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8-K - CHINA EDUCATION ALLIANCE INC. | v204829_8k.htm |
China
Education Alliance, Inc. (CEU)
Shareholder
Update Conference Call
Tuesday,
December 7, 2010 at 10 a.m. Eastern
Dial-In
Information:
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Alan
& HSC Global Team:
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3.) Enter
Password 2530818,
4.) Enter
Conference Number 4390901.
Zack Pan &
CEU:
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Operator: Good
day, ladies and gentlemen, and thank you for standing by. Welcome to
the China Education Alliance Shareholder Update Conference
Call. During this Conference call, all participants are in a
listen-only mode except speakers. As a reminder, this conference is
being recorded.
It is now
my pleasure to introduce our host, Alan Sheinwald, Managing Director of HSC
Global. Thank you. Please go ahead, Mr.
Sheinwald.
Alan
Sheinwald: Thank you very
much. Good morning, everybody in North America and good evening to
those of you in China, and welcome to the China Education Alliance shareholder
update conference call. With us today is Chairman and CEO of the
Company, Mr. Xiqun Yu, and Chief Financial Officer, Mr. Zack Pan, who will be
the translator and will also be speaking on behalf of Mr. Yu.
I’d like
to remind listeners that during the call, management’s prepared remarks may
contain forward-looking statements which are subject to risks and
uncertainties. Management may make additional forward-looking
statements in response to your questions today. Therefore, the
company claims protection under Safe Harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of
1995. Actual results may differ from results discussed today and,
therefore, we refer you to a more detailed discussion of these risks and
uncertainties in the Company’s filings with the SEC. In addition, any
projections as to the Company’s future performance represented by management
include estimates today, as of December 7, 2010, and the Company assumes no
obligation to update these projections in the future as market conditions
change.
And at
this time, I’d like to welcome the Chairman, Mr. Yu, who will give opening
comments and will be translated by Zack Pan, CFO.
Mr.
Yu:
Opening
comments by Mr. Yu (translated by Zack)
在过去一周, 我们收到大量的投资人电话和电邮. 我们夜以继日的回答大家的询问. 为了对我们现在和未来的投资人作出统一公开问答,我们认为有必要以此电话会议来回复我们的投资者, 次电话会议将被录音作为公司的公共记录.
我和公司的CFO收集并总结了一些关键的问题, 并准备了答案. 我们认为这些包括了最重要的最关心的问题.
我们认为公司的真诚,信誉第一重要, 希望这次电话会议更能提高公司的披露与透明度. 另外,公司通过常驻美国的CFO与美国的投资人交流及会晤, 及时提交SEC的财务报表, 定期发布新闻等方式来加强与投资人的密切关系, 使你们能更好的理解公司的运作, 重大决定和成长战略.
除此以外, 我们我们还安排了投资人月底参观我们在北京的设施, 哈尔滨的总部和培训中心. 也许此时哈尔滨天气寒冷,但我们迷人的冰雕节会让您留下难忘的记忆. 我诚挚的欢迎你们参观, 并期待着亲自与你们讨论我们的激动人心的发展规划.
Zack
Pan: The following is the TRANSLATION OF MR.
YU’S OPENING COMMENTS
Over the
last week, we have received a significant number of calls and emails from
investors. We have worked around the clock to respond to each investor inquiry.
To be consistent and open with all our current and prospective investors, we
thought it appropriate to address the investment community on this call which
will be recorded and held as part of our Company public records.
Our Chief
Financial Officer and I have collected and summarized a number of the
over-riding questions which have been posed and have prepared responses we think
addresses the most important themes.
We stand
by the integrity of our company and hope that our disclosure and transparency
provided by this conference call, in addition to having a U.S. based CFO that is
always available for US based investor meetings, timely financial reporting to
the SEC, and periodic press releases will help investors foster close ties and a
clearer understandings of our business operations, business decisions and growth
strategies.
In
addition, we have scheduled a shareholder tour for later this month at both our
Beijing facility and headquarters and training centers located in Harbin. While
it might be cold our amazing ice festival will help make your visit quite
memorable. I welcome you to attend and look forward to personally discussing our
exciting growth plans.
This
concludes translation of Mr. Yu’s opening remarks.
Since the
past week I have worked closely with the Chairman, our IR firm, our lawyers, and
auditor, to address the current situation at hand in the most efficient and
responsible manner possible. China Education Alliance has always strived to be a
transparent company and we will continue to cross language and cultural barriers
to actively engage the investment community and be responsive to their
needs.
We
recognize that many of our investors do not have the ability to readily visit
our facilities and operations in China and the distance presents a special
challenge. We have always been open to any investor requests to visit our
headquarters and training facilities in Harbin, Heilongjiang Province. Recently
we announced our annual meeting of stockholders which will take place on
December 20, 2010. Following the meeting on the 20th we
would like to invite our investors to tour our new facility in Beijing. The next
day, the 21st, we
will host a tour of our training facilities in Harbin.
Additionally,
our website was updated today to include several pictures of our
facilities to bridge the gap for our investors who are not able to visit
China. We have also posted a video tutorial showing investors a step by step
process of how to use our prepaid cards online. Both the pictures and video can
be found at www.chinaeducationalliance.com.
Recently
we announced that on November 5, 2010, as a supplemental procedure of our third
quarter financial review, our audit firm Sherb & Co.,LLP performed
additional confirmation procedures to our bank balances. These procedures were
performed by staff members from Sherb’s Beijing office. The confirmation
procedures were applied to approximately $67 million or 86% of our total cash
balance of approximately $77 million. Such procedures included visits to PRC
financial institutions, meeting bank personnel and obtaining cash balance
information as of September 30, 2010. As of September 30, 2010 we also
maintained approximately $8.6 million in the U.S. at JP Morgan and EastWest Bank
and approximately $1.3 million at ICBC bank in Beijing which auditors reviewed
related bank statements. These balances encompass our total cash at
September 30, 2010 of $77.5 million. Some questions were raised with regards to
the dates on the confirmations. The confirmations were all processed
and sent on the same date. Sherb sent a staff member with its
standard form bank confirmation, who visiting all the banks on the same day to
verify the cash balances. The date was penned by the same staff
member when the bank affixed its seal.
More
detailed information regarding the additional procedures by our audit firm can
be found in the press release issued on December 2nd and the
8k filed with the SEC.
A number
of our investors have voiced the opinion that as a NYSE firm they would prefer
to have a top name brand audit firm represent CEU. Our current auditor, Sherb
& Co., LLP has provided China Education Alliance with timely and accurate
review of our financial information for our quarterly and yearend financial
results. Additionally, they have performed enhanced audit procedures
at the 3rd quarter
this year as discussed above which have been filed with the SEC and reported to
our shareholders. The interests of our shareholders are our number one priority
and at the moment our board of directors is evaluating their
recommendations. We will gladly update investors when the board
reaches a final determination on this issue.
For the
purposes of this call, we have categorized the different questions and will be
responding to them by reading the question and then the answer.
TOPICS:
MARGINS:
|
1.
|
What
contributed to the seemingly high gross margins (20+ %) relative to CEU’s
competitors? How do you do things so much
better?
|
Gross
margins are different with different business segments and at different
companies. Our high gross margin was mainly due to the Company’s effective
control on costs. Our higher gross margins are typically received
with our on-line course materials, versus our on-site training revenue that
requires physical classrooms and teachers. On-line materials typically have
higher set up and implementation costs, or fixed costs, and minimal variable
costs on a per unit basis, or on a student by student basis. Due to this
structural advantage of on-line education, and our large on-line student
customer base, we are able to achieve high gross margins. Our high margins are a
reflection of our educational products. Other educational company’s margins
might differ from ours that might be due to their own course material offered
and their own operating structure. The student focus of our on-line effort is
geared to middle and high school students. The student focus of other on-line
educational companies might be different from ours resulting in different gross
profit margins.
|
2.
|
What
accounts for the majority of the company’s learning card sales? What are
the mostly likely locales we will find students using the learning
cards? How many sales people do you have selling prepaid
cards?
|
The
majority of our cards are sold by our sales people to students. We
have around 200 sales people located at different areas in North China, not
including part-time sale agents.
|
3.
|
How
does the company explain the declining balance of deferred revenue yet
30+% higher online and combined sales figures in 2009 relative to
2008?
|
Our
deferred revenue declined slightly from approximately $1.2 million in 2008 to
$1.0 million in 2009. Our deferred revenue reflects the unearned portion of
debit cards sold in the online division and unearned tuition from training
centers. The deferred revenue is not necessarily in direct proportion to our
revenue. Usually our deferred revenue remains at a relatively low level, as most
students consume their debit cards in a short period of time, and mostly tuition
fees are expensed monthly. So a change in deferred revenue is not necessarily
related to students’ enrollment, and also has no significant impact in
subsequent periods.
|
4.
|
Given
the high margins, how will the company hold on to those margins given that
the abundance of similar websites that offer free
downloads? You have publicly stated your intent to invest more
capital to training and education centers and not on online – do you see
troubling trends as the landscape becomes more competitive and suitable
alternatives are available for
free?
|
We
realize that some free download learning material is available online. However,
most students view the free available material as inferior products. We believe
that our testing material is the most updated, high quality and
relevant material to the locale of the students. Most our materials
are prepared by famous local and popular teachers, and they are either members
of the high school entrance or college entrance exam paper committee,
or certified top-level teachers. We promote our products to students
and parents with this information.
We
realize the competition is getting very strong in the education sector in China.
However, we believe our business model has its own special advantage and
strength. We are confident in our future growth.
INTERNAL
CONTROLS:
|
5.
|
Why
do you not audit “internal controls”? Perhaps it is not required,
but it would help to dispel any questions about your financial
statements.
|
Since the
inception of the Company, we have constantly been upgrading our internal
controls and we believe that we have strict internal controls in place. We are
required to and will have our internal controls audited in connection with our
December 31, 2010 audit. We believe our internal controls are
adequate and well documented and anticipate having an unqualified opinion on our
internal control procedures.
AUDITOR:
|
6.
|
An
audit committee is a must and it should include at least one partner-level
auditor from a recognized institution. CEU needs to find an
auditor more appropriate for a company of its size and investor
base. All of this will cost money but the value that will
accrue to equity owners from having an infrastructure that gives US
shareholders comfort will vastly outweigh these costs. So the
question is: when can we expect these
changes?
|
We have
an independent audit committee consisting of 3 highly trained
professionals. Sherb & Co. LLP has been doing a competent
job for us and their audit is thorough and strict. Meanwhile, we are also
sensitive to our shareholder’s suggestions, and we will take these suggestions
into consideration.
|
7.
|
Why
the change in auditors every couple of years and why not hire a big-4
audit firm to give credibility to the
company?
|
It was
not the Company’s intent to change auditors frequently. We have listened to our
investors at different stages of the Company’s growth. Our current
auditor, Sherb & Co., LLP, has been auditing us for three years and they
have always delivered timely and accurate service. We will continue to evaluate
our investor’s request and make the best decision both for the Company and
investors.
SAIC
AND SEC FILINGS:
|
8.
|
Please
explain the discrepancy between the financials filed with the SEC and the
SAIC filings.
|
Every
U.S. listed Chinese company with actual business operations in China has to file
financial statements with at least three agencies: The SEC, China's State
Administration of Industry and Commerce (SAIC), and the Chinese State
Administration of Taxation (SAT).
SAIC
The SAIC
(http://www.saic.gov.cn) is primarily responsible for business registration,
business licenses and acts as the government supervisor of corporations. The
SAIC is the Chinese government registrar for official documents like articles of
incorporation, legal persons, registered capital and company ownership. In order
to renew their annual business licenses, all Chinese companies must file a
so-called 'Company Annual Inspection Report' with the SAIC between March and
June every year. This report includes financial statements such as balance sheet
and income statement, but those numbers are not verified or audited by the SAIC.
The agency is primarily concerned with legal compliance issues and not with
operating data or taxes.
State
Administration of Taxation (SAT)
Chinese
companies pay a variety of taxes as VAT, Enterprise Income Tax (EIT), business
tax and payroll taxes. The tax filings made with the SAT
(http://www.chinatax.gov.cn) are much more similar to SEC filings than what has
to be submitted to the SAIC for business licenses. The SAT requires audited
financial data including balance sheet, income statement and cash flow statement
and the tax bureaus audit those reports quite frequently themselves and fine
offenders who under-report to the SAT. Financial statements to the SAT are much
more reliable than SAIC filings. It is with the SAT numbers that our
auditor verifies our earnings. Unfortunately, these reports are not
readily available to the public.
Reasons
for non-matching SAIC/SEC Numbers
There are
several legitimate reasons for SAIC reported financial statements not to match
those numbers filed with the SEC. First of all, the SAIC is the business
registrar and not the Chinese equivalent of the SEC. The SAIC does neither
review nor audit financial statements submitted with the annual inspection
report. Most companies see the sole purpose of an SAIC filing in getting their
business license renewed, and some even hire a third party to do the filing for
them. In our case, we have outsourced our filing work to a third party agent too
and their filings are as a matter of custom, not reviewed by us because the SAIC
does not require reviewed or require audited financial
statements. Oftentimes, Chinese companies access SAIC filings to
learn more about their competitors to gain a commercial advantage. As
a result many companies have understated their financial results in such
filings. Investors knowledgeable in the China field do not rely on SAIC filings
as a basis for determining the company’s financial position. Rather
they rely on a company’s tax filings and payments to the authorized PRC
government authorities.
Another
reason is the difference in accounting principles. Chinese documents are audited
under PRC GAAP, while SEC filings are based on U.S. GAAP standards for financial
reporting. There are many differences between those standard, starting with how
revenue is recognized. I can't get into detail here but the bottom line is that
certain key numbers don't have to be the same in order to still both be
correct.
Business
Consolidation: In China every legal entity has to file its own annual inspection
report with the SAIC. This includes every individual division or subsidiary of
the U.S.-listed company and a separate report from the parent company. Sometimes
the parent report is consolidated while other times it is not. Inter-company
transactions might be treated differently than in the U.S. For U.S. GAAP
purposes, inter-company transactions are treated carefully to avoid double
counting. However, for PRC tax purposes, PRC tax professionals may seek to use
inter-company transactions in ways to minimize tax. This includes using
different consolidation approaches and/or using inter-company transactions to
allocate profits to entities that are subject to lower tax rates (including Hong
Kong companies or PRC entities that have special tax benefits).
Overseas
Activities: SAIC filings only reflect business activities in the PRC while filed
reports with the SEC have to reflect worldwide financial data for the
consolidated U.S.-listed company. Revenue that is generated overseas or assets
held outside of the PRC (even Hong Kong) will not be included in the SAIC
filings. Another good example for the effects is that cash that a company keeps
on U.S. bank accounts to pay for overseas expenses might not show up on the
balance sheet submitted to the SAIC.
Notwithstanding
the above mentioned reasons, because of the recent attacks on Chinese companies
and the severe discrepancies between SAIC and SEC filings, we will be more
vigilant on the reports filed by our agent to ensure accuracy of such
reports.
SHARE
BUYBACK
|
9.
|
The
company initiated a 1 million share buy back program in 2008. According to
your 2009 10K, no shares has been bought in 2009. Considering
the stock is currently valued at less then it's Enterprise Value which is
extremely rare, do you intend to buy back any shares at these very low
valuations?
|
At this
point in time, our focus will be on restoring investor confidence in us and
using assets to expand our operations. However, we are keeping all
our options open and may consider a share buyback at the appropriate
time.
10.
|
What
was the purpose of raising additional capital in the most recent stock
offering? Why was a secondary offering necessary with so much
cash on the books for the company? And if we should
expect more dilution going
forward.
|
When you
look back you will see that at the time of offering we didn’t have this much
cash balance as compared to today ($77 million). We had about $38.8 million cash
at the time of offering. We planned to acquire a vocational training center at
that time. However, due to market competition we didn’t accomplish that
goal.
Another
important reason for the offering was to increase the Company’s visibility and
our shareholder base. We were a small OTCBB company for most of the past few
years. The offering helped us with the trading volumes of our stock and
increased the Company’s visibility greatly. In part, thanks to the
offering, we were successfully upgraded to NYSE listing in January this year. We
do not plan to raise more capital presently and will focus on using our funds
wisely and efficiently by building more training centers and making accretive
acquisitions.
11.
|
Will
the CEO buy shares?
|
The CEO’s annual salary is
only about $20,000, and his shares are restricted. Currently he does not
have enough funds to buy stock. The board is considering a raise for him, and if
he gets a raise, he may use part of the raise to buy some shares.
INTEREST
12.
|
Why
is interest income so low with $80M in
cash?
|
We earn
0.36% on our deposits with the banks in China, and 0.2% on our deposits with US
banks . Based on these rates our interest income is accurate with market
yields. However, we are considering investors’ suggestion on
how to get better rates of return on our cash balances.
FACILITY
13.
|
A
complete and logical explanation needs to address the recent allegations
regarding the facilities of CEU.
|
The
Company has many training centers, and they are used for different purpose. The
one that has been questioned more recently is one of our older training
centers, which requires some maintenance and remodelling work. The facility was
in the process of being remodeled when a video was taken.
That
building’s remodelling has now been completed. We plan to cooperate with
one of the famous arts colleges and use this remodeled building as a training
center for students preparing for entry into colleges for the arts. The program
is still in the planning stage.
We
believe it is irresponsible for anyone to use footage of a building that was
undergoing remodeling without inquiry or investigation to allege fraud on our
part.
OPERATIONS
14.
|
What
growth do you plan to achieve in
2011?
|
As in the
past we will release our 2011’s revenue and earnings projection when we release
our 2010 annual report.
We would
like to state for the record that the recent rumors have badly hurt the
Company’s reputation. Since the rumors came out, about 10 major media agencies
in China have reported it. As you know, our reputation is critical to our
performance as an education company. Once the image is tainted, it will take
time to recover. At this time management is under great pressure to minimize the
negative impact by proving our integrity, while trying our best to reach our
goals.
15.
|
How
do most of your customers pay for the online
tests?
|
The
Company employs a sales force of approximately 200 individuals working on a
salary and commission basis that sell our cards to students. Each salesperson
has its own customer base. When customers need cards they usually contact our
sales rep, and the cards are delivered to their hands on time.
16.
|
What
are your learning cards face values? Please also provide me a prepaid card
to test the online download
|
Our
learning cards have 4 face values: 10, 20, 50, and 100 RMB. We have provided 20
cards with user name and password for our investors to test
online. If you need a card to test please contact our IR firm, Alan
Sheinwald at HSC Global.
17.
|
Can
you summarize the revenue breakdown of CEU so that investors are more
aware what amount of revenue comes from various segments of the
business?
|
Our two
major lines of revenue:
Online
downloadable exam preparation material, about 60% of our total
revenue.
Onsite
training centers, about 30% of our total revenue.
We also
have less than 10% revenue from other sources, mostly online advertising and
network services.
18.
|
Are
websites, training facilities in operation and all assets real and do you
believe that your Income statement, balance sheet and statement of Cash
flows filed with the SEC are
accurate?
|
Our
websites, training facilities and assets, along with our financial statements
are audited annually and reviewed quarterly by an independent third party
auditor. Our reports are reliable. So as to give comfort to our
investors, we are literally opening our doors to our investors to view our
facilities both in Beijing and in Harbin. Details are found in our
press release of December 3, 2010 and also our Current Report on Form 8-K filed
with the SEC on the same day.
WEBSITE
19.
|
Why
does the company’s websites have so many non-functioning payment systems
and broken links? How large is your technology team. Do you ever get
complaints from customers? What percent of your online revenues come from
Prepaid vs. Direct Pay (credit or debit
card?).
|
Our
server is located in North China and we do not have any servers outside of
China, so there may be some delays in gaining access from the United States. In
the near future we plan to increase the number of servers and improve processing
speeds to help minimize this problem in the future.
The
Company has approximately 50 people on its technology team.
Almost
all our online revenues are from prepaid cards. Revenue is recognized
upon downloading of exam preparation materials being accessed by the student
/customer in accordance to US GAAP and our revenue recognition
policy. Prepaid sales cards are distributed primarily in the Northern
provinces. Since we derive all our online revenue through the
sales of prepaid card as opposed to payment online, we have disabled the credit
card payment function on our website and it has been disabled for some
time. We have presently removed the credit card payment option
on our website.
As a
reminder we have provided an online tutorial of how to use our prepaid cards
which can be found on the homepage of our website.
20.
|
Why
were there so many error screens on the website when you click on a
link?
|
Our
technicians maintain and monitor our website daily. Maintenance work is usually
conducted after hours, which is day time in the U.S. Also,
there could be some delay in accessing our website from overseas as our server
is primarily located in China. Based on our daily monitoring
record, we do not see many errors. We would be happy to
demonstrate the use of our website at our tours later this
month.
21.
|
How
do you explain the low traffic counts to the company’s websites? Please
provide some user metrics and how those have trended during the past 2
years.
|
There is
no global standard for statistics on website traffic and there are several
different measurement criteria that may be used. We believe that the
Alexa website is a useful tool to gauge our website traffic. Alexa ranks us as
1,845th in China and 15,259th globally. This rank has been stable in
the past. If you are interested, you may do a search on
Alexa.com and look for our website at www.edu-chn.com . Considering
that we are 1,845 in all of China and the size of the Chinese population, we do
not regard our website as having a low traffic count.
FINANCIAL
RESULTS:
22.
|
Are
your financial figures correct or will we see an adjustment of revenues
like with other Chinese companies over the past
weeks?
|
Our
financial statements are accurate and we do not expect any adjustments.
Actually, the SEC just finished reviewing our 2009 10K with some comments in
late October. We then re-filed our 10K including these comments on October 28,
2010, but there was no revision to our financial statements.
This
concludes our formal comments.
Again, we
would like to thank our shareholders and everyone who has participated on
today’s call. We look forward and welcome those of you who will be able to
attend our annual stockholders meeting on December 20th. For
those of you who cannot attend we invite you to visit our website to view the
pictures of our facilities in China. If you have any further questions, I’d
appreciate it if you would feel free to contact myself or Alan Sheinwald of HSC
Global.