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EX-31.1 - EXHIBIT 31.1 - CHINA EDUCATION ALLIANCE INC.v423740_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - CHINA EDUCATION ALLIANCE INC.v423740_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - CHINA EDUCATION ALLIANCE INC.v423740_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - CHINA EDUCATION ALLIANCE INC.v423740_ex32-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from ______________ to _____________

 

Commission file number:  001-34386

 

CHINA EDUCATION ALLIANCE, INC.

(Exact name of Company as specified in its charter)

 

North Carolina   56-2012361
(State or other jurisdiction of incorporation or   (I.R.S. Employer Identification No.)
organization)    

 

58 Heng Shan Road, Kun Lun Shopping Mall    
Harbin, People’s Republic of China   150090
(Address of principal executive offices)   (Zip Code)

 

  86-451-8233-5794  
  (Registrant’s telephone number, including area code)  

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed 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 (§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 x  No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 Large accelerated filer ¨ Accelerated filer ¨
       
Non-accelerated filer ¨ 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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes ¨    No ¨

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

 

As of November 13, 2015, there were 10,582,530 shares of $0.001 par value common stock issued and outstanding.

 

 

 

 

FORM 10-Q

CHINA EDUCATION ALLIANCE, INC.

INDEX

 

    Page
     
PART I. Financial Information 3
     
  Item 1.  Financial Statements (Unaudited). 3
     
  Item 2.  Management’s Discussion and Analysis of Financial Condition and results of Operation. 19
     
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk. 28
     
  Item 4.  Controls and Procedures. 29
     
PART II. Other Information 29
     
  Item 1.  Legal Proceedings. 29
     
  Item 1A. Risk Factors. 29
     
  Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds. 29
     
  Item 3.  Defaults Upon Senior Securities. 29
     
  Item 4.  Mine Safety Disclosures. 29
     
  Item 5.  Other Information. 29
     
  Item 6.  Exhibits. 30
     
  Signatures 31

 

 2 

 

  

PART I –FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

China Education Alliance, Inc. and Subsidiaries
Consolidated Balance Sheets

  

   September 30,   December 31, 
   2015   2014 
   (Unaudited)     
ASSETS          
           
Current Assets          
Cash and cash equivalents  $3,592,047   $22,696,126 
Accounts receivable   21,553    22,763 
Other receivables   331,417    464,550 
Prepaid expenses and other current assets   366,355    594,390 
Total current assets   4,311,372    23,777,829 
           
Non-current Assets          
Property and equipment, net   4,402,638    6,555,511 
Intangibles and capitalized software, net   123,858    961,839 
Total non-current assets   4,526,496    7,517,350 
           
Total Assets   $8,837,868   $31,295,179 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current Liabilities          
Accounts payable and accrued expenses  $368,404   $468,098 
Deferred revenue   1,255,955    1,319,962 
Income tax and other taxes payable   199,369    210,582 
Total current liabilities   1,823,728    1,998,642 
           
Commitments and Contingent Liabilities   -    - 
           
Stockholders' Equity          
           
Common stock ($0.001 par value, 150,000,000 shares authorized, 10,582,530 and 10,582,530 issued as of September 30, 2015 and December 31, 2014, respectively; 137,512 and 137,512 shares held in treasury, as of September 30, 2015 and December 31, 2014, respectively)   10,583    10,583 
Additional paid-in capital   40,942,009    40,942,009 
Statutory reserve   3,792,161    3,792,161 
Retained earnings   (47,451,703)   (25,859,244)
Accumulated other comprehensive income   11,987,527    12,338,272 
Less: Treasury stock   (977,072)   (977,072)
Stockholders' equity - CEAI and Subsidiaries   8,303,505    30,246,709 
Noncontrolling interests in subsidiaries   (1,289,365)   (950,172)
Total stockholders' equity   7,014,140    29,296,537 
           
Total Liabilities and Stockholders' Equity  $8,837,868   $31,295,179 

  

The accompanying notes are an integral part of these consolidated financial statements. 

 

 3 

 

  

China Education Alliance, Inc. and Subsidiaries
 Consolidated Statements of Operations and Comprehensive Income
(Unaudited)

  

   Three months ended September 30,   Nine months ended September 30, 
   2015   2014   2015   2014 
                 
Revenue                    
Online education revenue  $83,465   $134,879   $252,444   $392,526 
Training center revenue   83,030    936,700    290,491    1,993,285 
Total revenue   166,495    1,071,579    542,935    2,385,811 
                     
Cost of Revenue                    
Online education costs   1,007,182    1,062,915    3,116,396    3,170,379 
Training center costs   72,424    590,279    352,202    1,365,283 
Total cost of revenue   1,079,606    1,653,194    3,468,598    4,535,662 
                     
Gross Profit/(Loss)                    
Online education gross loss   (923,717)   (928,036)   (2,863,952)   (2,777,853)
Training center gross profit   10,606    346,421    (61,711)   628,002 
Total gross loss   (913,111)   (581,615)   (2,925,663)   (2,149,851)
                     
Operating Expenses                    
Selling expenses   752,592    3,398,742    2,529,595    5,794,444 
Administrative expenses   4,599,770    9,742,804    14,863,893    18,447,595 
Depreciation and amortization   275,149    742,605    1,024,774    1,758,769 
Total operating expenses   5,627,511    13,884,151    18,418,262    26,000,808 
                     
Loss from operations   (6,540,622)   (14,465,766)   (21,343,925)   (28,150,659)
                     
Other Income (Expense)                    
Other income(expenses), net   (777)   (6,891)   (1,018)   31,132 
Loss on disposal of property and equipment   (16,586)   (385)   (47,831)   (16,547)
Impairment loss on intangible assets   5,798    -    (620,124)   - 
Interest income   6,729    35,663    36,665    123,533 
Total other income/(Expense), net   (4,836)   28,387    (632,308)   138,118 
                     
Net Loss Before Provision for Income Tax   (6,545,458)   (14,437,379)   (21,976,233)   (28,012,541)
Income taxes:                    
Current   -    -    -    - 
Deferred   -    -    -    - 
                     
Net Loss   (6,545,458)   (14,437,379)   (21,976,233)   (28,012,541)
Net Loss attributable to the noncontrolling interests   (2,301)   2,762    (383,774)   (203,563)
Net Loss - attributable to CEAI and Subsidiaries  $(6,543,157)  $(14,440,141)  $(21,592,459)  $(27,808,978)
                     
Net Loss per common stock-basic and diluted  $(0.62)  $(1.36)  $(2.04)  $(2.63)
                     
Weighted Average Shares Outstanding-basic and diluted   10,582,530    10,582,530    10,582,530    10,582,530 
                     
The Components of Other Comprehensive Income                    
Net Loss  $(6,543,157)  $(14,440,141)  $(21,592,459)  $(27,808,978)
Foreign currency translation adjustment   (537,225)   55,794    (350,745)   (395,643)
                     
Comprehensive Loss  $(7,080,382)  $(14,384,347)  $(21,943,204)  $(28,204,621)

 

The accompanying notes are an integral part of these consolidated financial statements.

  

 4 

 

  

China Education Alliance, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

  

   Nine Months ended September 30, 
   2015   2014 
         
Cash flows from operating activities          
Net loss  $(21,976,233)  $(28,012,541)
Adjustments to reconcile net loss to net cash used in operating activities          
Depreciation and amortization - operating expenses   1,024,775    2,189,192 
Depreciation and amortization - cost of revenue   1,124,866    875,902 
Loss on disposal of fixed assets   47,831    16,547 
Impairment loss on intangible assets   620,124    - 
Net changes in operating assets and liabilities          
Accounts receivable   445    (22,782)
Prepaid expenses and other receivables   335,469    (70,378)
Accounts payable and accrued liabilities   (88,450)   (595,096)
Income tax and other taxes payable   (11,213)   1,374,582 
Deferred revenue   (19,443)   469,045 
Net cash used in operating activities continuing operations   (18,941,829)   (23,775,529)
           
Cash flows from investing activities          
Purchases of property and equipment   (21,091)   (1,583,694)
Proceeds from disposal of property and equipment   25,739    6,030 
Net cash provided by (used in) investing activities continuing operations   4,648    (1,577,664)
           
Cash flows from financing activities          
Net cash used in financing activities continuing operations   -    - 
           
Effect of exchange rate changes on cash   (166,898)   (340,230)
           
Net decrease in cash and cash equivalents   (19,104,079)   (25,693,423)
           
Cash and cash equivalents at beginning of period   22,696,126    56,377,154 
           
Cash and cash equivalents at end of period  $3,592,047   $30,683,731 
           
Supplemental disclosure of cash flow information          
Income tax paid  $-   $- 

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

 5 

 

  

China Education Alliance, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

1.Description of Business

 

Nature of organization - China Education Alliance, Inc. (the “Company”), formerly known as ABC Realty Co., was organized under the laws of the State of North Carolina on December 2, 1996. ABC Realty Co.’s primary purpose was to act as a broker or agent in residential real estate transactions. On September 15, 2004, ABC Realty Co., pursuant to a Plan of Exchange, acquired Harbin Zhong He Li Da Education Technology, Inc. (“ZHLD”), a corporation formed on August 9, 2004 in the City of Harbin in the Heilongjiang Province, People’s Republic of China (the “PRC”), with an authorized capital of $60,386 (Renminbi (“RMB”) 500,000).

 

On September 15, 2004, ABC Realty Co. entered into a Plan of Exchange with ZHLD and Duane C. Bennett, the former Chairman of ABC Realty Co., pursuant to which the shareholders of ZHLD exchanged all of their registered capital of $60,386 for 18,333,334 shares of common stock of the Company, or approximately 95% of the Company’s then issued and outstanding common stock. On November 17, 2004, the Company changed its name to China Education Alliance, Inc. On December 13, 2004, the Company consummated the Plan of Exchange with ZHLD and ZHLD’s shareholders. As a result of the Plan of Exchange, the transaction was treated for accounting purposes as a recapitalization of ZHLD.

 

ZHLD is a technology company engaged in the online education industry in the PRC. Its mission is to promote online exam preparation services in the PRC, to improve the efficiency and effectiveness of elementary education, secondary education, vocational education, skill education, continuing education, and professional training programs, and to integrate with the international education system.

 

ZHLD’s subsidiary, Heilongjiang Zhonghe Education Training Center (“ZHTC”) was registered in the PRC on July 8, 2005 with a registered capital of RMB0.5 million (approximately $60,788) and is accounted for as a wholly owned subsidiary of ZHLD. ZHLD owns 99% of ZHTC with 1% held in trust by Mr. Xiqun Yu, the Company’s CEO, for the benefit of ZHLD. In December 2013, ZHTC increased its share capital to RMB1 million (approximately $142,412).

 

ZHLD also owns 70% of the equity interests of Beijing Hua Yu HuiZhong Technology Development Co., Ltd. (“BHYHZ”). BHYHZ was formed on September 30, 2006 in the PRC. At the time of its organization, we transferred a 30% interest in this subsidiary to the National Vocational Education Association of China, a non-profit, quasi-government entity, for no consideration to enable us to work with the Association’s network to expand our business.

 

On January 4, 2009, ZHLD entered into an agreement with Mr. Guang Li to jointly incorporate and invest in a joint venture company, Zhong He Li Da (Beijing) Management Consultant Co., Ltd. (“ZHLDBJ”). ZHLD contributed RMB425,000 (approximately $62,107), and Mr. Guang Li contributed RMB 75,000 (approximately $10,960) towards the registered capital of ZHLDBJ, amounting to a total registered capital of RMB500,000 (approximately $73,067). In return for their respective contributions, ZHLD owns an 85% equity interest, and Mr. Guang Li owns a 15% equity interest in ZHLDBJ. ZHLD has entrusted Mr. Xiqun Yu to hold 20% of its equity interest of ZHLDBJ on its behalf. ZHLDBJ will be involved in the vocational training business, which includes IT engineering, and accounting training. In February 2010, the Company, through ZHLD, incorporated a new company in the PRC, Beijing New Shifan Education & Technology Co., Ltd. (“New Shifan”) with a registered capital of RMB1.95 million (approximately $291,132). ZHLD owned a 65% equity interest in New Shifan and the other equity holders together owned a 35% equity interest in New Shifan. In September 2011, New Shifan changed its name to Beijing Hua Yu Pin Xue Education Technology Co., Ltd ("HYPX"). In October 2011, ZHLD took over the 35% equity interest from the other equity holders of HYPX without any consideration, and entrusted Mr. Xiqun Yu to hold the 35% equity interest on behalf of ZHLD. In November 2011, HYPX increased its share capital to RMB2 million (approximately $298,567). In January 2012, due to changes in government regulations, the Company authorized Mr. Yu to hold the 100% equity interest on behalf of ZHLD. In 2012, HYPX established a wholly owned school - Beijing Xicheng District Hua Yu Pin Xue Training School, and together with a previously established wholly owned subsidiary of the Company - Beijing Shifanxuezhitang Information Science Institute, established the Company’s new brand image and reputation in several districts in Beijing. In 2015, HYPX established another two wholly owned school – Beijing Dongcheng District Hua Yu Pin Xue Training School and Beijing Haidian District Pinxuetang Training School. HYPX focuses on expansion of our training centers in Beijing, as well as developing extensive marketing strategy to establish new markets in other main cities.

    

 6 

 

  

On March 4, 2011, the Company entered into a management agreement with Nanchang Institute of Technology (“NIT”), a vocational training institution based in Nanchang, PRC. Pursuant to the agreement, the Company would assist in managing the daily operations of NIT for ten years for an annual management fee of RMB 10 million (approximately $1,461,347). The management fee was payable on a quarterly basis and in the event of late payment, a late fee would be imposed. Additionally, a liquidated damage of RMB 50 million (approximately $7,935,122) would be paid by any party that defaulted on the agreement.

 

In connection with the management agreement, the Company entered in to a loan agreement, pursuant to which the Company loaned NIT RMB 50 million (approximately $7,935,122) to build training facilities and NIT would repay the RMB 50 million (approximately $7,935,112) in ten years from the date NIT received the principal. The loan had an annual interest rate of 20% and the Company would waive the interest if NIT made all payments under the management agreement in a timely manner. We received 20% annual interest income due each quarter, therefore, the management fee was waived. The assets of certain guarantors secured the loan. On March 29, 2013, NIT repaid the loan principal of RMB50 million and accrued interests and the loan agreement was terminated. On the same day, the management agreement with NIT was also terminated.

 

On February 25, 2011, the Company entered into a share transfer agreement with the shareholder of Harbin Tianlang Culture and Education School (“Tianlang”), a tutoring school with 5,000 students, based in Harbin, PRC. Pursuant to the share transfer agreement, the Company purchased 60% of the equity interests of Tianlang for RMB 35 million (approximately $5.3 million). The shareholder and the Company also provided RMB 2 million (approximately $0.3 million) and RMB 3 million (approximately $0.5 million) as working capital for Tianlang, respectively. Tianlang had established a new board of directors with five directors, of which three directors were appointed by the Company and two directors were appointed by the shareholder. The acquisition of Tianlang was completed in April 2011. We are currently co-managing Tianlang with the previous majority owner. The Company and the previous majority owner will be entitled to 60% and 40%, respectively, of the profits of Tianlang. The Company did not foresee that the investment cost in Tianlang is recoverable in the near future. As a result, the Company conducted impairment test by the end of 2014 and June 2015, and the impairment loss of $3,254,308 and $625,922 has been included in this financial statement.

 

On May 31, 2011, the Company entered into share transfer agreements with the shareholders (the “Shareholders”) of Changchun City Chaoyang District Nuoya Foreign Languages School (“Changchun Nuoya”) and Harbin City Nangang District Nuoya Foreign Languages School (“Harbin Nuoya”), two foreign language schools based in the PRC.

 

Pursuant to the agreements, the Company purchased 100% of the two schools for an aggregate of RMB 16 million (approximately $2.5 million), and all consideration had been paid up. The Shareholders’ obligations under the agreements are guaranteed by a guarantor who will be jointly and severally liable in the event of a breach by the Shareholders. The acquisition of Changchun Nuoya and Harbin Nuoya was completed by the end of May 2011 and their financial statements had been consolidated with the Company’s financial statements since May 2011. The Company did not foresee that the investment cost in Harbin Nuoya and Changchun Nuoya is recoverable in the near future. As a result, the Company fully impaired its investment in the two schools. As there is very minimum demand for non-English classes at the time being, the Company has suspended the operation of both schools, and deregistered Harbin Nuoya licence from local educational office by the end of September 2015..

 

In June 2012, the Company, through ZHLD, incorporated a new company in the PRC, Harbin Zhong He Li Da Information Technology Co., Ltd. (“ZHLDIT”) with a registered capital of RMB2 million. Mr. Yu has been entrusted to hold the 100% equity interest on behalf of ZHLD. ZHLDIT was established to initiate and design a platform for online education programs, and provide this effective and efficient communication service to all the teachers and students.

 

 7 

 

2Basis of Preparation of Financial Statements

 

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. The portion of the income applicable to noncontrolling interests in subsidiaries undertakings is reflected in the consolidated statement of operations.

 

The consolidated interim financial information As of September 30, 2015 and for the three and nine month periods ended September 30, 2015 and 2014 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have not been included. The consolidated interim financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, previously filed with the SEC.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position As of September 30, 2015, its consolidated results of operations and cash flows for the three and nine month periods ended September 30, 2015 and 2014, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

  3. Summary of Significant Accounting Policies

 

Use of estimates - The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods.

 

Significant estimates include values, classification, useful lives assigned to and impairment of acquired intangible assets, the useful lives and impairment of property and equipment, collectability of accounts receivable, reserves for allowances and stock option valuation. Actual results may differ from these estimates.

 

Cash and cash equivalents - The Company considers all highly liquid debt instruments purchased with a maturity period of three months or less to be cash or cash equivalents. The carrying amounts reported in the accompanying unaudited condensed consolidated balance sheets for cash and cash equivalents approximate their fair value. All of the Company’s cash that is held in bank accounts in the PRC is not protected by Federal Deposit Insurance Corporation (“FDIC”) insurance or any other similar insurance in the PRC. The cash that the Company maintains in US banks is insured up to $250,000 at each bank as of September 30, 2015 and December 31, 2014. The Company’s cash at their US banks is in excess of statutorily insured limits at $384,784 and $788,942, As of September 30, 2015 and December 31, 2014, respectively.

 

Property and equipment - Property and equipment is stated at the historical cost, less accumulated depreciation and impairments. Depreciation on property and equipment is provided using the straight-line method over the estimated useful lives of the assets as follows:

 

Buildings   20 years
     
Communication equipment   10 years
     
Transportation vehicles   5 years
     
Furniture and fixtures   5 years
     
Leasehold improvements   over unexpired lease terms

 

 8 

 

  

Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations in the period/year 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 benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.

 

Upon sale or disposal of an asset, the historical cost and related accumulated depreciation and impairment of such asset are removed from their respective accounts and any gain or loss is recorded in the statements of operations.

 

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property and equipment are used, and the effects of obsolescence, demand, competition, and other economic factors.

 

Intangibles - Intangibles consist of franchise rights on educational products, software, teacher list, student list, domain/brand name, course materials, goodwill, magazine rights and contest operation rights. Most intangible assets are amortized over the lives of the rights agreements, or their respective operational useful lives.

 

The Company evaluates the carrying value of intangible assets during the second quarter of each year and between annual evaluations if events occur, or circumstances change, that would more likely than not reduce the fair value of the intangible asset below its carrying amount. For the three and nine months ended September 30, 2015 and 2014, the Company recorded $5,798 and expense of $620,124, $0 and $0, respectively, as result of impairment test.

 

In April 2011, the Company purchased 60% equity interest of Tianlang for RMB35 million (approximately $5.3 million) and 100% ownership of Changchun Nuoya and Harbin Nuoya. These three schools’ net assets included identifiable intangible assets such as domain name/brand name, cost of materials, student list, course materials and teacher lists. The economic useful life for domain name/brand name is estimated to be 10 years and the others are estimated to be 3 years.

 

Long-lived assets - The Company reviews its long-lived assets for impairments when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less cost to sell. To the extent carrying values exceed fair values; an impairment loss is recognized in operating results.

 

Foreign Currency - The Company’s principal country of operations is the PRC. The financial position and results of operations of the Company are recorded in USD as the functional currency, and the financial position and results of operations of the Company’s PRC subsidiaries are recorded in RMB as the functional currency. The results of operations denominated in foreign currency are translated at the average rate of exchange during the respective reporting period.

 

Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the market rate of exchange at that date. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency (“U.S. Dollars” or “US$”) are recorded in accumulated other comprehensive income, a separate component within shareholders’ equity. The accompanying consolidated financial statements are presented in US$. The functional currency of the Company is RMB. The consolidated financial statements are translated into US$ from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The resulting translation adjustments are recorded as a component of shareholders’ equity included in other comprehensive income. Gains and losses from foreign currency transactions are included in profit or loss. There were no gains and losses from foreign currency transactions during the quarter ended September 30, 2015 and 2014.

 

 9 

 

 

   As of 
   30 September 2015   31 December 2014 
RMB: US$ exchange rate   6.3638    6.1460

  

   Nine Months Ended September 30, 
   2015   2014 
Average RMB: US$ exchange rate   6.1638    6.1480 

 

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$ at the rates used in translation.

 

Noncontrolling interest - Noncontrolling interest in the Company’s subsidiaries are recorded in accordance with the provisions of Financial Accounting Standard Board (“FASB”) Codification 810 Consolidation (“ASC 810”) and are reported as a component of equity, separate from the parent’s equity. Purchase or sales of equity interests that do not result in a change of control are accounted for as equity transactions. Results of operations attributable to the noncontrolling interest are included in our consolidated results of operations and, upon loss of control, the interest sold, as well as interest retained, if any, will be reported at fair value with any gain or loss recognized in earnings.

 

Revenue recognition - Revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. The Company believes that these criteria are satisfied when customers download prepaid study materials.

 

Prepaid debit cards allow the Company’s subscribers to purchase a predetermined monetary amount of download materials downloadable from its website. The Company tracks usage of the debit card and records revenue when the debit card is used.

 

At the time that the prepaid debit card is purchased, the receipt of cash is recorded as deferred revenue. Revenues are recognized in the month when card is used. Unused value relating to debit cards is recognized as revenues when the prepaid debit card expires.

 

Tuition from courses is recognized ratably over the period that fees are earned, typically the life of the course. The Company offers credits to students if they should withdraw, or are unable to complete their courses. Historically the issuances of credits have not been high with regards to tuition fees. The Company offers cash refunds on a limited basis based on individual circumstances.

 

The Company engages an advertisement agency to manage its on-line advertisement revenue. Pursuant to the contract with this agency, upon posting of an on-line advertisement on the Company’s website, the Company is entitled to share with the agency 50% of the amount charged to the on-line advertiser.

 

The Company recognizes advertising revenue monthly on receipt of the confirmation from the agent. The agency is responsible for collection of all ad revenue from advertisers. The agency is required to make their remittance for on-line advertising six months after on-line ads are posted on the Company’s website.

 

Deferred revenue reflects the unearned portion of debit cards sold and tuition payments received. Tuition is recognized as revenue ratably over the periods in which it is earned, generally the term of the program or as the debit card is used.

 

Deferred revenue - Deferred revenue reflects the unearned portion of debit cards sold and tuition payments received. Deferred revenue As of September 30, 2015 and December 31, 2014 was $1,255,955 and $1,319,962, respectively.

 

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Advertising - The Company expenses advertising costs at the time they are published on the media channel and for all other advertising the first time the respective advertising takes place. These costs are included in selling and administrative expenses. The total advertising expenses incurred for the three and nine months ended September 30, 2015 and 2014 were $360,048.43 and $1,253,279, $2,266,217 and $3,181,153, respectively.

 

Taxation - Taxation on profits earned in the PRC are calculated on the estimated assessable profits for the year at the rates of taxation prevailing in the PRC after taking into effect the benefits from any special tax credits or “tax holidays” allowed in the PRC.

 

The Company does not accrue United States income tax on unremitted earnings from foreign operations, as it is the Company’s intention to invest these earnings in foreign operations for the foreseeable future. All of the Company’s revenues are generated in the PRC. The Company’s US operations provide corporate and administrative functions for the entire Company. The Company’s tax provisions for the three and nine months ended September 30, 2015 and 2014 are related to the Company’s PRC operations.

 

If the Company should have an uncertainty in accounting for income taxes, the Company evaluates a tax position in a two-step process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of the position. The second step is to measure the tax position that meets the more-likely-than-not threshold to determine the amount of provision or benefit to be recognized in the financial statements. A tax position is measured at the largest amount of provision or benefit where there is a greater than 50% likelihood of being realized upon ultimate settlement.

 

Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent reporting period in which the threshold is no longer met.

 

Income Tax

 

Private schools or colleges operated for reasonable returns, such as our subsidiary Tianlang, are subject to income taxes at 25%, but were sometimes subject to deemed amounts or preferential tax arrangement of income tax to be determined by the relevant tax authorities. Our subsidiary Tianlang had not yet been charged income taxes under current regulation. The Company is unable to accurately estimate the chance of having the Tianlang’s tax position being challenged by PRC tax authorities; therefore the Company did not record any tax liabilities in respect of Tianlang’s profits.

 

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax provisions or benefits As of September 30, 2015, is not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax provisions or benefits As of September 30, 2015, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current PRC tax laws and policies, that the unrecognized tax provisions or benefits will significantly increase or decrease over the next 12 months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

 

The effect of deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company had no deferred tax assets As of September 30, 2015 and December 31, 2014.

 

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Value added tax

 

The Provisional Regulations of the People’s Republic of China Concerning Value Added Tax (“VAT”) promulgated by the State Council came into effect on January 1, 1994. Under these regulations and the Implementing Rules of the Provisional Regulations of the PRC Concerning VAT is imposed on goods sold in or imported into the PRC and on processing, repair and replacement services provided within the PRC.

 

The PRC Operating Companies are subject to business tax and related surcharges on the revenue earned for services provided in China. The applicable business tax rate was 5%. Business tax and related surcharges are deducted from revenues before arriving at net revenues. Certain PRC Operating Companies were also subject to value added tax (“VAT”). In general, the applicable VAT rate on the revenue earned is 6% for services and 17% for sales of prepaid study cards. VAT is computed on the difference after deduction of input value-added tax. Revenue is recognized net of related surcharges in the consolidated statement of operations.

 

Stock-based compensation - The Company records compensation expense associated with stock-based awards and other forms of equity compensation. Such compensation would include the recording of cost resulting from all stock-based payment transactions including shares issued under its stock option plans. The Company records expense over the vesting period in connection with stock options granted. The compensation expense for stock-based awards includes an estimate for forfeitures and is recognized over the expected term of the award on a straight-line basis.

 

The Company did not record any stock-based compensation expenses for the three and nine months ended September 30, 2015 and 2014.

 

Fair value of financial instruments - The Company has adopted newly issued generally accepted accounting principles with regards to fair value measurement for assets and liabilities that establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of these principles did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.

 

Fair value is defined fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, current standards require the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

 

Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities
   
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data
   
Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

 

The Company did not have any assets or liabilities valued using Level 2 or Level 3 inputs As of September 30, 2015 and December 31, 2014, respectively.

 

Treasury stock - We account for treasury stock under the cost method and include treasury stock as a component of stockholders’ equity. When retired, the excess of the cost of treasury stock over its par value is allocated between retained earnings and additional paid-in capital.

 

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Recent accounting pronouncements - Management does not believe that any recently issued, but not yet effective, accounting standards or pronouncements, if currently adopted, would have a material effect on the Company’s consolidated financial statements.

 

4.Concentrations of business and credit risk

 

The majority of the Company’s bank accounts are with banks located in the PRC that are not covered by any type of protection similar to that provided by the FDIC on funds held in U.S. banks.

 

The Company is operating in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the US$ and the RMB.

 

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and accounts receivable, the balances of which are stated on the balance sheet. The Company places its cash in high credit quality financial institutions; however, such funds are not insured in the PRC. As of September 30, 2015 and December 31, 2014, the Company maintains cash in the US, in a financial institution insured by the FDIC that has approximately $384,784 and $788,942, respectively, in funds in excess of FDIC insured amounts.

 

For the three and nine months ended September 30, 2015 and 2014, no sales to a single customer accounted for 10% or more of our revenue.

 

Our subsidiaries, ZHTC, Changchun Nuoya and Harbin Nuoya, are private schools not operated for reasonable returns; therefore, are not allowed to distribute dividends. As of September 30, 2015 and December 31, 2014, the total un-distributable net assets of ZHTC, Changchun Nuoya and Harbin Nuoya amounted to $31,189,133 and $32,884,052, respectively.

 

5.Cash and cash equivalents

 

Cash and cash equivalents consist of the following:

 

   September 30, 2015   December 31, 2014 
   (Unaudited)     
Cash on Hand -China  $39,695   $50,871 
Bank Deposits-China   2,917,569    21,606,313 
Bank Deposits-US   634,783    1,038,942 
   $3,592,047   $22,696,126 

 

6.Other Receivables

 

Other receivable consist of the following:

 

   September 30, 2015   December 31, 2014 
   (Unaudited)     
Security deposit  $300,419   $386,750 
Staff temporarily borrowing   12,226    54,350 
Others   18,772    23,450 
   $331,417   $464,550 

  

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7.Prepaid expenses and other current assets

 

Prepaid expenses consist of the following:

 

   September 30, 2015   December 31, 2014 
   (Unaudited)     
Prepaid rent  $93,238   $339,888 
Prepaid teachers and online material   216,304    215,715 
Prepaid services and professional fees   -    12,474 
Other prepaid expenses   56,813    26,313 
   $366,355   $594,390 

   

8.Property and equipment, net

 

Property and equipment consist of the following:

 

   September 30, 2015   December 31, 2014 
   (Unaudited)     
Buildings  $1,396,653   $1,446,146 
Transportation vehicles   137,204    142,066 
Communication equipment   8,122,827    9,535,304 
Furniture and fixtures   4,706,403    5,224,229 
Leasehold improvement   5,385,129    5,554,811 
    19,748,216    21,902,556 
Less: Accumulated Depreciation   (15,345,578)   (15,347,045)
Property and Equipment, net  $4,402,638   $6,555,511 

  

For the three and nine months ended September 30, 2015 and 2014, depreciation expenses totaled $589,768 and $1,938,579, $958,494 and $2,421,721, respectively. For the three and nine months ended September 30, 2015 and 2014, loss on disposal of fixed assets was $16,586 and $47,831, $385 and $16,547, respectively.

 

9.Intangibles and capitalized software, net

 

Intangibles of the Company consisted of franchise rights on educational products, software, magazine rights, contest operation rights, domain name/brand name, course materials, student list and teacher list, and goodwill.

 

Franchise rights

 

The franchise rights owned by the Company consist of the following:

 

¨The ACCP training course is an authority for training software engineers under training procedures with textbooks;

 

¨The BENET training course is an authority for training internet engineers under training procedures with textbooks.

 

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Capitalized software

 

The capitalized software of the Company consists of all the Company’s software, among which two main ones are the following:

 

¨ The usage rights for job seekers is software to help university students to search jobs, post their resumes, and communicate with potential employers;
   
¨ The usage right for learners is software to help elementary and secondary students to do assignments, test papers, and get instructions from teachers.

 

Intangible assets on acquisitions

 

In March 2011, the Company acquired a 60% controlling interest in Tianlang for a purchase price of RMB 35 million (approximately $5.3 million). The school had insignificant tangible assets or liabilities at the acquisition date. The entire estimated fair value of approximately $8.9 million has been allocated to the net identifiable assets of Tianlang; the intangible assets recorded are all subject to amortization.

 

In May 2011, the Company acquired a 100% ownership in Changchun Nuoya and Harbin Nuoya. The aggregate purchase price for the two schools was RMB 16 million (approximately $2.5 million). The schools had insignificant tangible assets or liabilities at the acquisition date. The entire estimated fair value of approximately $2.5 million has been allocated to the net identifiable assets of Changchun Nuoya and Harbin Nuoya; the intangible assets recorded are all subject to amortization.

 

Intangibles and capitalized software consist of the following:

 

   September 30, 2015   December 31, 2014 
   (Unaudited)     
ACCP training course  $791,980   $820,046 
BENET training course   55,470    57,436 
Usage rights- Job Seekers   471,416    488,122 
Usage rights- Learners   314,278    325,415 
Others   2,455,857    2,507,075 
Domain names   9,373,023    9,634,749 
Course materials   529,694    545,164 
Student list   783,828    806,103 
Teacher list   1,034,134    1,061,977 
    15,809,680    16,246,087 
Less: Impairments   (7,840,302)   (7,390,020)
Less: accumulated amortization   (7,845,520)   (7,894,228)
Intangible and Capitalized Software, net  $123,858   $961,839 

  

For the three and nine months ended September 30, 2015 and 2014, amortization expenses were $49,041 and $211,062, $214,534 and $643,373, respectively.

 

Amortization of intangibles and capitalized software over the next five years is as follows:

 

Years ending December 31,    
2015  $31,902 
2016   91,956 
2017   - 
2018   - 
2019   - 
   $123,858 

  

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10.Accounts payable and accrued expenses

 

Accounts payable and accrued expenses consist of the following:

 

   September 30, 2015   December 31, 2014 
   (Unaudited)     
Accrued payroll   105,892    115,615 
Accrued expenses   50,911    13,750 
Other payables   211,601    338,733 
   $368,404   $468,098 

 

11.Deferred revenue

 

Deferred revenues include subscriber prepayments and education fee prepayments. Subscriber prepayments represent deferred revenue for the purchase of debit cards used to pay for the online downloading of education materials. The Company recognizes revenue when the card is used to download material. During the period between the purchase and use of debit cards, the unused portion of the debit card is treated as deferred revenue to the Company. Education fee prepayments represent payments for tuition for the Company’s training schools, which are amortized over the term of the course. As of September 30, 2015 and December 31, 2014, the Company had deferred revenue of $1,255,955 and $1,319,962, respectively.

 

12.Stockholders’ Equity

 

The Company had no equity transactions during the quarter ended September 30, 2015.

 

13.Warrants and options

 

Stock Options

 

During the quarters ended September 30, 2015 and 2014, the Company did not issue any stock options. The total stock based compensation was $0 and $0, respectively, related to the vesting of previously granted options.

 

The Company measures the fair value of options at the end of each reporting period until options are exercised, cancelled or expire unexercised. As of September 30, 2015, there were no stock options outstanding. As of September 30, 2015, there was no unrecognized compensation expense related to stock options.

 

14.Earnings per share

 

Per GAAP the Company reconciles the numerator and denominator of the basic and diluted earnings per share (EPS) computations.

 

For the quarters ended September 30, 2015 and 2014, dilutive shares include shares attributable to exercisable options only if such inclusion would be dilutive.

 

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The following reconciles the components of the EPS computation:

 

  

Nine Months Ended
September 30,

(Unaudited)

 
   2015   2014 
Net loss to common shareholders  $(21,592,459)  $(27,808,978)
Weighted average shares outstanding - basic   10,582,530    10,582,530 
Weighted average shares outstanding - diluted   10,582,530    10,582,530 
Loss per share – basic and diluted  $(2.04)  $(2.63)

 

   Three Months Ended
September 30,
 
   2015   2014 
Net loss to common shareholders  $(6,543,157)  $(14,440,141)
Weighted average shares outstanding - basic   10,582,530    10,582,530 
Weighted average shares outstanding - diluted   10,582,530    10,582,530 
Loss per share – basic and diluted  $(0.62)  $(1.36)

 

During the three and nine months ended September 30, 2015 and 2014, options to purchase 0 and 0 shares of common stock with exercise prices greater than the average fair market value of the Company’s stock were not included in the calculation because the effect is anti-dilutive.

 

15.Commitments and contingencies

 

Employee Benefits

 

The full time employees of subsidiaries based in the PRC are entitled to employee benefits including medical care, welfare subsidies, unemployment insurance and pension benefits through a Chinese government mandated multi-employer defined contribution plan. The Company is required to accrue for those benefits based on certain percentages of the employees’ salaries and make contributions to the plans out of the amounts accrued for medical and pension benefits. The total provision and contributions made for such employee benefits for the three and nine months ended September 30, 2015 and 2014 were $7,281 and $23,136, $38,953 and $99,364, respectively. The Chinese government is responsible for the medical benefits and the pension liability to be paid to these employees.

  

Minimum Lease Commitments

 

The Company has office leases and training center leases which expire at various dates from April 2015 through to the end of 2018. The Company recorded an aggregate of $67,847 and $610,395, $269,467 and $1,046,828 as rent expenses for the three and nine months ended September 30, 2015 and 2014, respectively. Rental commitments As of September 30, 2015 are as follows:

 

2015 (three months)  $233,134 
2016   628,589 
2017   446,882 
2018   459,328 
2019   - 
   $1,767,933 

 

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16.Operating Risk

 

(a) Country risk

 

Currently, the Company’s revenue is mainly derived from sale of educational products and services in the PRC. The Company hopes to expand its operations in the PRC, however, there are no assurances that the Company will be able to achieve such an expansion successfully. Therefore, a downturn or stagnation in the economic environment of the PRC could have a material adverse effect on the Company’s financial condition.

 

(b) Products risk

 

The Company competes with larger companies, who have greater funds available for expansion, marketing, research and development and the ability to attract more qualified personnel. There can be no assurance that the Company will remain competitive with larger competitors.

 

(c) Exchange rate risk

 

The Company cannot guarantee that the current exchange rate will remain steady, therefore there is a possibility that the Company could post the same amount of profit for two comparable periods and because of a fluctuating exchange rate actually post higher or lower profit depending on exchange rate of RMB converted to US$ on that date. The exchange rate could fluctuate depending on changes in the political and economic environments without notice. 

  

(d) Political risk

 

Currently, the PRC is in a period of growth and is openly promoting business development in order to bring more business into the PRC. Additionally, the PRC allows for certain Chinese corporation to be owned by a United States corporation. If the PRC government changes the laws or regulations, the Company’s ability to operate in the PRC could be affected.

 

(e) Key personnel risk

 

The Company’s future success depends on the continued services of executive management in the PRC. The loss of any of their services would be detrimental to the Company and could have an adverse effect on business development. The Company does not currently maintain key-man insurance on their lives. Future success is also dependent on the ability to identify, hire, train and retain other qualified managerial and other employees. Competition for these individuals is intense and increasing.

 

(f) Non-compliance with financing requirements

 

The Company might need to obtain future financing that require timely filing of registration statements, and have declared effective those registration statements, to register the shares being offered by the selling stockholders in future financing. The Company might be subject to liquidated damages and other penalties if they continue to obtain future financing requiring registration statements, and not having those registration statements filed and declared effective in a prompt manner.

 

17.Related Party Transactions

 

For the three and nine months ended September 30, 2015 and 2014, the Company entered into transactions with a related party amounting to $0 and $0, $0 and $960,503, respectively. As of September 30, 2015 and December 31, 2014, the Company had no transaction balance with related party.

 

18.Subsequent Events

 

The Company has evaluated subsequent events through the issuance of the consolidated financial statements and no subsequent event is identified.

   

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion of the results of our operations and financial condition should be read in conjunction with our consolidated financial statements and the related notes thereto, which appear elsewhere in this Quarterly Report. Except for the historical information contained herein, the following discussion, as well as other information in this report, contain “forward-looking statements,” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the “safe harbor” created by those sections. Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those discussed from time to time in this report, as well as any risks described in the “risk factors” section of our filings we make with the SEC. In addition, such statements could be affected by risks and uncertainties related to the ability to conduct business in the PRC, demand, including demand for our products resulting from change in the educational curriculum or in educational policies, our ability to raise any financing which we may require for our operations, competition, government regulations and requirements, pricing and development difficulties, our ability to make acquisitions and successfully integrate those acquisitions with our business, as well as general industry and market conditions and growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, should not be relied upon as representing our views as of any subsequent date and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report.

  

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. On an on-going basis, we evaluate these estimates, including those related to useful lives of property and equipment, bad debts, impairment, net intangibles, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.

  

Overview

 

We are engaged in the business of distribution of educational resources through the Internet. Our website, www.edu-chn.com, is a comprehensive education network platform which is based on network video technology and large data sources of education resources. We have a database comprising such resources as test papers for secondary education courses as well as video on demand. Our database includes more than 500,000 exams, test papers and courseware for secondary and elementary schools. We generate revenue through our website by selling prepaid debit cards to our subscribers and sales of advertisement on our website.

 

We also provide on-site teaching and training services and have training facilities in Heilongjiang and Beijing, which can accommodate over 5,000 students each year. The courses cover primarily the compulsory education curriculum of junior, middle and high school. We also provide vocational training services and language training services. We charge tuition fees for these classes and services.

  

We have also introduced another online service aimed at students who want to attend vocational school. These students include high school students who do not intend to continue their education at universities and university graduates who are looking for employment. The core business for our vocation education will be in three main areas: vocation training, vocational certification, and career development for college graduates. We have collaborated with the National Vocational Education Association of China in setting up www.360ve.com, which provides information regarding vocation training schools and vocation training both on-line and on-site at our training centers.

 

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Based on extensive market research and professional field study, at the beginning of 2012, the Company, through ZHLD, started to design and build a web-based information platform for its online education program - “China Education Cloud Platform” (the “Platform”). One of the main objectives and functions of this Platform is to provide a stable long distance education network for schools, teachers, students, and parents including video/audio courses, cloud-based network service and an online educational administration services system. This Platform is also intended to serve as a comprehensive cloud-based resource/space for educational institutions and individual teachers to store and share resources, market and sell their courses and services, including course management, video releases, examination system, courseware, study cards management system, etc. We launched this platform in early October 2014 and are currently offering free access to teachers, students, schools and educational institutions to develop our user base. After the initial promotion period, we will share with educational institutions and teachers the platform usage, maintenance and service fees paid by the students. Our original plan was to contract up to one thousand schools and reputational teachers by the end of 2015. As of the date of this report, we signed up approximately 100 schools and educational institutions. Since we did not achieve our initial target, we decided to extend the free trial period for additional six months in order to retain existing schools and further promote our Platform. However, there can be no assurance that we will be able to sign up educational institutions and teachers as planned within the extended period and if we fail, our revenue will be adversely affected.

  

Significant Accounting Estimates and Policies

 

The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of our products, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our 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 under different assumptions or conditions.

 

Property and equipment are evaluated for impairment whenever indicators of impairment exist. Accounting standards require that if an impairment indicator is present, we must assess whether the carrying amount of the asset is unrecoverable by estimating the sum of the future cash flows expected to result from the asset, undiscounted and without interest charges. If the recoverable amount is less than the carrying amount, an impairment charge must be recognized based on the fair value of the asset.

 

Intangible assets and capitalized software, which we acquired from third parties, are amortized over the lives of the rights agreements, which are two to five years. We evaluate the carrying value of the franchise rights during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the intangible asset below its carrying amount.

 

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Our deferred tax assets are from US corporate parent and have been fully reserved. Our US parent provides corporate and administrative functions for the entire consolidated Company. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent that we establish a valuation allowance or increase this allowance in a period, we must include a tax provision or reduce our tax benefit in the statements of operations. We use our judgment to determine our provision or benefit for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We believe, based on a number of factors including historical operating losses, which we will not realize the future benefits of a significant portion of our net deferred tax assets and we have accordingly provided a full valuation allowance against our deferred tax assets. However, various factors may cause those assumptions to change in the near term.

  

We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

 

 20 

 

 

We have determined the significant principles by consulting accounting policies that involve the most complex and subjective decisions or assessments. Our most significant accounting policies are those related to revenue recognition and deferred revenue.

 

Revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. We believe that these criteria are satisfied upon customers’ download of prepaid study materials. Prepaid debit cards allow our subscribers to purchase a predetermined monetary amount of download materials posted on our website. Prepaid service contracts are amortized to income on a straight-line basis over the length of the service contract. These service contracts allow the user to obtain materials for a designated period of time. At the time that the prepaid debit card is purchased, the receipt of cash is recorded as deferred revenue.

 

Revenue is recognized in the month when services are actually rendered. Unused value relating to debit cards is recognized as revenue when the prepaid debit card has expired. Revenue from advertising on our website is recognized when the advertisement is run. Since advertising customers are billed monthly, there is no unearned advertising revenue.

 

The Company engages an advertisement agency to manage its on-line advertisement revenue. Per the contract with this agency, upon posting of an on-line advertisement on the Company’s website, the Company is entitled to share with the agency 50% of the amount charged to the on-line advertiser. The Company recognizes revenue upon posting of an advertisement on their web-site. The agency is responsible for collection of all advertisement revenue from advertisers. The agency is required to make their remittance for on-line advertising within six months after on-line ads are posted on our website.

 

Prepaid expenses are primarily comprised of advance payments made for services to teachers for on-line materials and video, outdoor advertising and prepaid rent.

 

Deferred revenue includes subscriber prepayments and education fee prepayments. Subscriber prepayments represents deferred revenue for the purchase of debit cards used to pay for the on-line downloading of education materials, including testing booklets, supplemental materials and teaching video clips. We value the sales based on the actual occurrence of customer download. Therefore, the spare time between the purchase of debit cards and actual download is recorded under advances on accounts as deferred or unearned revenue. Once the download takes place, the amount is then transferred from advances on accounts to sales. Education fee prepayments represent tuition payments and payments for service contracts which are amortized over their respective terms. To the extent that we do adopt such plans in the future, such grants will be valued at the grant date and expensed over the applicable vesting period.

 

Recent Accounting Pronouncements

 

Management does not believe that any recently issued, but not yet effective, accounting standards or pronouncements, if currently adopted, would have a material effect on the Company’s consolidated financial statements.

 

 21 

 

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2015 and 2014  

 

The following table sets forth information from our statements of operations for the quarters ended September 30, 2015 and 2014:

 

   Three Months Ended September 30, 
   2015   2014 
   (Unaudited)   % of
Revenue
   (Unaudited)   % of
Revenue
 
Revenue  $166,495    100.00%  $1,071,579    100.00%
Cost of revenue   1,079,606    648.43%   1,653,194    154.28%
Gross Loss   (913,111)   -548.43%   (581,615)   -54.28%
Selling expenses   752,592    452.02%   3,398,742    317.17%
Administrative expenses   4,599,770    2762.71%   9,742,804    909.20%
Other income   (4,836)   -2.90%   28,387    2.65%
Loss from operations   (6,540,622)   -3928.42%   (14,465,766)   -1349.95%
Net loss before provision for income tax   (6,545,458)   -3931.32%   (14,437,379)   -1347.30%
Provision for income taxes   -    0.00%   -    0.00%
Net loss - attributable to CEAI and Subsidiaries   (6,543,157)   -3929.94%   (14,440,141)   -1347.56%
Net loss   (6,545,458)   -3931.32%   (14,437,379)   -1347.30%

 

Revenue

 

Revenue for the three months ended September 30, 2015 (the “September 30, 2015 Quarter”) decreased by $905,084, or 84%, to $166,495 from $1,071,579 for the three months ended September 30, 2014 (the “September 30, 2014 Quarter”).

 

Revenue from the online education division includes revenue generated from online examination orientated material downloads, tutorial exercise downloads, and advertisement income. Revenue generated by the online education division decreased by $51,414, or 38%, to $83,465 for the September 30, 2015 Quarter from $134,879 for the September 30, 2014 Quarter. 

 

Revenue from the training center division is mostly from after school tutoring for primary and middle school students. Revenue generated by the training center division decreased by $853,670, or 91% to $83,030 for the September 30, 2015 Quarter from $936,700 for the September 30, 2014 Quarter.

 

The decline in revenue for the quarter ended September 30, 2015 was a result of decline in revenue across all of our business due to continuously weakening brand recognition in the main targeted market and increased competition from new competitors. One of our tutoring schools, Tianlang, continues to be affected by the policy of Harbin local government prohibiting teachers of public schools from engaging in any tutoring/training activities outside of public schools as it had to cut its class offerings dramatically as a result of these policies since the last quarter of 2014 and has not been able to locate and hire qualified non-public school teachers to restore its operations to the prior scale.

 

Despite our belief in the opportunities presented by the rise of the online education industry in China and our continuous efforts on the development and promotion of our online education Platform launched in October 2014, we have not been successful in turning over our online education business. Since the launch of the Platform to the date of this report, we have been offering free access to the Platform to teachers and students aiming to quickly develop the user base and achieve a leading position within the industry. However, we did not achieve our original plan. As such we decided to extend the free trial period for additional six months in order to retain the existing schools and further market and promote our Platform. However, there can be no assurance that we will be able to attract enough educational institutions and teachers as planned during the extended period and if we fail, our revenue will be adversely affected.

 

 22 

 

 

Cost of Revenue

 

Our overall cost of revenue decreased by $573,588 or 35% to $1,079,606 for the September 30, 2015 Quarter, from $1,653,194 for the September 30, 2014 Quarter.

 

Cost of revenue for the online education business comprises cost of obtaining new materials to offer students, depreciation related to computer equipment, amortization related to software, and direct labor cost. Direct labor cost in connection with the maintenance and operation of our websites are fixed costs whereas the costs for purchase of materials and deprecation of equipment and software are variable costs. While the direct labor cost usually stays stable, the costs for purchase of materials and depreciation of equipment and software vary as we purchase new materials, equipment and software. The cost of revenue for the purchase of new materials, equipment and software does not directly correlate with revenue. We constantly have to invest in and update our content to be competitive and current in spite of falling revenue in the online education business.

 

The cost of revenue for the online education division decreased by $55,733 or 5% to $1,007,182 for the September 30, 2015 Quarter, from $1,062,915 for the September 30, 2014 Quarter. The decrease was primarily due to the decrease in depreciation costs resulting from decreased expenditure on fixed assets. While we strive to provide high-quality and update-to-date online materials, we continue to control cost of revenue for the online education division by closely monitoring the variable costs while maintaining fixed costs at a stable level. 

 

The principal components of cost of revenue at our training centers are rentals, direct labor costs and the depreciation expense. While the rental expenses are fixed and depreciation usually remains stable, the costs for direct labor (i.e. teachers’ salary) vary. Cost of revenue for the training center division decreased by $517,855 or 88% to $72,424 for the September 30, 2015 Quarter from $590,279 for the September 30, 2015 Quarter. The decrease in cost of revenue was mainly due to a decrease in teachers’ salary as our teachers are paid by the number of classes they teach and there was a decrease in classes we offered during the September 30, 2015 Quarter particularly the dramatic decrease in the course offerings of Tianlang as compared to the same period in 2014.

 

Gross Profit (Loss)

 

The flowing table sets forth information as to the gross profit (loss) and gross margin for our two lines of business for the quarters ended September 30, 2015 and 2014: 

 

   Three Months Ended September 30, 
   2015   2014 
   (Unaudited)   (Unaudited) 
Online Education  $   $ 
           
Revenue   83,465    134,879 
Cost of revenue   1,007,182    1,062,915 
Gross loss   (923,717)   (928,036)
Gross margin   -1107%   -688%
           
Training Center Revenue          
           
Revenue  $83,030   $936,700 
Cost of revenue   72,424    590,279 
Gross profit   10,606    346,421 
Gross margin   13%   37%

 

The gross margin for online education division is negative 1107% for the September 30, 2015 Quarter as compared with negative 688% for the September 30, 2014 Quarter. The significant drop in gross margin was because there was a significant decrease in revenue from online education while the cost of revenue remained at the same level.  

 

 23 

 

 

The gross margin for our training center division decreased to 13% for the September 30, 2015 Quarter from 37% for the September 30, 2014 Quarter because cost of revenue did not decrease proportionately with revenue due to reasons discussed above.

  

Selling Expenses

  

Selling expenses include advertising and marketing expense, consulting fees, sales commissions, and other expenses. Selling expenses decreased by $2,646,150 or 78% to $752,592 for the September 30, 2015 Quarter, from $3,398,742 for the September 30, 2014 Quarter. The decrease in selling expenses was mainly due to the decrease in marketing and advertising expenses as we have been focusing on rebuilding our brand name and reputation through in-house efforts since the beginning of this year.

 

Administrative Expenses

  

Administrative expenses decreased by $5,143,034 or 53%, to $4,599,770 for the September 30, 2015 Quarter, from $9,742,804 for the September 30, 2014 Quarter. We completed and launched the Platform in the fourth quarter of 2014 and therefore the research and development expenses for the Platform dropped significantly. In addition, the decrease in labor costs for the onsite education also contributed to the decrease in administrative expenses for the September 30, 2015 Quarter as compared to the same quarter in 2014.

  

Other Income (Expense)

 

Other income or expense includes loss on disposal of property and equipment, interest income and impairment loss on intangible assets. Net other expense was $4,836 for the September 30, 2015 Quarter, a decrease of $33,223, as compared to net income of $28,387 for the September 30, 2014 Quarter. This is mainly due to the loss on disposal of property and equipment of $16,586 we recognized for the September 30, 2015 Quarter.

  

Income Taxes

 

The provision for income tax was nil for the September 30, 2015 Quarter and the September 30, 2014 Quarter. In 2015, the applicable income tax rate is 15% for ZHLD, as ZHLD has been approved by the local government as being involved in a high technology industry. Otherwise, the regular PRC statutory tax rate is 25%. ZHTC, Tianlang, Changchun Nuoya, Harbin Nuoya, Beijing Xicheng District Hua Yu Pin Xue Training School, Beijing Dongcheng District Hua Yu Pin Xue Training School and Beijing Haidian District Pinxuetang Training School are currently exempt from PRC taxation, as they operate as a business enterprise engaged in educational opportunities. The Company’s other subsidiaries: BHYHZ, ZHLDBJ, HYPX, ZHLDIT and Beijing Shifanxuezhitang Information Science Institute are taxed at the PRC regular statutory rate (25%), and have not accrued taxes since inception due to recurring losses or not having generated income since inception.  

 

Net Loss

 

As a result of the foregoing, we had net loss attributable to the Company and its subsidiaries of $6,543,157, or negative return of $0.62 per share basic and diluted, for the September 30, 2015 Quarter, as compared to net loss of $14,440,141 or negative return of $1.36 per share basic and diluted, for the September 30, 2014 Quarter.

 

 24 

 

  

Comparison of the Nine Month Ended September 30, 2015 and 2014  

 

The following table sets forth information from our statements of operations for the nine months ended September 30, 2015 and 2014:

 

   Nine Months Ended September 30, 
   2015   2014 
   (Unaudited)   % of
 Revenue
   (Unaudited)   % of
 Revenue
 
Revenue  $542,935    100.00%  $2,385,811    100.00%
Cost of revenue   3,468,598    638.86%   4,535,662    190.11%
Gross Loss   (2,925,663)   -538.86%   (2,149,851)   -90.11%
Selling expenses   2,529,595    465.91%   5,794,444    242.87%
Administrative expenses   14,863,893    2737.69%   18,447,595    773.22%
Other income   (632,308)   -116.46%   138,118    5.79%
Loss from operations   (21,343,925)   -3931.21%   (28,150,659)   -1179.92%
Net loss before provision for income tax   (21,976,233)   -4047.67%   (28,012,541)   -1174.13%
Provision for income taxes   -    0.00%   -    0.00%
Net loss - attributable to CEAI and Subsidiaries   (21,592,459)   -3976.99%   (27,808,978)   -1165.60%
Net loss   (21,976,233)   -4047.67%   (28,012,541)   -1174.13%

 

Revenue

 

Due to the reasons cited above in the three month discussion, our revenue continued to decline for the nine months ended September 30, 2015. Revenue for the nine months ended September 30, 2015 decreased by $1,842,876, or 77%, to $542,935 from $2,385,811 for the nine months ended September 30, 2014.

 

Revenue from the online education division includes revenue generated from online examination orientated material downloads, tutorial exercise downloads, and advertisement income. Revenue generated by the online education division decreased by $140,082, or 36%, to $252,444 for the nine months ended September 30, 2015 from $392,526 for the nine months ended September 30, 2014.

 

Revenue from the training center division is mostly from after school tutoring for primary and middle school students. Revenue generated by the training center division decreased by $1,702,794, or 85% to $290,491 for the nine months ended September 30, 2015 from $1,993,285 for the nine months ended September 30, 2014.

 

 25 

 

 

Cost of Revenue

 

Our overall cost of revenue decreased by $1,067,064 or 24% to $3,468,598 for the nine months ended September 30, 2015, from $4,535,662 for the nine months ended September 30, 2014.

 

Cost of revenue for the online education business comprises cost of obtaining new materials to offer students, depreciation related to computer equipment, amortization related to software, and direct labor cost. Direct labor cost in connection with the maintenance and operation of our websites are fixed costs whereas the costs for purchase of materials and deprecation of equipment and software are variable costs. While the direct labor cost usually stays stable, the costs for purchase of materials and depreciation of equipment and software vary as we purchase new materials, equipment and software. The cost of revenue for the purchase of new materials, equipment and software does not directly correlate with revenue. We constantly have to invest in and update our content to be competitive and current in spite of falling revenue in the online education business.

 

The cost of revenue for the online education division decreased slightly to $3,116,396 for the nine months ended September 30, 2015 from $3,170,379 for the nine months ended September 30, 2014. While we strive to provide high-quality and update-to-date online materials, we continue to control cost of revenue for the online education division by closely monitoring the variable costs while maintaining fixed costs at a stable level.

 

The principal components of cost of revenue at our training centers are rentals, direct labor costs and the depreciation expense. While the rental expenses are fixed and depreciation usually remains stable, the costs for direct labor (i.e. teachers’ salary) vary. Cost of revenue for the training center division decreased by $1,013,081 or 74% to $352,202 for the nine months ended September 30, 2015 from $1,365,283 for the nine months ended September 30, 2014. The decrease in cost of revenue was mainly due to a decrease in teachers’ salary as our teachers are paid by the number of classes they teach and there was a decrease in classes we offered during the nine months ended September 30, 2015 particularly the dramatic decrease in the course offerings of Tianlang as compared to the same period in 2014.

 

Gross Profit (Loss)

 

The flowing table sets forth information as to the gross profit (loss) and gross margin for our two lines of business for the nine months ended September 30, 2015 and 2014: 

 

   Nine Months Ended September 30, 
   2015   2014 
   (Unaudited)   (Unaudited) 
Online Education  $    $  
           
Revenue   252,444    392,526 
Cost of revenue   3,116,396    3,170,379 
Gross profit   (2,863,952)   (2,777,853)
Gross margin   -1134%   -708%
           
Training Center Revenue          
   $    $  
Revenue   290,491    1,993,285 
Cost of revenue   352,202    1,365,283 
Gross profit   (61,711)   628,002 
Gross margin   -21%   32%

 

The gross margin for online education division is negative 1134% for the nine months ended September 30, 2015 as compared with negative 708% for the nine months ended September 30, 2014. The significant drop in gross margin was because there was a significant decrease in revenue from online education while the cost of revenue stayed at the same level.  

 

 26 

 

 

The gross margin for our training center division decreased to negative 21% for the nine months ended September 30, 2015 from 32% for the nine months ended September 30, 2014 because cost of revenue did not decrease as much as revenue due to reasons discussed above.

  

Selling Expenses

  

Selling expenses include advertising and marketing expense, consulting fees, sales commissions, and other expenses. Selling expenses decreased by $3,264,849 or 56% to $2,529,595 for the nine months ended September 30, 2015, from $5,794,444 for the nine months ended September 30, 2014. The decrease in selling expenses was mainly due to the decrease in marketing and advertising expenses and labor costs during the nine month period ended September 30, 2015.

 

Administrative Expenses

  

Administrative expenses decreased by $3,583,702 or 19%, to $14,863,893 for the nine months ended September 30, 2015, from $18,447,595 for the nine months ended September 30, 2014. This decrease was mainly due to the decrease in related amortization and depreciation expenses and a slight decrease in labor costs for the ongoing maintenance of the Platform.

  

Other Income (Expense)

 

Other income or expense includes loss on disposal of property and equipment, interest income and impairment loss on intangible assets. Net other expense was $632,308 for the nine months ended September 30, 2015, a change of $770,426, as compared to net income of $138,118 for the nine months ended September 30, 2014. This is mainly due to the impairment loss of $620,124 we recognized in the nine months ended September 30, 2015.

  

Income Taxes

 

The provision for income tax was nil for the nine months ended September 30, 2015 and 2014. In 2015, the applicable income tax rate is 15% for ZHLD, as ZHLD has been approved by the local government as being involved in a high technology industry. Otherwise, the regular PRC statutory tax rate is 25%. ZHTC, Tianlang, Changchun Nuoya, Harbin Nuoya, Beijing Xicheng District Hua Yu Pin Xue Training School, Beijing Dongcheng District Hua Yu Pin Xue Training School and Beijing Haidian District Pinxuetang Training School are currently exempt from PRC taxation, as they operate as a business enterprise engaged in educational opportunities. The Company’s other subsidiaries: BHYHZ, ZHLDBJ, HYPX, ZHLDIT and Beijing Shifanxuezhitang Information Science Institute are taxed at the PRC regular statutory rate (25%), and have not accrued taxes since inception due to recurring losses or not having generated income since inception.  

 

Net Loss

 

As a result of the foregoing, we had net loss attributable to the Company and its subsidiaries of $21,592,459, or negative return of $2.04 per share basic and diluted, for the nine months ended September 30, 2015, as compared to net loss of $27,808,978 or negative return of $2.63 per share basic and diluted, for the nine months ended September 30, 2014.

 

Liquidity and Capital Resources

 

Our current assets primarily consist of cash, prepaid expenses, and other receivable. We do not have inventory. Because students who purchase our on-line programs purchase debit cards for the programs that they use and students who enroll in our training classes pay their tuition before starting classes, we do not have accounts receivable except some accounts receivable from our advertising business on our website. Our prepaid expenses are primarily advance payments made to teachers for on-line materials, prepaid advertisement expense, prepaid rent, and other prepayments.

 

 27 

 

  

As of September 30, 2015, we had working capital of $2,487,644, a decrease of $19,291,543, or 89% from working capital of $21,779,187 at December 31, 2014 mainly due to significant losses from operations. We consider current working capital and borrowing capabilities adequate to cover our planned operating and capital requirements.

 

At September 30, 2015, we had cash and cash equivalents of $3,592,047, a decrease of $19,104,079 or 84%, from $22,696,126 as of December 31, 2014.

 

   Nine Months Ended September 30, 
   2015   2014 
   (Unaudited)   (Unaudited) 
Net cash (used in) provided by operating activities  $(18,941,829)  $(23,775,529)
Net cash used in investing activities   4,648    (1,577,664)
Net cash used in financing activities   -    - 

 

Cash Flow in Operating Activities

 

Our net cash used in operating activities was $18,941,829 for the nine months ended September 30, 2015, a decrease of $4,833,700 or 20% from $23,775,529 for the nine months ended September 30, 2014 which mainly resulted from: 1) the decrease in business operating loss of $6,036,308, or 22% from loss of $28,012,541 for the nine months ended September 30, 2014 to loss of $21,976,233 for the nine months ended September 30, 2015; 2) depreciation and amortization outflow of $2,149,641 for nine months ended September 30, 2015, a decrease of $915,453, or 30% as compared to outflow of $3,065,094 for the same period of 2014.

  

Cash Flow in Investing Activities

 

Our cash provided by investing activities was $4,648 for the nine months ended September 30, 2015, as compared with cash outflow of $1,577,664 in investing activities for the nine months ended September 30, 2014. The main difference is due to purchase of property and equipment of $1,583,694 in the nine months ended September 30, 2014.

  

Cash Flow in Financing Activities

 

We did not use any cash in financing activities for the nine months ended September 30, 2015, and 2014.

 

We believe that our working capital will be sufficient to enable us to meet our cash requirements for the next 12 months. However, we may incur additional expenses as we seek to improve and promote our platform as well as to optimize the operation of our on-site training centers. We believe we have adequate working capital to fund future growth activities. Although currently we do not have any plans to complete any acquisitions, it is possible that we may seek to acquire one or more businesses in the education sector, and we may require financing for that purpose. We cannot assure you that funding will be available if and when we require funding. 

 

Off-Balance Sheet Arrangements

 

As of September 30, 2015, we have no off-balance sheet arrangements. 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable. 

 

 28 

 

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Company's management, including the Company's chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including Xiqun Yu, the Company’s chief executive officer, and Cloris Li, the Company’s chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the quarter ended September 30, 2015. Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective.  

 

Changes in Internal Controls over Financial Reporting

 

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

 

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2015 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.

 

None.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Not applicable.

 

 29 

 

 

Item 6. Exhibits.

 

Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.

 

Exhibit

No.

  Description
 
31.1   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*  
31.2   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*  
32.1   Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**  
32.2   Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**  
101.INS   XBRL Instance Document*
101.SCH   XBRL Taxonomy Extension Schema Document*
101.CAL   XBRL Taxonomy Calculation Linkbase Document*
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB   XBRL Taxonomy Label Linkbase Document*
101.PRE   XBRL Taxonomy Presentation Linkbase Document*

 

*Filed herewith.

**Furnished herewith.

 

 30 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CHINA EDUCATION ALLIANCE, INC.
     
Date: November 16, 2015 By: /s/ Xiqun Yu
    Xiqun Yu
    Chief Executive Officer and Chairman
    (Principal Executive Officer)
     
Date: November 16, 2015 By: /s/ Cloris Li
    Cloris Li
    Chief Financial Officer
    (Principal Accounting and Financial Officer)

 

 31