their job hunting endeavors after
graduation. As a consequence, student recruitment witnessed a significant
expansion in recent years for our ten (10) schools that are located in Shaoshan,
Changsha and Shaoyang of Hunan Province, and in Lushan, Shimian, Tianquan and
Yingjing of Sichuan Province, and in Tianzhen of Shanxi Province, respectively.
To carry out the customized training program, we established cooperative
relationships with 128 enterprises as of November 30, 2010, including Fuji Xerox
Technology (Shenzhen) Co., Ltd., Flextronics (Zhuhai) Co., Ltd., Dongguan Master
Electronics Co., Ltd., ASUSTeK Computer (Shenzhen) Inc., Shanghai Inventec Co.,
Ltd., among many others.
PROSPECT
Under economic globalization, enterprises in China are expanding faster than
ever and this has resulted in a serious shortage of labor force. According to
the Secondary Vocational Education Innovation and Development Plan (Year
2010-2012) issued on November 27, 2010 by the Ministry of Education, in the
coming three years, about 20 million skilled workers will be trained and they
will become driving force for social and economic development. A study conducted
by National Institute for Educational Research showed that the shortage of
technical talents will range from 17.46 million to 26.65 million by the end of
2010. This provides a huge expansion space for the vocational education in the
mainland of China and provides desirable opportunities for the development of
our business.
To achieve stable, sustainable and fast development, HQ Global has formed ten
business divisions to integrate market educational resources. Each department
has an experienced manager responsible for its operation and will complete its
integration in the fiscal year 2011. We will start to assess the performance of
these ten business divisions in the fiscal year 2011 and expect to see their
great vitality in the reports for the fiscal year 2011. These business divisions
are as follows:
1. SECONDARY VOCATIONAL EDUCATION DIVISION. Under the customized education mode,
we expect to build new teaching facilities in our existing schools so as to
expand the capacity of student enrollment. Meanwhile, we are expecting to add
another ten (10) vocational or technical schools in the coming five years which
will be potentially located in provinces such as Hubei, Hebei, Xinjiang and
Hunan, in addition to the ten (10) schools we currently operate.
2. REMOTE NETWORK EDUCATION DIVISION. We plan to integrate high quality teaching
resources to provide online educational training programs for employees of the
enterprises that have cooperative relationship with us.
3. VOCATIONAL CERTIFICATION DIVISION. We expect to offer primary, intermediate
and senior vocational qualification credentials to students at our existing
schools.
4. SHORT-TERM TRAINING DIVISION. We intend to utilize our existing teaching
resources including school buildings, facilities and staff to provide foreign
language, mandarin and computer training programs for primary and secondary
school students during summer and winter vocations.
5. HUMAN RESOURCES DIVISION. We plan to provide labor dispatch services and
senior talent recruiting services for enterprises.
6. PRE-SCHOOL EDUCATION DIVISION. Pre-school education refers to childhood
education. We are engaged in intellectual and interest development for Children
aged 3-5 years old.
18
7. CAMPUS SERVICES DIVISION. As a place gathering a large consumer group, each
of our schools provides good logistic services (food, drinks and daily
necessities) for our teachers and students, which effectively increases our
revenue.
8. TEACHING MATERIALS DEVELOPMENT AND MARKETING DIVISION. We organize our
excellent teachers and professional technicians from target enterprises to
develop useful teaching materials based on specific position requirements. Those
materials will be distributed outside schools across China.
9. CONTINUING EDUCATION DIVISION. We are rendering a new education program named
2+2 Model. Under this program, students will take 2-year vocational high school
education and 2-year junior college education. Upon graduation, they will obtain
technical secondary school degree and junior college degree to enhance their
qualities and value.
10. ORDER-ORIENTED EDUCATION DIVISION. We will strive to stabilize our
relationships with the existing 128 cooperative enterprises and establish
cooperation with more enterprises, so that we can place more qualified skilled
workers at those enterprises and arrange more on-field, off-campus internship
opportunities for students.
CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our unaudited condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these unaudited condensed consolidated
financial statements requires us to make estimates and judgments that affect our
reported assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We evaluate our estimates on an on-going
basis and use them on historical experience and various other assumptions that
are believed to be reasonable under the circumstances as the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates because of different assumptions or conditions.
We believe the following critical accounting policies affect our significant
estimates and judgments used in the preparation of our consolidated financial
statements. These policies should be read in conjunction with Note 2 of the
Notes to consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America ("U.S. GAAP"). The unaudited condensed consolidated
financial statements include the financial statements of the Company, Risetime,
GEI, Xiangtan Nicestar, Oya, as well as Oya's subsidiaries and VIEs. All
significant inter-company balances and transactions are eliminated in
consolidation.
At November 30, 2010, we determined that we are the primary beneficiary of Oya
based on the ongoing reassessments, taking into consideration of our economic
control over Oya; the existing contractual relationship in which all of Oya's
activities either involve or are conducted on our behalf, and we have the
obligations to absorb Oya's expected returns and losses.
USE OF ESTIMATES
The preparation of unaudited condensed consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes, and disclosure of contingent liabilities at the date of the
consolidated financial statements. Estimates are used for, but not limited to,
the selection of the useful lives and residual values of property and equipment
and intangible assets, provision for doubtful accounts, provision necessary for
contingent liabilities, fair values, revenue recognition, and other similar
charges. Management believes that the estimates utilized in preparing its
consolidated financial statements are reasonable and prudent. Actual results
could differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows the provisions of Accounting Standards Codification ("ASC")
820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition
of fair value, prescribes methods for measuring fair value, and establishes a
fair value hierarchy to classify the inputs used in measuring fair value as
follows:
19
Level 1 - Inputs are unadjusted quoted prices in active markets for identical
assets or liabilities available at the measurement date.
Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities
in active markets, quoted prices for identical or similar assets and liabilities
in markets that are not active, inputs other than quoted prices that are
observable, and inputs derived from or corroborated by observable market data.
Level 3 - Inputs are unobservable inputs which reflect the reporting entity's
own assumptions on what assumptions the market participants would use in pricing
the asset or liability based on the best available information.
The Company's unaudited condensed consolidated financial instruments include
cash and cash equivalents, accounts receivable, advances to vendors, other
receivables, accounts payable, accrued expenses, taxes payable, other payables
and accrued liabilities, unearned revenues, notes payable and loans payable.
Management has estimated that the fair value of these financial instruments
approximate their carrying amounts due to the short-term nature. The fair value
of long-term loans also approximate their recorded value because the interest
rates charged under the loan terms are not substantially different than current
interest rates.
REVENUE RECOGNITION
The Company recognizes revenues in accordance with ASC 605 "Revenue
Recognition". The Company recognizes revenue when the following criteria are
met: (i) persuasive evidence of an arrangement exists, (ii) the services have
been rendered, (iii) the fees are fixed or determinable and (iv) collection of
the resulting receivable is reasonably assured.
(a) Tuition revenue received from educational programs and services is
recognized proportionately according to the progress the student completes
regarding educational programs in the school. Tuition paid in advance is
recorded as unearned revenues.
(b) We provide off-campus internship arrangements for students and collect
service charges at fixed amount from both recruiters and students. Revenue
is recognized upon completion of the internship program.
(c) We provide other services, mainly logistic services, for our students and
the revenue from such services is recognized upon completion of the
service.
ACCOUNTS RECEIVABLE
Accounts receivable consists of balances receivable for the charges of education
services provided and for tuition revenues. Accounts receivable are recorded at
net realizable value consisting of the carrying amount less an allowance for
uncollectible amounts.
According to the Company's policy, accounts receivable over 90 days are
considered overdue. The Company does periodical reviews as to whether the
carrying values of accounts have become impaired. The assets are considered to
be impaired if the collectability of the balances become doubtful, accordingly,
the management estimates the valuation allowance for anticipated uncollectible
receivable balances. When facts subsequently become available to indicate that
the allowance provided requires an adjustment, then the adjustment will be
recorded as a change in allowance for doubtful accounts. If we were to apply a
hypothetical increase of 1% in estimating allowance for doubtful accounts for
the period and year ended November 30, 2010 and August 31, 2010, respectively,
the provision for bad debt expenses would increase by $105,243 and $90,238,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with ASC 360, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company is required to review its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through the estimated
undiscounted cash flows expected to result from the use and eventual disposition
of the assets. Whenever any such impairment exists, an impairment loss will be
recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including property, plant and equipment and
other assets, for recoverability when events or circumstances indicate that the
net carrying amount is greater than its fair value. Assets are grouped and
evaluated at the lowest level for their identifiable cash flows that are largely
independent of the cash flows of other groups of assets. The Company considers
historical performance and future estimated results in its evaluation of
potential impairment and then compares the carrying amount of the asset to the
future estimated cash flows expected to result from the use of the asset. If the
carrying amount of the asset exceeds estimated expected undiscounted future cash
flows, the Company measures the amount of impairment by comparing the carrying
amount of the asset to its fair value. The estimation of fair value is generally
determined by using the asset's expected future discounted cash flows or market
20
value. The Company estimates fair value of the assets based on certain
assumptions such as budgets, internal projections, and other available
information as considered necessary. There was no impairment of long-lived
assets as of November 30, 2010 and August 31, 2010.
INTANGIBLE ASSETS
Intangible assets are accounted for in accordance with the provisions of ASC
350, "Goodwill and Other Intangible Assets". Under ASC 350, other intangible
assets deemed to have indefinite useful lives are not amortized.
Indefinite-lived intangible assets are assessed for impairment at least annually
based on comparisons of their respective fair values to their carrying values.
Intangible assets with a finite useful life are amortized over their useful
lives. Intangible assets consist of land use rights which are granted by PRC
government for a term of 50 years. The Company does not have any indefinite
-lived intangible assets as of November 30, 2010 and August 31, 2010.
INCOME TAX
The Company did not generate any taxable income outside of the PRC for the three
months ended November 30, 2010 and 2009 and the Company is governed by the
Income Tax Law of the PRC. The Company accounts for income taxes using an asset
and liability approach which allows for the recognition and measurement of
deferred tax assets based upon the likelihood of realization of tax benefits in
future years. Under the asset and liability approach, deferred taxes are
provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. A valuation allowance is provided for
deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future
deductibility is uncertain. In the event the PRC government determines that the
Company is no longer exempt from income taxes, the Company would be subject to a
statutory tax rate of 25% on income reported in the statutory financial
statements after appropriate tax adjustments.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2010 AND 2009
Our chief operating decision maker ("CODM") is our Chief Executive Officer who
reviews the financial information of separate operating segments when making
decisions about allocating resources and assessing performance of the group.
Based on management's assessment, we have determined that we have three
operating segments which are Vocational Education, Order-oriented Service, and
Campus services. These three operating segments are also identified as
reportable segments.
* Vocational education services are our main business currently and we
provide a wide range of programs through our vocational secondary schools.
Fee based revenues from vocational education services primarily consist of
student tuition and fees derived from the programs we offer and collected
from students based on the fee standards that filed and approved by the
related local authorities;
* Revenue generated from Order-oriented services mainly consist of fees we
collected from students and enterprises sponsors related to campus
internship arrangement and job placement services;
* Revenue generated from Campus services primarily consist of canteen
services and grocery sales provided to our students.
We adjusted our operating segments and have reclassified results of all periods
presented to conform to the revised operating segments disclosures for the three
months ended November 30, 2010 and 2009.
Results of operations are a general reflection of our experience in providing
customized educational programs, the operation time of our schools, the
reputation of our schools, the scalability of our schools and the total number
of students, all of which demonstrated a growth trend in the past years and are
expected to expand in the future. Our expansion can be reflected specifically in
the increase of our student enrollment, the development of new customized
educational programs, the cooperation with more target employers, the education
appropriations from local government for running new schools. It also will be
reflected in our return from the investment on new business in the future. The
number of students increased from 32,238 in the first semester of fiscal year
2010 to 37,408 in the first semester of fiscal year 2011.
The following table summarizes our unaudited consolidated operating results for
the three months ended November 30, 2010 and 2009, respectively:
21
For the three months ended Comparison
November 30, -------------------------
2010 2009 Amount Percent
---- ---- ------ -------
US$ US$ US$ %
Revenues
Fee based 12,198,708 8,798,076 3,400,632 38.65
Service based 4,443,050 4,211,002 232,048 5.51
----------- ----------- ----------- ------
16,641,758 13,009,078 3,632,680 27.92
----------- ----------- ----------- ------
Cost of revenues
Fee based (6,177,728) (4,293,119) (1,884,609) 43.90
Service based (3,970,014) (3,565,373) (404,641) 11.35
----------- ----------- ----------- ------
(10,147,742) (7,858,492) (2,289,250) 29.13
----------- ----------- ----------- ------
Gross profit 6,494,016 5,150,586 1,343,430 26.08
Selling expenses (169,225) (136,094) (33,131) 24.34
G&A expenses (780,402) (451,564) (328,838) 72.82
----------- ----------- ----------- ------
Income from operations 5,544,389 4,562,928 981,461 21.51
Other expenses (59,609) (988,758) 929,149 (93.97)
Income taxes -- -- -- --
----------- ----------- ----------- ------
Net income 5,484,780 3,574,170 1,910,610 53.46
=========== =========== =========== ======
In line with the business expansion, both revenue and profit have demonstrated
significant growth in these periods. For the three months ended November 30,
2010, we achieved total revenue of $16,641,758, representing an increase of
$3,632,680 or 27.92% as compared to $13,009,078 for the three months ended
November 30, 2009. The significant increase in revenue was mainly attributable
to the expansion of our operation. Our net income for the three months ended
November 30, 2010 was $5,484,780, representing an increase of $1,910,610 or
53.46% as compared to $3,574,170 for the three months ended November 30, 2009.
REVENUES, COST OF REVENUES AND GROSS PROFIT BY SEGMENT
Revenues for the three months ended November 30, 2010 and 2009
Revenues Comparison
-------------------------- -------------------------
For the three months ended November 30,
2010 2009 Amount Percentage
---- ---- ------ ----------
Vocational Education - fee based $10,191,687 $ 7,882,440 $ 2,309,247 29%
Order-oriented service - fee based 2,007,021 915,636 1,091,385 119%
Campus Services - service based 4,443,050 4,211,002 232,048 6%
----------- ----------- -----------
Total $16,641,758 $13,009,078 $ 3,632,680 28%
=========== =========== ===========
Cost of revenues for the three months ended November 30, 2010 and 2009
Cost of Revenues Comparison
-------------------------- -------------------------
For the three months ended November 30,
2010 2009 Amount Percentage
---- ---- ------ ----------
Vocational Education - fee based $ 6,059,548 $ 4,256,897 $ 1,802,651 42%
Order-oriented service - fee based 118,180 36,222 81,958 226%
Campus Services - service based 3,970,014 3,565,373 404,641 11%
----------- ----------- -----------
Total $10,147,742 $ 7,858,492 $ 2,289,250 29%
=========== =========== ===========
22
Gross profit for the three months ended November 30, 2010 and 2009
Gross profit Comparison
-------------------------- -------------------------
For the three months ended November 30,
2010 2009 Amount Percentage
---- ---- ------ ----------
Vocational Education - fee based $ 4,132,139 $ 3,625,543 $ 506,596 14%
Order-oriented service - fee based 1,888,841 879,414 1,009,427 115%
Campus Services - service based 473,036 645,629 (172,593) (27)%
----------- ----------- -----------
Total $ 6,494,016 $ 5,150,586 $ 1,343,430 26%
=========== =========== ===========
(1) Revenues from vocational education services primarily consist of student
tuition and fees derived from the programs we offer and collected from
students based on the fee standards that filed and approved by the related
local authorities. For the three months ended November 30, 2010, total
tuition and miscellaneous fees had an increase of 29% as compared to
tuition and miscellaneous fees for the three months ended November 30,
2009. The increase was the result of increase in the student enrollments
and the expansion of our business.
* Our student enrollments increased to 37,408 as of November 30, 2010 as
compared to 32,238 as of November 30, 2009, representing an increase
of 5,170 or 16%. Our order-oriented education mode, excellent job
placement rate and great reputation have attracted greater number of
students to study in our schools.
* In July 2010, Tianzhen Huangqiu Technical Secondary School invested by
one of our VIEs - Hunan Oya Education Technology Co., Ltd (Oya) was
founded at Tianzhen County, Datong City, Shanxi Province. On September
1, 2010, Tianzhen Huangqiu Technical Secondary School commenced
operation and it contributed $432,513 to our total revenue for the
three months ended November 30, 2010.
* Our tuition standards for the programs - Application of Electronic
Technology, Mold Design and Manufacture, Computer and Computer
Application, Application of Numerical Control Technology, Computer
Software Engineering and Tourism and Hotel Management of the schools
in Hunan province for the first semester of fiscal year 2011 increased
3%-35% compared with the first semester of prior period. The increase
in tuition standards also led to the increase in revenue.
Cost of vocational education services mainly includes salary and welfare of
teachers, depreciation of teaching facilities and educational equipment,
maintenance, and other expenses. For the three months ended November 30,
2010 we incurred total cost of $6,059,548, representing an increase of 42%
as compared to $4,256,897 for the three months ended November 30, 2009. The
increase was mainly attributable to the following:
* Increase in faculty and staff members in schools. The commencement of
operation of the new school and the increase in student enrollment led
to an increase in faculty and staff members. Besides, the Company
increased the pay rates for teachers to improve their income levels.
Therefore, salary and welfare for the first quarter of fiscal year
2011 increased 20.43% as compared with the amount for the same period
of prior year.
* Increase in cost of school-running cooperation. The Company has put
more efforts in expanding the scale of continuing education in fiscal
year 2011. For the three months ended November 30, 2010, the total
number of students enrolled in "2+2" education program was 3,756,
representing an increase of 112.56% when compared with the number of
students for the same period of last year. This led to an increase of
$475,972 or 128.24% in cost of school-running cooperation as compared
with the three months ended November 30, 2010.
* Increase in depreciation expenses. With the expansion of business and
acquisition of assets including construction of buildings and
acquisition of teaching facilities, related depreciation expenses
increased accordingly. Depreciation expenses for the first quarter of
fiscal yesr 2011 increased $180,973 or 51.48% when compared with
depreciation expenses for the first quarter of fiscal year 2010.
(2) Order-oriented services refer to off-campus internship arrangement and job
placement service provided to our students. Order-oriented service revenue
for the three months ended November 30, 2010 was $2,007,021, representing
an increase of $1,091,385 or 119% when compared to $915,636 for the three
months ended November 30, 2009. The significant increase in our
order-oriented education revenue is mainly attributable to the increase of
fee rates we charged to our students and enterprises. The fixed management
23
fees we charged to our student per month increased approximately 50%, and
our commission fees charged to enterprise sponsors increased about 260% for
the first quarter of fiscal 2011 compared with the same period of prior
year.
Cost of Order-oriented services mainly includes salary of teachers and
staff, travel expenses of students from our schools to the enterprise
clients, and management's travel and meeting expenses incurred with
enterprise clients. The increase in fee standards and the stable cost per
student led to an increase in gross margin of this service category for the
three months ended November 30, 2010 when compared with the gross margin of
such services for the same period of last year.
(3) Campus services primarily consist of canteen services and grocery sales.
Due to the increase in the student enrollment, revenues from our campus
services increased by $232,048 to $4,443,050, an increase of 6%, for the
three months ended November 30, 2010 as compared to revenues of $4,211,002
for the three months ended November 30, 2009. Our management believes that
going forward, in addition to the student enrollment factor, revenues from
Campus services will also increase along with the increase in the service
categories we provide to students.
Cost of campus services primarily consist of staff salary, depreciation of
property and equipment used in providing campus services, and cost of food.
The prices of most categories of food and other goods rose significantly in
fiscal year 2011. As a result, the gross profit margin of such service this
quarter decreased 27% as compared to the same period of prior year.
OPERATING EXPENSES
We do not allocate selling, general and administrative expenses incurred at
corporate level to individual reporting segments as we believe our corporate
department provides necessary marketing and administrative supporting function
that benefits our entire operations taken as a whole.
SELLING EXPENSES
Our selling expenses primarily consist of expenses relating to advertising,
salary and staff welfare, office expenses, travel expenses and entertainment for
our marketing personnel. Our selling expenses increased by $33,131,from $136,094
for the three months ended November 30, 2009 to $169,225 for the three months
ended November 30, 2010, an increase of 24.34%. The increase was primarily
attributable to increase in staff compensation, travel and marketing expenses as
a result of our business expansion.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses primarily consist of (i) compensation
and benefits of management team, administrative staff (ii) rental expenses for
office space leased for administrative uses, (iii) office administration, human
resources management and professional service fees and (iv) depreciation and
amortization of property and equipment, including purchased software, used in
our general and administrative activities. Our general and administrative
expenses increased by $328,838 from $451,564 for the three months ended November
30, 2009 to $780,402 for the three months ended November 30, 2010, representing
an increase of 72.82%. The increase was mainly attributable to the following:
(1) Operation of new schools and increase in the student enrollment. Tianzhen
HQ Vocational School commenced operations in September 2010 and we employed
more management personnel for this new school. Meanwhile the increased
student enrollment in other schools demanded additional management
personnel. This led to an increase of $46,089 in salaries and welfare,
representing an increase rate of 25%.
(2) The cost of being a public company. We went public in the first quarter of
2010. To build a strong management team, we hired more management staff
which resulted in the increase of $97,529 in salaries, travel expenses and
other related expenses.
(3) The professional service fees mainly including legal fees, audit fees,
secretary service fees and consulting fee for financing service incurred in
the three months ended November 30, 2010 was $177,748 while there is little
consulting fee incurred in the same period of prior year, which led to an
increase of 30.67% of general and administrative expenses when compared
with the same period of prior year.
OTHER EXPENSES
Other expenses primarily consist of donation to Changsha Foundation for
Education, fine for termination of office rental agreements and loss on disposal
of property and equipment. Other expenses decreased $929,149 from $988,758 for
24
the three months ended November 30, 2009 to $59,609 for the three months ended
November 30, 2010. This decrease was mainly due to the disposition of aged
equipment during the first fiscal quarter ended November 30, 2009, while there
was no disposal of property and equipment during the three months ended November
30, 2010.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity have been cash generated from our operating
activities and short-term financing from banks in China.
As at November 30, 2010, our short-term borrowings consisted of four loans: (1)
Two loans of $299,984 (RMB 2,000,000) and $449,975 (RMB 3,000,000) from Changsha
Foundation for Education, are unsecured and bore interest at 5% and 6% per
annum, and are repayable on March 17, 2011 and July 15, 2011, respectively. (2)
In addition to the loans mentioned above, we entered into two short-term bank
loan arrangements. One loan in the amount of $292,484 (RMB1,950,000) was
borrowed from Ningxiang Rural Credit Cooperative Union. The loan bears an
interest at 8.50% per annum and due on December 13, 2010 and was secured by a
land use right of the Company with the cost of $433,254. Another loan amounted
to $299,984 (RMB2,000,000) was borrowed from China Construction Bank Shaoshan
Branch, bears an interest at 5.84% per annum and due on March 23, 2011 and was
secured by a land use right of the Company with cost of $561,963.
As at November 30, 2010, our long-term loans consisted of three loans from
Ningxiang Rural Credit Cooperative Union with total amount of $652,465. The
loans were collateralized by the buildings with an aggregate cost of $1,071,163
and land use rights with an aggregate cost of $46,768.
As of November 30, 2010, we have a loan payable in the amount of US$310,000 to
Mr. He Guangwen, majority shareholder of the Company. The loan is unsecured,
bears no interest, with term of two years and is payable on February 28, 2012.
As of November 30, 2010, our working capital was $47,417,189 and our cash
balance was $9,798,855. We currently anticipate that we will be able to meet
both our short-term cash needs, as well as our need to fund operations and meet
our obligations beyond the next twelve months with cash generated by operations,
existing cash balances and, if necessary, borrowings under our credit facility.
OPERATING ACTIVITIES
For the three months ended November 30, 2010, the increase in net cash flows
provided by operating activities was primarily attributable to an increase of
$1,910,610 in our net income for the three months ended November 30, 2010 as
compared to net income for the same period in 2009. With the increase in student
enrollment and business expansion, we benefit from a steady and consistent flow
of revenues from different operating divisions, and with the effective cost
control, a steady increase in cash flows provided by operating activities is
expected in future.
INVESTING ACTIVITIES
For the three months ended November 30, 2010, net cash flows used in investing
activities were $3,861,282, representing a decrease of $2,564,508 as compared
with the cash flows used in investing activities of $6,425,790 for the three
months ended November 30, 2009. Cash used in investing activities is mainly for
the construction of the buildings, the acquisition of school facilities and land
use rights for Shaoshan Vocational Secondary School, Shaoyang Industrial
Vocational Technical School, Sichuan Tianquan Vocational School and Sichuan
Shimian Vocational School. The decrease in net cash flows used in investing
activities was mainly due to the existing construction projects other than
Shaoshan Vocational Secondary School were mostly paid for and new construction
projects have not started as of November 30, 2010.
FINANCING ACTIVITIES
For the three months ended November 30, 2010, net cash flows used in financing
activities were $28,089, representing a decrease of $848,292 in net cash
provided by financing activities as compared with net cash provided by financing
activities of $820,203 for the three months ended November 30, 2009. There was
collection of loans from related party in the amount of $878,789 during the
25
three months ended November 30, 2009, but during the three months ended November
30, 2010 there was only payment of one long-term loan in the amount of $74,755
and an additional loans from shareholder of $46,666. This resulted in the lower
net cash flows provided by financing activities for the first fiscal quarter
ended November 30, 2010.
FOREIGN CURRENCY TRANSLATION
The Company's financial information is presented in US dollars. The functional
currency of the Company is Renminbi ("RMB"), the currency of the PRC.
Transactions at the Company which are denominated in currencies other than RMB
are translated into RMB at the exchange rate quoted by the People's Bank of
China prevailing at the dates of the transactions. Exchange gains and losses
resulting from transactions denominated in a currency other than that RMB are
included in the unaudited consolidated statements of operations as exchange
gains, if any. The period end exchange rate as of November 30, 2010 was 6.6670,
which decreased significantly compared with the exchange rate 6.8074 as of
August 31, 2010. The average exchange rate for the three months ended November
30, 2010 of 6.6885, decreased significantly as compared with the exchange rate
of 6.8276 for the same period of prior year.
TAXATION
The PRC government provides various incentives to companies that engage in the
development of vocational education. Such incentives include reduced tax rates,
tax exemptions and other measures. According to Law of the People's Republic of
China on Promotion of Privately-run Schools, implemented from September 1, 2003,
and the Notice of Tax Policy for Education Activities, issued and effective on
February 5, 2004, some specific enterprises, organizations and schools enjoy the
same tax incentives as the schools run by the government, and could be exempt
from business tax and income tax accordingly. As the operation of the Company
meets the requirements of the aforementioned regulations, the Company is exempt
from business tax and income tax.
RECENT ACCOUNTING PRONOUNCEMENTS
In December, 2009, FASB issued ASU No. 2009-17, Improvement to Financial
Reporting by Enterprises Involved with Variable Interest Entities. This
Accounting Standard Update amends the FASB Accounting Standards Codification for
the issuance of FASB Statement No.167, Amendments to FASB Interpretation No. 46
(R). 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 (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 amendments in this Update also
require additional disclosures about a reporting entity's involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is required to adopt this guidance for the
year ending August 31, 2011, and does not expect the adoption of this ASU to
have a material impact on its consolidated financial statements.
In May 2010, ASC Update No. 2010-19 Foreign Currency (Topic 830): Foreign
Currency Issues: Multiple Foreign Currency Exchange Rates (SEC Update). In this
update the staff clarifies that upon application of highly inflationary
accounting registrants must follow the accounting outlined in paragraph ASC
830-10-45-11, which states that "the financial statements of a foreign entity in
a highly inflationary economy shall be remeasured as if the functional currency
were the reporting currency. Specifically, the disclosure requirements at year
end and interim period when the reported balances in an entity's financial
statements that are differ from their underlying U.S. Dollar denominated values.
This update is effective on March 18, 2010, when announced by the Staff of the
SEC. This update did not have a material effect on the Company's unaudited
condensed consolidated financial statements.
In March 2010, ASC Update No. 2010-13, Compensation--Stock Compensation (Topic
718): "Effect of Denominating the Exercise Price of a Share-Based Payment Award
in the Currency of the Market in Which the Underlying Equity Security Trades--a
consensus of the FASB Emerging Issues Task Force." This is an update regarding
the effect of denominating the exercise price of a share-based payment awards in
the currency of the market in which the underlying equity securities trades and
that currency is different from (1) entity's functional currency, (2) functional
currency of the foreign operation for which the employee provides services, and
(3) payroll currency of the employee. The update clarifies that an employee
share-based payment award with an exercise price denominated in the currency of
a market in which a substantial portion of the entity's equity securities trades
should be considered an equity award assuming all other criteria for equity
classification are met. The update will be effective for interim and annual
periods beginning on or after December 15, 2010, and will be applied
26
prospectively. Affected entities will be required to record a cumulative
catch-up adjustment for all awards outstanding as of the beginning of the annual
period in which the guidance is adopted. This update is not expected to have a
material impact on the Company's unaudited condensed consolidated financial
statements.
In January 2010, FASB amended ASC 820 Disclosures about Fair Value Measurements.
This update provides amendments to Subtopic 820-10 that requires new disclosure
as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should
disclose separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and describe the reasons for the transfers.
2) Activity in Level 3 fair value measurements. In the reconciliation for fair
value measurements using significant unobservable inputs (Level 3), a reporting
entity should present separately information about purchases, sales, issuances,
and settlements (that is, on a gross basis rather than as one net number). The
new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company has determined the
adoption of this rule does not have a material impact on its financial
statements.
OFF BALANCE SHEET ARRANGEMENTS
None.
SEASONALITY AND TRENDS
Our net revenues and operating results normally fluctuate as a result of
seasonal variations in our business, principally due to a flexible educational
calendar year. Our revenue historically fluctuated quarterly and has generally
been the highest in the first quarter of our fiscal year due to educational
calendar year-start spending trends in our major markets. Furthermore, holidays,
especially the Chinese New Year, have generally delayed the performance of the
revenue in the relevant quarters ended February and August. Our expenses,
however, do not vary significantly over the course of the year with changes in
our student population and net revenues. We expect quarterly fluctuations in
operating results to continue as a result of our flexible educational calendar
year and arrangement of students' vacation.
CONTINGENCIES
The Company is not currently a party to any legal proceedings, investigations or
claim which in the opinion of our management is likely to have a material
adverse effect on the business financial condition or result of operations. The
Company has not recorded any legal contingencies as of November 30, 2010.
SUBSEQUENT EVENT
The Company paid down the short-term portion of the long term loans in the
amount of $292,484 (RMB $1,950,000) on December 28, 2010. Concurrently, the
Company entered into another short-term loan arrangement in an amount of RMB
$1,550,000 bearing an annual interest rate of 7.47% with a term from December
28, 2010 to December 27, 2011.
On January 5, 2011, the Company entered into a loan agreement with the Chief
Executive Officer of the Company, whereby the Company will obtain an interest
free loan with a 3 year term for the purpose of business expansion. The total
loan amount has not yet been determined as of the date of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act
and are not required to provide the information required under this item.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended ( the "Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
27
As of November 30, 2010, the end of the fiscal quarter covered by this report,
we carried out an evaluation, under the supervision and with the participation
of our management, including our chief executive officer and our chief financial
officer, on the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our chief executive officer and
chief financial officer concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were
effective at the reasonable assurance level to ensure that information required
to be disclosed in our reports under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company completed a reverse acquisition transaction on February 8, 2010, and
the management of the Company is currently in the process of finalizing its
procedures for internal controls over financial reporting. In addition, no
changes in our internal control over financial reporting (as defined in Rule
13a-15(f) of the Securities Exchange Act of 1934) during the quarter ended
November 30, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We know of no pending legal proceedings to which we are a party which are
material or potentially material, either individually or in the aggregate. We
are from time to time, during the normal course of our business operations,
subject to various litigation claims and legal disputes. We do not believe that
the ultimate disposition of any of these matters will have a material adverse
effect on our financial position, results of operations or liquidity.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act
and are not required to provide the information required under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED).
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The following exhibits are filed herewith:
Exhibit No. Description
----------- -----------
31.1 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
* Filed herewith.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
January 14, 2011 HQ Global Education Inc.
By: /s/ Guangwen He
--------------------------------------------
Guangwen He
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Yunjie Fang
--------------------------------------------
Yunjie Fang
Chief Financial Officer
(Principal Financial and Accounting Officer)
29