Everest Resources Corp. - FORM 10-Q

Attached files

file	filename
EX-10.1 - FIRST AMENDMENT TO PROMISSORY NOTE - Everest Resources Corp.	f10q0610ex10i_covenant.htm
EX-4.2 - WARRANT TO WALSTON DUPONT GLOBAL ADVISORS LLC, DATED JUNE 10, 2010 - Everest Resources Corp.	f10q0610ex4ii_covenant.htm
EX-10.2 - BRIDGE LOAN AGREEMENT - Everest Resources Corp.	f10q0610ex10ii_covenant.htm
EX-4.3 - WARRANT TO JD HOLDINGS 1, INC., DATED JULY 2, 2010 - Everest Resources Corp.	f10q0610ex4iii_covenant.htm
EX-10.4 - SECOND AMENDMENT TO PROMISSORY NOTE - Everest Resources Corp.	f10q0610ex10iv_covenant.htm
EX-10.3 - BRIDGE LOAN AGREEMENT BY AND BETWEEN COVENANT GROUP OF CHINA INC. AND JD HOLDINGS 1, INC - Everest Resources Corp.	f10q0610ex10iii_covenant.htm
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - Everest Resources Corp.	f10q0610ex32i_covenantgroup.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - Everest Resources Corp.	f10q0610ex31i_covenantgroup.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - Everest Resources Corp.	f10q0610ex31ii_covenantgroup.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - Everest Resources Corp.	f10q0610ex32ii_covenantgroup.htm
EX-4.1 - WARRANT TO SUI GENERIS CAPITAL PARTNERS LLC, DATED JUNE 30, 2010 - Everest Resources Corp.	f10q0610ex4i_covenant.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2010

o Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______.

000-53463

(Commission file number)

COVENANT GROUP OF CHINA INC.

(Exact name of small business issuer as specified in its charter)

Nevada		68-0677260
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

Two Bala Plaza, Suite 300

Bala Cynwyd, PA 19004

(Address of principal executive offices)

(610) 660-7828

(Issuer’s telephone number)

N/A

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller reporting company)

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 o No x

On August 13, 2010, 9,603,909 shares of the registrant's common stock were outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4T.	Controls and Procedures	30

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	32

Item 4.	Removed and Reserved	32

Item 5.	Other Information	32

Item 6.	Exhibits	32

SIGNATURES		33

-2-

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

COVENANT GROUP OF CHINA INC.
CONSOLIDATED BALANCE SHEETS


	June 30, 2010			December 31, 2009
ASSETS	(Unaudited)			(Audited)

CURRENT ASSETS
Cash and cash equivalent	$	1,088,938		$	969,271
Accounts receivable, net		1,807,910			2,156,112
Retentions receivable		228,200			344,428
Other receivables		240,045			234,066
Prepayment and deposits		31,072			98,537
Inventories		237,902			102,950

Total current assets		3,634,067			3,905,364

NON-CURRENT ASSETS
Retentions receivable		147,256			146,451
Property, plant and equipment, net		24,016			21,794
Goodwill		572,020			572,020
Intangible assets		22,917			-

Total non-current assets		766,209			740,265

Assets of discontinued operations		-			4,162,726

Total assets	$	4,400,276		$	8,808,355

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Short term loans	$	263,294		$	37,638
Note payable		-			100,000
Accounts payable		381,809			983,656
Unearned revenue		177,478			155,432
Taxes payable		60,560			9,980
Other payables and accrued liabilities		110,054			438,774
Dividend payable		480,887			478,260
Loans payable, net of unamortized discount on warrants		232,417			-

Total current liabilities		1,706,499			2,203,740

Liabilities of discontinued operations		-			1,616,586

Total liabilities		1,706,499			3,820,326

STOCKHOLDERS' EQUITIY
Common stock, $0.00001 par value, 20,000,000 shares authorized, 11,083,909 shares issued and 9,683,909 shares outstanding as of June 30, 2010, and 11,480,909 shares issued and outstanding as of December 31, 2009 respectively		97			115
Additional paid-in capital		5,812,876			5,572,018
Deferred stock compensation		(45,938	)		-
Statutory surplus reserve		67,737			67,737
Accumulated deficit		(362,609	)		(647,735	)
Accumulated other comprehensive loss		9,667			(4,106	)
		5,481,830			4,988,029

Less: treasury stock, at cost; 1,400,000 shares of common stock		(2,788,053	)		-

Total stockholders' equity		2,693,777			4,988,029

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	4,400,276		$	8,808,355

See notes to these consolidated financial statements.

-3-

COVENANT GROUP OF CHINA INC.
CONSOLIDATED STATEMENTS OF OPERATION AND OTHER COMPREHENSIVE INCOME
(UNAUDITED)

	FOR THE SIX MONTHS			FOR THE THREE MONTHS
	ENDED JUNE 30, 2010			ENDED JUNE 30, 2010

NET SALES	$	2,977,020		$	1,551,079

COST OF SALES		2,301,390			1,294,425

GROSS PROFIT		675,630			256,654

OPERATING EXPENSES
Selling expenses		22,954			6,861
General and administrative expenses		569,206			324,883

Total Operating Expenses		592,160			331,744

INCOME (LOSS) FROM OPERATIONS		83,470			(75,090	)

OTHER INCOME (EXPENSES)
Other income		377			178
Other expense		(449	)		(247	)
Income (Loss) on settlement of debt		(23,200	)		404,800
Interest expense		(15,336	)		(11,077	)

Total Other Income (Expenses), net		(38,608	)		393,654

NET INCOME		44,862			318,564

OTHER COMPREHENSIVE INCOME
Foreign currency translation		13,773			11,605

COMPREHENSIVE INCOME	$	58,635		$	330,169

BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING		9,869,196			9,677,393

BASIC AND DILUTED NET INCOME PER SHARE	$	0.00		$	0.03

See notes to these consolidated financial statements.

-4-

COVENANT GROUP OF CHINA INC.
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2010
(UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	44,862
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization		8,320
Change in allowance for doubtful accounts		(9,403	)
Loss on disposal of fixed assets		115
Loss on settlement of debt		23,200
Stock issued for compensation		21,200
Deferred compensation		15,312
Amortization of discount on warrants		17,607
(Increase) decrease in current assets:
Accounts receivable		367,639
Retentions receivable		117,526
Other receivables		(4,669	)
Prepayment and deposits		67,664
Inventory		(133,711	)
Increase (decrease) in current liabilities:
Accounts payable		(604,198	)
Unearned revenue		21,086
Accrued liabilities and other payables		(329,467	)
Taxes payable		50,271

Net cash used in operating activities		(326,646	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property & equipment		(33,443	)

Net cash used in investing activities		(33,443	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term loans		474,316

Net cash provided by financing activities		474,316

EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS		5,440

NET INCREASE IN CASH & CASH EQUIVALENTS		119,667

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		969,271

CASH & CASH EQUIVALENTS, END OF PERIOD	$	1,088,938

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income tax paid	$	23,105
Interest paid	$	4,423

Supplemental disclosure of non-cash investing activities:
Net assets of discontinued operations	$	2,788,053

See notes to these consolidated financial statements.

-5-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Covenant Group of China Inc. (Covenant Group or the Company) (FKA: Everest Resources Corp.) was incorporated in the State of Nevada on November 8, 2006. On December 24, 2009, Covenant Group entered into and closed on a share exchange agreement with Covenant Group Holdings Inc. (Covenant Holdings), a privately held company incorporated under the laws of the State of Delaware. Pursuant to the share exchange agreement, Covenant Group acquired all of the issued and outstanding capital stock of Covenant Holdings in exchange for 9,380,909 shares of common stock. Prior to the acquisition of Covenant Holdings, the Company was in the development stage and had minimal business operations.

Covenant Holdings was formed in the State of Delaware on June 10, 2009 to acquire equity interests in private Chinese operating companies and providing these companies with strategic support. The total number of Covenant Holdings shares authorized for issuance is 20,000,000 with $0.00001 par value. Covenant Holdings identified companies that focus on IT applications in Government mandated areas such as communications and media, government manufacturing and security and surveillance. There was no significant activity from June 10, 2009 through December 31, 2009 except for two acquisitions.

On June 24, 2009, Covenant Holdings entered into a stock acquisition and reorganization agreement with Hainan Jien Intelligent Engineering Co. Ltd. (Jien) and its stockholders. Pursuant to the terms of the agreement, Covenant Holdings acquired 100% of the common stock of Jien, representing 100% of its outstanding equity interests, in exchange for 1,350,000 shares of a public shell's common stock, which would acquire all of the rights and obligations of Covenant Holdings. The acquisition stock price was initially valued at a provisional amount of $2 per share, which was the stock price for Covenant Holdings’ prior private capital raises. The Company changed its valuation stock price to $1.76 per share, which was determined by the volume weighted average stock price for the first day of trading of the Company’s common stock plus all private sales of Covenant Holdings’ common stock prior to the completion of the reverse merger with the Company. Jien was incorporated in Hainan Province, People’s Republic of China (PRC) in 1999. Jien specializes in the design and installation of security and surveillance infrastructure to protect financial institutions and government agencies, and it also implements intelligent construction projects for commercial customers.

On June 24, 2009, Covenant Holdings entered into a stock acquisition and reorganization agreement with Chongqing Sysway Information Technology Co. Ltd. (Chongqing Sysway) and its stockholders. Pursuant to the terms of the agreement, Covenant Holdings acquired 100% of the common stock of Chongqing Sysway, representing 100% of its outstanding equity interests, in exchange for 1,400,000 shares of a public shell's common stock, which would acquire all of the rights and obligations of Covenant Holdings. The acquisition stock price was initially valued at a provisional amount of $2 per share, which was the stock price for Covenant Holdings’ prior private capital raises. The Company changed its valuation stock price to $1.76 per share, which was determined by the volume weighted average stock price for the first day of trading of the Company’s common stock plus all private sales of Covenant Holdings’ common stock prior to the completion of the reverse merger with the Company. Chongqing Sysway was incorporated in Chongqing City, Sichuan Province, PRC, in 1999 as a State Owned Enterprise (SOE). Since 2005, Chongqing Sysway has operated as a private enterprise mainly engaged in systems integration services, including computer system installation, website design, and system firewall setup, particularly for the tobacco industry.

For accounting purposes, the effective acquisition date of Jien and Chongqing Sysway is deemed to be July 1, 2009 as the results of any activity from June 24, 2009 through June 30, 2009 were deemed to be immaterial to the financial statements taken as a whole.

-6-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

On December 24, 2009, Covenant Holdings entered into a share exchange agreement with Covenant Group. Covenant Group agreed to exchange 9,380,909 shares of its common stock, on a one-for-one basis, for each share of Covenant Holdings shares held of record on the date of the closing. Concurrent with the share exchange agreement, one of Covenant Group’s shareholders agreed to cancel 4,500,000 shares out of 6,600,000 of the total issued and outstanding shares of Covenant Group in exchange for the immediate payment of $100,000. He further agreed to cancel an additional 500,000 shares upon Covenant Holdings’ payment of the principal due on a note issued to the shareholder in the amount of $190,000, which, together with the $100,000 payment, represented the consideration for the acquisition of the shell company. As of December 31, 2009, $90,000 of the $190,000 note payable was paid. During the first quarter of 2010, the 500,000 shares were cancelled and the Company issued 300,000 shares to this shareholder in lieu of the payment for the note payable of $100,000. In May of 2010, the Company and this shareholder agreed to revise and reduce the 300,000 shares to 70,000 shares. The Share Exchange was being accounted for as a "reverse acquisition," since the Covenant Holdings shareholders own a majority of the outstanding shares of the Company's common stock immediately following the share exchange. Covenant Holdings was deemed to be the accounting acquiror in the reverse acquisition. Consequently, the assets and liabilities and the historical operations that were reflected in the financial statements prior to the share exchange were those of Covenant Holdings and were recorded at the historical cost basis of Covenant Holdings. The consolidated financial statements after completion of the share exchange would include the assets and liabilities of the Company and Covenant Holdings, and the historical operations of Covenant Holdings and operations of the Company from the closing date of the share exchange. As a result of the issuance of the shares of the Company’s common stock pursuant to the share exchange, a change in control of the Company occurred on the date of the consummation of the share exchange.

The Company's Board of Directors decided on April 30, 2010, to terminate and rescind the Acquisition Agreement with Chongqing Sysway due to several breaches of the agreement by Chongqing Sysway, including the failure of the prior owners of Chongqing Sysway to repay a dividend paid to them by Chongqing Sysway in excess of that permitted under the agreement and under China law and the failure of Chongqing Sysway and its prior owners to cooperate with the Company in the preparation of its financial statement disclosures required under United States securities laws. As a result of the termination and rescission of the agreement, the Company transferred all of the shares of capital stock of Chongqing Sysway to the prior owners of Chongqing Sysway, and the 1,400,000 shares of common stock of the Company issued in exchange for the shares of capital stock of Chongqing Sysway were returned to the Company and treated as treasury shares. The effect of this transaction was to return the Company, Chongqing Sysway, and the prior owners of the capital stock of Chongqing Sysway to their status prior to the completion of the acquisition by the Company of the capital stock of Chongqing Sysway on December 24, 2009. The termination and recission of the acquisition agreement resulted in the activities of Sysway being reflected on the financial statements as discontinued operations (see Note 18).

On January 12, 2010, the Company formed a wholly owned subsidiary – Pandaz LLC, a Delaware LLC (Pandaz Delaware). On January 13, 2010, Pandaz Delaware entered into an asset purchase agreement with The Pandaz LLC, a Nevada LLC, for certain assets and intellectual property associated with an automobile dealer and customer interface, vehicle search function and automobile purchasing website that the company is tentatively looking to implement in China. The total purchase consideration was $25,000, of which, $10,000 was paid as the forgiveness of a bridge loan that the Company provided to the seller on January 7, 2010 and $15,000 was paid as a one-time cash payment.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principle of Consolidation

The consolidated financial statements include the accounts of Covenant Holdings, Covenant Group, Pandaz Delaware and Jien. All intercompany transactions and account balances are eliminated in consolidation.

-7-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The financial statement should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission (SEC). Operating results for the six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

Use of Estimates

In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Accounts and Retentions Receivable

The Company’s policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Based on historical collection activity, the Company had allowances of $5,433 at June 30, 2010 and $78,356 at December 31, 2009.

At June 30, 2010, the Company had retentions receivable for product quality assurance of $375,456. At December 31, 2009, the Company had $490,879 of retentions receivable. The retention rate varies from 3% to 5% of the sales price, with variable terms from 1 year to 3 years. $228,200 and $344,428 of the retentions receivable at June 30, 2010 and December 31, 2009, respectively, are current and due within one year; $147,256 and $146,451 of the retentions receivable are treated as long term assets at June 30, 2010 and December 31, 2009, respectively.

Inventories

Jien’s inventories are valued at the lower of cost or market with cost determined on a first-in, first-out basis.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with 5% salvage value and estimated lives ranging from 3 to 25 years as follows:

-8-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

Building	20 - 25 years
Leasehold improvements	Shorter of lease term or 10 years
Vehicle	5 - 10 years
Office Equipment	3 - 5 years

Impairment of Long-Lived Assets

Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company believes that, as of June 30, 2010, there were no significant impairments of its long-lived assets.

Goodwill

Goodwill represents the excess of the fair value of the consideration transferred over the net of the acquisition date amount of identifiable assets acquired and the liability assumed. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”), codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, goodwill is not amortized but is tested for impairment annually, or when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair value of the reporting unit, with the fair value of the reporting unit determined using a discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.

Warranties

The Company offers a warranty to its customers on its products for a period from three months to three years depending on the contract terms negotiated with the customers; most warranty terms are one year. The Company accrues for warranty costs based on estimates of the costs that may be incurred under its warranty obligations. The warranty expense and related accrual is included in the Company's selling expenses and other payables respectively, and is recorded at the time revenue is recognized. Factors that affect the Company's warranty liability include the number of sold equipment, its estimates of anticipated rates of warranty claims, costs per claim and estimated support labor costs and the associated overhead. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The Company’s warranty expense was immaterial for the six and three months ended June 30, 2010.

Income Taxes

The Company utilizes Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes,” codified in FASB ASC Topic 740, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

-9-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (codified in FASB ASC Topic 740) on June 10, 2009. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48. As a result of the implementation of Interpretation 48, the Company recognized no material adjustments to liabilities or stockholders equity. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.

Covenant Holdings had a US net operating loss of $494,280 at June 30, 2010 and $690,724 at December 31, 2009. A 100% valuation allowance has been established due to the uncertainty of its realization.

Covenant Group of China and Pandaz Delaware had US net operating loss of $275,695 and $37,330 at June 30, 2010, respectively.

Jien is qualified as a small business in the construction industry in the PRC. The Company is subject to a 1.76% and 3% tax rate on net sales for 2010 and 2009. Since the tax is based on sales, under US GAAP, it is not an income tax. Accordingly, $45,724 and $20,029 were recorded as general and administrative expense for the six and three months ended June 30, 2010.

The following table reconciles the U.S. statutory rates to the Company’s consolidated effective tax rate for the six and three months ended at June 30, 2010:

	Six Months Ended			Three Months Ended
	June 30, 2010
U.S. statutory rates	$	15,253		$	108,312
Foreign tax rate less than U.S. statutory rate		(43,695	)		(16,048	)
Unrecognized tax benefit on US operating loss		135,942			83,961
Non tax deductible expense (non taxable income) for US company		13,874			(131,646	)
Foreign income exempt from foreign income tax		(121,374	)		(44,579	)
Income tax expense	$	-		$	-

-10-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

Deferred tax assets (liabilities) at June 30, 2010 consist of the following:

U.S. net operating loss
Deferred tax asset
U.S. net operating loss	$	370,787
Less valuation allowance		(370,787	)
Net deferred tax asset	$	-

The valuation allowance for deferred tax assets as of June 30, 2010 was $370,787. The change in the total valuation for the six months ended June 30, 2010 was an increase of $135,941. The deferred tax asset arose from the net operating loss generated at the US parent company level. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the net operating losses and temporary differences become deductible. Management considered projected future taxable income and tax planning strategies in making this assessment. The value of the deferred tax assets was offset by a valuation allowance, due to the current uncertainty of the future realization of the deferred tax assets.

Revenue Recognition

The Company's revenue recognition policies are in compliance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 104 (codified in FASB ASC Topic 480). Revenue is recognized when services have been rendered or product delivery has occurred, a formal arrangement exists, the price is fixed or determinable, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.

The Company derives the majority of its revenue from the supply and installation of surveillance and security equipment and systems. And the two deliverables do not meet the separation criteria under Emerging Issues Task Force (EITF) Issue 00-21 “Revenue Arrangements with Multiple Deliverables” (EITF No. 00-21) (codified in FASB ASC Topic 605). Revenue from the supply and installation of surveillance and security equipment and systems are recognized when the installation is completed and the customer acceptance is received. Sales revenue represents the invoiced value of goods and services, net of value-added tax (VAT).

Jien is qualified as a small business so that all of the Company’s products sold in the PRC are subject to a fixed VAT rate of 3% of the gross sales price regardless of the VAT paid for 2010. Sales revenue from such sale of goods represents the invoiced value of goods, net of VAT. This VAT cannot be offset by VAT incurred by the Company on its purchase. Sales generated from installation services are considered as services and are not subject to VAT. Only sale of goods are subject to VAT. Revenue from installation contracts is subject to a 3% business tax, which is reflected in the cost of goods sold.

The standard warranty of Jien is provided to its customers and is not considered an additional service; rather it is considered an integral part of the product and services’ sale. The Company believes that the existence of its standard product warranty in a sales contract does not constitute a deliverable in the arrangement and thus there is no need to apply the EITF 00-21(codified in FASB ASC Topic 605-25) separation and allocation model for a multiple deliverable arrangement. FAS 5 (codified in FASB ASC Topic 460-25 Warranty) specifically addresses the accounting for standard warranties, and neither SAB 104 nor EITF 00-21 supersedes FAS 5. The Company believes that accounting for its standard warranty pursuant to FAS 5 does not impact revenue recognition because the cost of honoring the warranty can be reliably estimated.

Cost of Revenue

Cost of goods sold consists primarily of material costs, labor costs, and related overhead which are directly attributable to the production of the service. Write-down of inventory to lower of cost or market is also recorded in cost of goods sold.

-11-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

Basic and Diluted Earnings (Loss) per Share (EPS)

Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is similarly computed, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted net earnings per share are based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to have been exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. At June 30, 2010, the Company has outstanding warrants with an anti-dilutive feature; therefore, the basic and diluted EPS are the same.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist primarily of accounts receivable and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its clients' financial condition and customer payment practices to minimize collection risk on accounts receivable.

The operations of the Company are located in the PRC. Accordingly, the Company's business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy.

Statement of Cash Flows

In accordance with SFAS No. 95, “Statement of Cash Flows,” codified in FASB ASC Topic 230, cash flows from the Company's operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.

Fair Value of Financial Instruments

For certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, other receivables, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities.

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

	·	Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

	·	Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

	·	Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815.

-12-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

As of June 30, 2010, the Company did not have any financial instruments that are required to be presented on the balance sheet at fair value.

Foreign Currency Translation and Transactions

The accompanying consolidated financial statements are presented in United States Dollars (“USD”). The Company’s functional currency is the USD, while the Company’s wholly-owned Chinese subsidiaries’ functional currency is the Renminbi (“RMB”). The functional currencies of the Company’s foreign operations are translated into USD for balance sheet accounts using the current exchange rates in effect as of the balance sheet date and for revenue and expense accounts using the weighted-average exchange rate during the fiscal year. The translation adjustments are recorded as a separate component of stockholders’ equity, captioned accumulated other comprehensive income (loss). Gains and losses resulting from transactions denominated in foreign currencies are included in other income (expense) in the consolidated statements of operations. There have been no significant fluctuations in the exchange rate for the conversion of RMB to USD after the balance sheet date.

Comprehensive Income (Loss)

The Company uses SFAS 130 “Reporting Comprehensive Income” (codified in FASB ASC Topic 220). Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for the six and three months ended June 30, 2010 included net income and foreign currency translation adjustments.

Stock-Based Compensation

The Company accounts for its stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment, an Amendment of FASB Statement No. 123,” codified in FASB ASC Topic 718. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.

Segment Reporting

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," codified in FASB ASC Topic 280, requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

SFAS 131 has no effect on the Company's financial statements as substantially all of the Company's operations are conducted in one industry segment. The Company consists of one reportable business segment. Most of the Company's assets are located in the PRC and its principal market is in the PRC except US banks accounts for Covenant Holdings, Covenant Group of China, and Pandaz Delaware, and $25,000 intangible assets that are belong to Pandaz Delaware

New Accounting Pronouncements

Recently Issued Accounting Pronouncements Not Yet Adopted

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2009-13 on ASC 605, Revenue Recognition – Multiple Deliverable Revenue Arrangement – a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 amended guidance related to multiple-element arrangements which requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. The consensus eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances. All entities must adopt the guidance no later than the beginning of their first fiscal year beginning on or after June 15, 2010. Entities may elect to adopt the guidance through either prospective application for revenue arrangements entered into, or materially modified, after the effective date or through retrospective application to all revenue arrangements for all periods presented. We are currently evaluating the impact, if any, of ASU 2009-13 on our financial position and results of operations.

-13-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

In October 2009, the FASB issued ASU No. 2009-14 on ASC 985, Certain Revenue Arrangements That Include Software Elements (ASU 2009-14). ASU 2009-14 amended guidance that is expected to significantly affect how entities account for revenue arrangements that contain both hardware and software elements. As a result, many tangible products that rely on software will be accounted for under the revised multiple-element arrangements revenue recognition guidance, rather than the software revenue recognition guidance. The revised guidance must be adopted by all entities no later than fiscal years beginning on or after June 15, 2010. An entity must select the same transition method and same period for the adoption of both this guidance and the revisions to the multiple-element arrangements guidance noted above. We are currently evaluating the impact, if any, of ASU 2009-14 on our financial position and results of operations.

In April 2010 the FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation – Stock Compensation (ASC Topic 718), Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This Update provides amendments to Accounting Standards Codification (ASC) Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. The Company does not expect the adoption of ASC Topic 718 will have an impact on the Company’s consolidated financial statements.

Recently Adopted Accounting Pronouncements

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820), Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material impact to the Company’s financial statements.

-14-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

In January 2010, FASB issued ASU No. 2010-05, Compensation – Stock Compensation (ASC Topic 718), Escrowed Share Arrangements and the Presumption of Compensation. This update codifies Emerging Issues Task Force D-110. This standard is not currently applicable to the Company.

In January 2010, FASB issued ASU N0. 2010-01, Equity (ASC Topic 505), Accounting for Distributions to Shareholders with Components of Stock and Cash. The update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected prospectively in earnings per share and is not considered a stock dividend for purposes of ASC Topic 505 and Topic 260, Earnings Per Share. This standard is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. This standard is not currently applicable to the Company.

3. INVENTORY

Inventory consisted of the following at June 30, 2010 and December 31, 2009:

	2010		2009
Raw Material	$	23,012	$	20,056
Work in Process		214,890		82,894
Total	$	237,902	$	102,950

4. ACQUISITION AND GOODWILL

On June 24, 2009, Covenant Holdings entered into stock acquisition and reorganization agreements with Jien and Chongqing Sysway (note 1). For convenience of reporting the acquisition for accounting purposes, July 1, 2009 has been designated as the acquisition date.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.

	Jien			Chongqing Sysway			Total
Cash	$	710,552		$	44,098		$	754,650
Accounts receivable		2,420,881			1,380,413			3,801,294
Retention receivable		271,770			1,084,047			1,355,817
Prepaid expenses		238,275			-			238,275
Advance to suppliers		-			1,661			1,661
Other receivables		154,237			132,186			286,423
Inventory		134,087			83,858			217,945
Property and equipment		45,102			37,265			82,367
Intangible assets-core software		-			152,256			152,256
Goodwill		572,020			902,303			1,474,323
Accounts payable		(1,442,990	)		(991,463	)		(2,434,453	)
Other current liabilities		(182,370	)		(25,499	)		(207,869	)
Unearned revenue		(108,245	)		-			(108,245	)
Tax payable		(405,263	)		(337,125	)		(742,388	)
Short term loan		(32,056	)		-			(32,056	)
Purchase price	$	2,376,000		$	2,464,000		$	4,840,000

-15-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

The fair value of the consideration transferred was initially valued at a provisional amount of $2 per share, which was the stock price for Covenant Holdings’ prior private capital raises. The Company changed its valuation stock price to $1.76 per share, which was determined by the volume weighted average stock price for the first day of trading of the Company’s common stock plus all private sales of Covenant Holdings’ common stock prior to the completion of the reverse merger with the Company. The excess of the fair value of the consideration transferred over the net of the acquisition date amounts of identifiable assets acquired and liabilities assumed was allocated to goodwill.

The Company's Board of Directors decided on April 30, 2010 to terminate and rescind the Acquisition Agreement with Chongqing Sysway due to several breaches of the agreement by Chongqing Sysway, including the failure of the prior owners of Chongqing Sysway to repay a dividend paid to them by Chongqing Sysway in excess of that permitted under the agreement and under China law and the failure of Chongqing Sysway and its prior owners to cooperate with the Company in the preparation of its financial statement disclosures required under United States securities laws.

The following pro forma consolidated results of operations of the Company for the six months ended June 30, 2009 presents the consolidated operations of the Company as if the acquisition of Jien occurred on January 1, 2009.

	For The Six Months Ended June 30, 2009
Net revenue	$	3,025,835
Cost of revenue		(2,300,666	)
Gross profit		725,169
Total operating expenses		(229,500	)
Income from operations		495,669
Non-operating expenses		(4,511	)
Income tax		-
Net income	$	491,158

5. PROPERTY AND EQUIPMENT, NET

Property and equipment consisted of the following at June 30, 2010 and December 31, 2009:

	2010			2009
Vehicle	$	7,375		$	-
Office equipment		31,374			32,876
Leasehold Improvement		12,318			12,251
Subtotal		51,067			45,127
Less: Accumulated depreciation		(27,051	)		(23,333	)
	$	24,016		$	21,794

Depreciation expense for the six and three months ended June 30, 2010 was $8,692 and $6,860, respectively.

-16-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

6. OTHER RECEIVABLES

Other receivables consisted of the following at June 30, 2010 and December 31, 2009:

	2010		2009
Short term advance to third parties	$	138,243	$	180,043
Advance to staffs		26,756		42,307
Advance to subcontractors		73,573		-
Deposit		1,473		11,716
	$	240,045	$	234,066

7. INTANGIBLE ASSETS

Intangible assets of $25,000 at June 30, 2010 mainly consisted of website operating software with vehicle search function, manufacture’s code and dealer interface capabilities for the amount of $15,000 and intellectual property for technical information for the amount of $10,000, which were purchased by Pandaz Delaware during the first quarter of 2010. The amortization for the intangible assets for the six and three months ended June 30, 2010 was $2,083 and $2,083, respectively.

8. TAX PAYABLE

Tax payable consisted of the following at June 30, 2010 and December 31, 2009:

	2010			2009
Income tax payable	$	61,535		$	38,590
Business tax payable		12,259			(26,346	)
Other taxes payable		(13,234	)		(2,264	)
	$	60,560		$	9,980

9. ACCRUED LIABILITIES AND OTHER PAYABLES

Accrued liabilities and other payables consisted of the following at June 30, 2010 and December 31, 2009:

	2010		2009
Warranty provision	$	41,232	$	48,475
Short term advance from third parties		56,377		216,031
Sales and business tax payable		12,445		174,268
	$	110,054	$	438,774

10. COMMON STOCK

Effective November 10, 2009, the Company and the lender of three bridge loans agreed to cancel the promissory note of $399,870. In lieu of principal and interest payments due to the lender, the Company issued 200,909 shares of the Company’s common stock to the lender.

-17-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

Pursuant to the confidential private placement memorandum dated November 24, 2009, the Company offered to sell up to 750,000 shares at $2.00 per share, with a minimum purchase of 10,000 Shares ($20,000) per investor and a minimum total quantity of 150,000 Shares ($300,000) that must be subscribed for by all investors to affect a closing and avoid termination of the offering. At December 16, 2009, the Company sold 200,000 shares through the private placement, which were converted into publicly-traded securities upon the Company’s merger with a public shell company on December 24, 2009.

During the first quarter of 2010, one shareholder cancelled 500,000 shares of the Company’s stock that was originally held as collateral for a note arising from the share exchange transaction on December 24, 2009 with an outstanding balance of $100,000. The Company issued 300,000 shares to this shareholder in lieu of the payment for the note payable of $100,000. On May 13, 2010, the Company and this shareholder entered into a Second Amendment to the Share Cancellation and Loan Agreement, whereby the shareholder agreed to reduce the 300,000 shares to 70,000 shares as settlement of the debt (Note 14).

On April 8, 2010, the Company’s board of directors approved the issuance of 8,000 shares of the Company’s common stock to two individuals as partial consideration for web design service rendered. The Company recorded $21,200, fair value of stock-based compensation for the shares issued.

On June 15, 2010, the Company’s board of directors approved the issuance of 25,000 shares of the Company’s common stock to a company as consideration for providing services in connection with the Company’s offering of convertible preferred shares. This company commenced its work on the offering on April 1, 2010 and the offering is to remain open for one year from that date. The Company recorded $61,250, fair value of the stock issued as deferred compensation. During the six and three months ended June 30, 2010, the Company amortized $15,312 as stock-based compensation.

11. DIVIDEND PAYABLE

The Company declared a 30% dividend of Jien’s 2008 net income to Jien’s original shareholders and management as part of the acquisition agreement dated June 24, 2009. The dividend declared for Jien was $200,608, and has been recorded as a dividend payable at December 31, 2009. As part of the acquisition agreement, the Company also agreed to pay the original shareholders and management of Jien a 30% dividend on 2009 year end profits. The dividend was declared and was recorded as a dividend payable for Jien in the amount of $277,653, which was the retained earnings that were available for declaring a dividend at December 31, 2009.

At June 30, 2010, the dividend payable was approximately $481,000.

12. MAJOR CUSTOMERS

Five customers accounted for 73% of the total sales for the six months ended June 30, 2010, with each accounting for 19%, 16%, 14%, 13% and 11% of total sales, respectively. At June 30, 2010, the total receivable balance due from these customers was $1,182,243.

One supplier accounted for 67% of the total purchases for the six months ended June 30, 2010. At June 30, 2010, the total payable due to this vendor was $243,708.

Five customers accounted for 99% of the total sales for the three months ended June 30, 2010, with each accounting for 31%, 26%, 17%, 14% and 11% of total sales, respectively.

Two suppliers accounted for 84% of the total purchases for the three months ended June 30, 2010, with each accounting for 70% and 14% of total purchases, respectively.

-18-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

13. SHORT TERM LOANS

During the three months ended March 31, 2010, the Company borrowed $263,294 (RMB 1,788,000) from Shenzhen Development Bank. The loan bears interest at 5.59% per year and is due on July 26, 2010. This loan is collateralized by $396,024 (RMB 2,689,360) of accounts receivable. This loan was paid in full upon maturity.

At December 31, 2009, the Company had borrowed $37,600 from Shenzhen Development Bank with interest at 5.832% per year, due in February of 2010; this loan was paid in full upon maturity.

14. NOTE PAYABLE

At December 31, 2009, note payable represented the $100,000 remaining balance from a $190,000 promissory note issued to a former majority shareholder of Covenant Group plus cash consideration for the acquisition of the shell company. This note was settled on March 25, 2010 by issuing the shareholder 300,000 common shares of the Company with a fair value of $528,000, resulting in a loss on settlement of $428,000. On May 13, 2010, the Company and this shareholder entered into a Second Amendment to the Share Cancellation and Loan Agreement, whereby the shareholder agreed to reduce the 300,000 shares to 70,000 shares as settlement of the debt. As a result, the loss on settlement became $23,200.

15. LOANS PAYABLE WITH WARRANTS ISSUED

On April 22, 2010, the Company entered into a bridge loan agreement to obtain $120,000 in short-term financing from a private investor. In addition, 200,000 restricted common stock shares were issued to this investor in connection with this financing. On June 30, 2010, the Company entered an amendment to this loan agreement whereby both parties agreed to cancel the 200,000 restricted common stock shares and the Company issued a warrant to purchase up to 14,400 shares of restricted common stock at a $3 strike price, exercisable within 2 years from April 22, 2010. The entire principal balance will be payable in full three months from April 22, 2010. On August 13, 2010, the parties entered into a second amendment to this agreement to extend the term of the loan, whereby the entire principal balance will be payable in full three months from August 13, 2010.

On June 10, 2010, the Company entered into a bridge loan agreement to obtain $130,000 in short-term financing from a private investor. In addition, the Company issued a warrant to purchase up to 15,600 shares of restricted common stock at a $3 strike price, exercisable within 2 years from June 10, 2010. The entire principal balance will be payable in full three months from June 10, 2010.

The warrants are immediately exercisable and expire on the second anniversary of their issuance. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions: discount rate – 2.76%; dividend yield – 0%; expected volatility – 88% and term of 2 years. The value of the warrants was $40,972.

The fair value of the warrants was allocated to the total proceeds from the loans, based on the relative fair value of the warrants and debts, as unamortized interest totaling $35,190, to be amortized over the term of the loans. The warrants were classified as equity. The amortized interest expense for the three months ended June 30, 2010 was $17,607. At June 30, 2010, loans payable net of unamortized interest on warrants was $232,417. During the three months ended June 30, 2010, no warrants were exercised.

-19-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

Following is a summary of the warrant activity:

	Number of Shares		Average Exercise Price per Share		Weighted Average Remaining Contractual Term in Years
Outstanding at December 31, 2009		-		-		-
Exercisable at December 31, 2009		-		-		-
Granted		30,000		3.00		2.00
Exercised
Forfeited
Outstanding at June 30, 2010		30,000		3.00		1.87
Exercisable at June 30, 2010		30,000		3.00		1.87

16. STATUTORY RESERVES

Pursuant to the corporate law of the PRC effective January 1, 2006, PRC subsidiaries of the Company are required to maintain a statutory reserve by appropriating from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings, in which dividends cannot be distributed .

Surplus reserve fund

The PRC subsidiaries of the Company are required to transfer 10% of their net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital. The Company had $67,737 in this reserve at June 30, 2010.

The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

Common welfare fund

Common welfare fund is a voluntary fund to which the Company can elect to transfer 5% to 10% of its net income. The Company did not make any contribution to this fund for the period since business inception through June 30, 2010.

This fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation.

Pursuant to the "Circular of the Ministry of Finance (MOF) on the Issue of Corporate Financial Management after the Corporate Law Enforced" (No.67 [2006]), effective on April 1, 2006, issued by the MOF, companies transferred the balance of SCWF (Statutory Common Welfare Fund) as of December 31, 2005 to Statutory Surplus Reserve. Any deficit in the SCWF was charged in turn to Statutory Surplus Reserve, additional paid-in capital and undistributed profit of previous years. If a deficit still remains, it should be transferred to retained earnings and be reduced to zero by a transfer from after tax profit of following years. At December 31, 2005, the Company did not have a deficit in the SCWF.

17. COMMITMENTS

Jien leased its office under a long term, non-cancelable, and renewable operating lease agreement on November 8, 2007, with an expiration date of November 7, 2009. Upon expiration, the Company renewed the lease for a period from November 8, 2009 to November 7, 2012, with monthly rent of approximately $3,600 (RMB 24,509). Annual rental expense is approximately $43,200 for the years ended December 31, 2010 and 2011, and approximately $36,000 for 2012. For the six and three months ended June 30, 2010, the rental expense was $18,000 and $7,200, respectively.

-20-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

18. DISPOSAL OF SUBSIDIARY

The Company records discontinued operations if both of the following conditions are met: (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the Company as a result of the disposal transaction and (b) the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction. During a period in which a component of the Company either has been disposed of or is classified as held for sale, the income statement of the Company for current and prior periods shall report the results of operations of the component, including any gain or loss recognized in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” (codified in FASB ASC Topic 360) in discontinued operations. The results of operations of a component classified as held for sale shall be reported in discontinued operations in the period(s) in which they occur. The results of discontinued operations, less applicable income taxes (benefit), shall be reported as a separate component of income before extraordinary items and the cumulative effect of accounting changes (if applicable).

The Company's Board of Directors decided on April 30, 2010 to terminate and rescind the Acquisition Agreement with Chongqing Sysway due to several breaches of the agreement by Chongqing Sysway, including the failure of the prior owners of Chongqing Sysway to repay a dividend paid to them by Chongqing Sysway in excess of that permitted under the agreement and under China law and the failure of Chongqing Sysway and its prior owners to cooperate with the Company in the preparation of the financial statement disclosures required under United States securities laws.

As a result of the termination and rescission of the agreement, the Company transferred all of the shares of capital stock of Chongqing Sysway to the prior owners of Chongqing Sysway, and the 1,400,000 shares of common stock of the Company issued in exchange for the shares of capital stock of Chongqing Sysway were returned to the Company and treated as treasury shares. The intent of this transaction was return the Company, Chongqing Sysway, and the prior owners of the capital stock of Chongqing Sysway to their status prior to the completion of the acquisition by the Company of the capital stock of Chongqing Sysway on December 24, 2009. For convenience of reporting for accounting purposes, January 1, 2010 has been designated as the date of rescission.

The assets and liabilities of Chongqing Sysway have been reclassified at December 31, 2009 as assets of discontinued operations and liabilities of discontinued operations.

Identifiable net assets of Chongqing Sysway as of December 31, 2009 were as follows:

Cash & cash equivalents	$	413,093
Accounts receivable, net		1,456,008
Other current assets		1,159,231
Goodwill		902,303
Other noncurrent assets		232,091
Total assets	$	4,162,726

Accounts payable	$	829,444
Tax payable		536,633
Dividend payable		242,851
Other current liabilities		7,658
Total liabilities	$	1,616,586

-21-

COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

19. CONTINGENCIES

The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’ s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The Company’s sales, purchases and expenses transactions are denominated in RMB, and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in order to effect the remittance.

20. EQUITY CREDIT AGREEMENT

On January 31, 2010, the Company entered into an equity credit agreement with an institutional investor providing the Company with the right, but not the obligation, to issue shares of its common stock at any time and from time to time during the next two years for gross proceeds of up to $20,000,000. The Company may require the investor to purchase shares of its common stock from time to time under the equity credit agreement by delivering a put notice specifying the total purchase price for the shares to be purchased. The investment amount may not be greater than the lesser of (a) $1,000,000 or (b) 300% of the average dollar volume (closing bid price times the volume on the OTC Bulletin Board for a trading day) for the 20 trading days preceding the put notice. The purchase price per share for the shares to be purchased for the investment amount will be 94% of the lowest closing bid price on the OTC Bulletin Board during the five trading days following the put notice.

The Company also agreed to issue to the investor warrants to purchase an additional 300,000 shares of its common stock during a five year period at an exercise price of $2.00 per share. The warrant will be issued to the investor upon the effectiveness of a registration statement on Form S-1 to be filed with the Securities and Exchange Commission (SEC). The warrant will be exercisable in whole or in part upon issuance and will remain exercisable for a five year period.

The Company also entered into a registration rights agreement as part of the transaction. The registration rights agreement requires the Company to prepare promptly, and file with the SEC within 60 days, the registration statement for the resale of the shares of common stock issuable upon exercise of the warrant.

As of June 30, 2010, the Company has not made any requirements to the investor.

21. SUBSEQUENT EVENTS

On July 1, 2010, the Company entered into a loan agreement with an investor for an amount up to $1,000,000. Under the agreement, the Company can draw down on this loan upon mutual agreement with Covenant and the investor. On July 2, 2010, the Company drew down $500,000 of this loan. As consideration for the loan, the investor is entitled to warrants to purchase up to 150,000 shares of the Company’s common stock at a $3.00 strike price, two-year term. The investor is entitled to exercise the warrants pro-rata with the amount drawn down on the loan.

-22-

CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the SEC (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by the Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the factors discussed in the section “results of operations” below), and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

Although the Company believes that the expectations reflected in the forward-looking statements are based on reasonable assumptions, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

Our financial statements are prepared in US Dollars and in accordance with accounting principles generally accepted in the United States. See “Foreign Currency Translation” and “Comprehensive Income (Loss)” below for information concerning the exchange rates at which Renminbi (“RMB”) were translated into US Dollars (“USD”) at various pertinent dates and for pertinent periods.

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

Overview

We are a holding company engaged in the business of acquiring equity interests in private companies based and operating in the People’s Republic of China (“PRC”) and providing these companies with support, including administrative, legal, accounting and marketing assistance, and an infusion of capital with the long term goal of preparing them to become public companies in their own right. We plan to continue to focus on the acquisition of small-to-medium-sized private companies doing business in certain growth industries located in China.

We were incorporated in the State of Nevada on November 8, 2006 under the name Everest Resources Corp. as an exploration stage corporation that intended to engage in the exploration of gold. On December 24, 2009 we changed our name to Covenant Group of China Inc. and acquired all of the equity interests in Covenant Group Holdings Inc. (“Covenant Holdings”), a privately held company incorporated under the laws of the State of Delaware and engaged in the business of acquiring equity interests in private Chinese operating companies and providing these companies with strategic support. The acquisition of the equity interests of Covenant Holdings was accomplished on December 24, 2009 pursuant to the terms of a share exchange agreement by and among the Company, Covenant Holdings and all of the shareholders of Covenant Holdings. Upon the closing of the share exchange, each of the Covenant Holdings shareholders exchanged their respective shares of Covenant Holdings, on a one-for-one basis, for 9,380,909 shares of the Company’s common stock. As a result of the share exchange, Covenant Holdings became a wholly owned subsidiary of the Company.

-23-

Prior to our acquisition of Covenant Holdings, we were in the development stage and had minimal business operations. We had no interest in any property, but had the right to conduct mineral exploration activities on 471 acres located in southern British Columbia, Canada pursuant to an agreement with the former majority shareholder of the Company, Gary Sidhu. In connection with the acquisition of Covenant Holdings, Mr. Sidhu terminated the Company’s mineral exploration rights, and he agreed to surrender 5,000,000 shares of the Company’s common stock in exchange for $100,000 and a promissory note from the Company in the principal amount of $190,000, $90,000 of which the Company has prepaid. Mr. Sidhu has surrendered 4,500,000 shares of our common stock and has agreed to surrender his remaining 500,000 shares upon full payment of the promissory note by the Company. On March 25, 2010, Mr. Sidhu and the Company entered into an agreement pursuant to which Mr. Sidhu agreed to cancel the promissory note and surrender his remaining 500,000 shares in exchange for the Company issuing to him 300,000 shares of common stock of the Company. In May of 2010, the Company and Mr., Sidhu agreed to revise and reduce the 300,000 shares to 70,000 shares.

There was no significant activity from June 10, 2009 through December 31, 2009 except for the acquisitions of our two operating subsidiaries, Hainan Jien Intelligent Engineering Co. Ltd. (“JIEN”) and Chongqing HongSheng Sysway Information Technology Co. Ltd. (“Sysway”). On June 24, 2009, Covenant Holdings entered into a stock acquisition and reorganization agreement with JIEN and its stockholders. Pursuant to the terms of this agreement, Covenant Holdings acquired 100% of the capital stock of JIEN, representing 100% of the company’s outstanding equity interests, in exchange for 1,350,000 shares of a public shell's common stock. For purposes of this acquisition, the common stock of the shell company that would acquire all of the rights and obligations of Covenant Holdings was valued at $1.76 per share, which was determined by the volume weighted average stock price for the first day of trading of the Company’s common stock plus all private sales of Covenant Holdings’ common stock prior to the completion of the reverse merger with the Company. JIEN was incorporated in Hainan Province, People’s Republic of China in 1999. JIEN specializes in the design and installation of security and surveillance infrastructure to protect financial institutions and government agencies, and it also implements intelligent construction projects for commercial customers.

On June 24, 2009, Covenant Holdings entered into a stock acquisition and reorganization agreement with Chongqing Sysway and its stockholders. Pursuant to the terms of this agreement, Covenant Holdings acquired 100% of the capital stock of Sysway, representing 100% of the company’s outstanding equity interests, in exchange for 1,400,000 shares of a public shell's common stock. For purposes of this acquisition, the common stock of the shell company that would acquire all of the rights and obligations of Covenant Holdings was valued at $1.76 per share, which was determined by the volume weighted average stock price for the first day of trading of the Company’s common stock plus all private sales of Covenant Holdings’ common stock prior to the completion of the reverse merger with the Company. Chongqing Sysway was incorporated in Chongqing City, Sichuan Province, PRC, in 1999 as a State Owned Enterprise (“SOE”). Since 2005, Chongqing Sysway has operated as a private enterprise mainly engaged in systems integration services, including computer systems installation, website design, and system firewall setup, particularly for the tobacco industry.

On January 12, 2010, the Company formed a wholly owned subsidiary – Pandaz LLC, a Delaware LLC (“Pandaz Delaware”). On January 13, 2010, Pandaz Delaware entered into an asset purchase agreement with The Pandaz LLC, a Nevada LLC, purchasing certain assets and intellectual property associated with an automobile dealer and customer interface, vehicle search function and automobile purchasing website that the Company is tentatively looking to implement in China. The total purchase consideration was $25,000, of which, $10,000 was paid as the forgiveness of a bridge loan that the Company provided to the seller on January 7, 2010 and $15,000 was paid as a one-time cash payment.

On April 30, 2010, the Board of Directors of the Company voted to terminate and rescind the stock acquisition and reorganization agreement with Chongqing Sysway due to multiple breaches of such agreement by Sysway, including the failure of the prior owners of Sysway to repay a dividend paid to them by Sysway in excess of that permitted under the agreement and under China law and the failure of Sysway and its prior owners to cooperate with the Company in the preparation of the financial statement disclosures required under United States securities laws.

As a result of the termination and rescission of the agreement, the Company transferred all of the shares of capital stock of Sysway to the prior owners of Sysway, and the 1,400,000 shares of common stock of the Company issued in exchange for the shares of capital stock of Sysway were returned to the Company and treated as treasury shares. The effect of this transaction was to return the Company, Sysway, and the prior owners of the capital stock of Sysway to their status prior to the completion of the acquisition by the Company of the capital stock of Sysway on December 24, 2009. The termination and recission of the acquisition agreement resulted in the activities of Sysway being reflected on the financial statements as discontinued operations (see Note 18 of the accompanying notes to financial statements).

-24-

Critical Accounting Policies

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this management’s discussion and analysis.

Basis of Presentation

The Company’s financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP”).

Principle of Consolidation

The consolidated financial statements include the accounts of Covenant Holdings, Covenant Group of China, Pandaz Delaware and JIEN, and all intercompany transactions and account balances are eliminated in consolidation.

Use of Estimates

Accounts Receivable and Retentions Payable

The Company’s policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. We have retentions receivable for product quality assurance; our retention rate varies from 3% to 5% of the sales price with variable terms from 1 year to 3 years.

Inventories

JIEN’s inventories are valued at the lower of cost or market with cost determined on a first in, first out basis.

Property and Equipment

Building	20-25 years
Leasehold improvements	Shorter of lease term or 10 years
Vehicle	5-10 years
Office Equipment	3-5 years

-25-

Goodwill

Revenue Recognition

The Company derives the majority of its revenue from the supply and installation of surveillance and security equipment and systems.. And the two deliverables do not meet the separation criteria under Emerging Issues Task Force (EITF) Issue 00-21 “Revenue Arrangements with Multiple Deliverables” (EITF No. 00-21) (codified in FASB ASC Topic 605). Revenue from the supply and installation of surveillance and security equipment and systems are recognized when the installation is completed and the customer acceptance is received. Sales revenue represents the invoiced value of goods and services, net of value-added tax (VAT).

Cost of Revenue

Cost of goods sold consists primarily of material costs, labor costs, and related overhead that are directly attributable to the production of the service. Write-down of inventory to lower of cost or market is also recorded in cost of goods sold.

-26-

Foreign Currency Translation and Transactions

Comprehensive Income (Loss)

Segment Reporting

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (codified in FASB ASC Topic 280), requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

SFAS 131 has no effect on the Company’s financial statements as substantially all of the Company’s operations are conducted in one industry segment. The Company consists of one reportable business segment. Most of the Company’s assets are located in the PRC except US banks accounts for Covenant Holdings, Covenant Group of China, and Pandaz Delaware, and $25,000 intangible assets that are belong to Pandaz Delaware.

RESULTS OF OPERATIONS

For the three months ended June 30, 2010 and the comparative period of 2009

The following table presents the actual consolidated results of operations of Covenant Group of China for the three months ended June 30, 2010 as compared to the pro forma consolidated results of operations of Covenant Group of China for the period from April 1, 2009 through June 30, 2009 as if the acquisition of JIEN occurred on January 1, 2009, indicated as a percentage of net sales.

	For Three Months Ended June 30,
	2010					2009 (Pro Forma)
	$		% of Sales			$		% of Sales
Sales		1,551,079					997,313
Cost of sales		1,294,425		83	%		724,840		73	%
Gross Profit		256,654		17	%		272,473		27	%
Operating Expenses		331,744		21	%		84,941		9	%
Income (loss) from Operations		(75,090)		(4)	%		187,532		18	%
Other Income (Expenses), net		393,654		25	%		(3,210)		0	%
Net Income		318,564		21	%		184,321		18	%

-27-

NET REVENUES

Net revenues for the three months ended June 30, 2010 were $1,551,079, as compared to net revenues of $997,313 for the comparative period of 2009, an increase of $553,766, or approximately 56%. This increase was mainly attributed to JIEN obtaining several large projects in the second quarter of 2010, such as the projects with JingRui Real Estate Development Company, Government Affair Center and Haikou City Prison. We believe the recovery of the Chinese economy through the central government’s effective economic stimulation programs creates an active environment for JIEN’s business, which we predict, combined with the strengthening of JIEN’s own sales force, will allow JIEN to continue growing in the second half of 2010.

COST OF REVENUES

Cost of revenue includes material costs, labor costs, and related overhead, which are directly attributable to our provided services and products. For the three months ended June 30, 2010, cost of revenues amounted to $1,294,425, or approximately 83% of net revenues, as compared to cost of revenues of $724,840, or approximately 73% of net revenues, for the comparative period of 2009.

The increase in cost of revenue as a percentage to net revenue was attributed to outsourcing certain work on projects due to tight time schedules, as well as increased prices for certain raw materials due to overall price inflation in China. The cost of each project varies based on the nature of each project.

GROSS PROFIT

Gross profit for the three months ended June 30, 2010 was $256,654, as compared to $272,473 for the comparative period of year 2009, a decrease of $15,819 or approximately 6%. Gross profit margin was 17% for the three months ended June 30, 2010 and 27% for the comparative period of 2009. This decrease in gross profit margin was due to the relatively higher cost of revenue as a percentage of revenue for the three months ended June 30, 2010 for the reasons described above.

OPERATING EXPENSES

Operating expenses consisted of selling, general and administrative expenses totaling $331,744 for the three months ended June 30, 2010, compared to $84,941 for the comparative period of 2009, an increase of $246,803 or 291%. The increase in operating expenses was primarily due to increased expenses in audit, legal, and consulting fees arising from the Company being a public company as a result of the reverse merger at the end of 2009.

The operating expense for JIEN was approximately $85,047 for the three months ended June 30, 2010 as compared to $84,941 for the same period of 2009, a slight increase of $106 or 0.1%. This decrease was mainly attributed to the efficient control of costs and expenses by JIEN’s management, as well as the decreased tax rate on net sales from 3% in 2009 to 1.76% in 2010.

NET INCOME

For the three months ended June 30, 2010, the Company had net income of $318,564 as compared to net income of $184,321 for the comparative period of 2009, an increase of $134,243, or approximately 73%. This increase in net income was mainly due to a one-time, non-cash income of $404,800, which resulted from reducing the shares to Mr. Sidhu in lieu of the payment for the note payable from 300,000 shares to 70,000 shares. The Company recorded a $428,000 loss on settlement of debt as a result of the issuance of 300,000 shares to Mr. Sidhu during the first quarter of 2010.

-28-

For the six months ended June 30, 2010 and the comparative period of 2009

The following table presents the actual consolidated results of operations of Covenant Group of China for the six months ended June 30, 2010 as compared to the pro forma consolidated results of operations of Covenant Group of China for the period from January 1, 2009 through June 30, 2009 as if the acquisition of JIEN occurred on January 1, 2009, indicated as a percentage of net sales.

	For Six Months Ended June 30,
	2010					2009 (Pro Forma)
	$		% of Sales			$		% of Sales
Sales		2,977,020					3,025,835
Cost of sales		2,301,390		77	%		2,300,666		76	%
Gross Profit		675,630		23	%		725,169		24	%
Operating Expenses		592,160		20	%		229,500		8	%
Income from Operations		83,470		3	%		495,669		16	%
Other Expenses, net		(38,608)		(1)	%		(4,512)		(0	)%
Net Income		44,862		2	%		491,157		16	%

NET REVENUES

Net revenues for the six months ended June 30, 2010 were $2,977,020, as compared to net revenues of $3,025,835 for the comparative period of 2009, a decrease of $48,815, or approximately 2%. JIEN obtained several large contracts from government agencies in both the six months ended June 30, 2010 and 2009 with different contract prices. We believe the recovery of the Chinese economy through the central government’s effective economic stimulation programs creates an active environment for JIEN’s business, which we predict, combined with the strengthening of JIEN’s own sales force, will bring JIEN more new projects throughout 2010.

COST OF REVENUES

Cost of revenue includes material costs, labor costs, and related overhead, which are directly attributable to our provided services. For the six months ended June 30, 2010, cost of revenues amounted to $2,301,390, or approximately 77% of net revenues, as compared to cost of revenues of $2,300,666, or approximately 76% of net revenues, for the comparative period of 2009. The slight increase in cost of revenue as a percentage of net revenue was relatively low price inflation in China.

GROSS PROFIT

Gross profit for the six months ended June 30, 2010 was $675,630, as compared to $725,169 for the comparative period of year 2009, a decrease of $49,539 or approximately 7%. Gross profit margin was 23% for the six months ended June 30, 2010 and 24% for the comparative period of 2009. This slight decrease in gross profit margin was due to the slight increase in cost of revenue as a percentage of revenue due to overall price inflation in China.

OPERATING EXPENSES

Operating expenses consisted of selling, general and administrative expenses totaling $592,160 for the six months ended June 30, 2010, compared to $229,500 for the comparative period of 2009, an increase of $362,660 or 158%. The increase in operating expenses was primarily due to increased expenses in audit, legal, and consulting fees arising from the Company being a public company as a result of the reverse merger at the end of 2009.

The operating expense for JIEN was approximately $192,781 for the six months ended June 30, 2010 as compared to $229,500 for the same period of 2009, a decrease of $36,719 or 16%. This decrease was mainly attributed to the efficient control of costs and expenses by JIEN’s management, as well as the decreased tax rate on net sales from 3% in 2009 to 1.76% in 2010.

-29-

NET INCOME

For the six months ended June 30, 2010, the Company had net income of $44,862 as compared to net income of $491,157 for the comparative period of 2009, a decrease of $446,295, or approximately 91%. This decrease in net income was mainly due to increased expenses in audit, legal, and consulting fees arising from the Company being a public company, a bad debt allowance expense of $66,000 and a one-time, non-cash expense of $23,200 resulting from the settlement of a note payable to Mr. Sidhu in exchange for the issuance of 70,000 shares of the Company’s common stock during the six months ended June 30, 2010.

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended June 30, 2010 and the comparative period of 2009

As of June 30, 2010, we had cash and cash equivalents of $1,088,938, of which Covenant Group of China directly held $72,652 and JIEN held $1,016,024. Other current assets were $2,545,129 and current liabilities were $1,706,499. Working capital was $1,927,568. The ratio of current assets to current liabilities was 2.1:1 at June 30, 2010.

The following table presents the actual summary of cash provided by or used in each of the indicated types of activities of Covenant Group of China for the six months ended June 30, 2010 as compared to the pro forma summary of cash provided by or used in each of the indicated types of activities of Covenant Group of China for the six months ended June 30, 2009 as if the acquisition of JIEN occurred on January 1, 2009.

	2010		(Pro Forma) 2009
Cash provided by (used in):
Operating Activities	$	(326,646)	$	498,614
Investing Activities		(33,443)		-
Financing Activities		474,316		140,284

Net cash flow used in operating activities was $326,646 during the six months ended June 30, 2010, as compared to net cash flow provided by operating activities of $498,614 for the comparative period of 2009. The decrease in net cash flow generated in operating activities during the six months ended June 30, 2010 was mainly due to decreased net income, purchase of inventory, payments for accounts payable and other payables, but partially offset by quick repayment of accounts receivable.

Net cash flow used in investing activities was $33,443 in the six months ended June 30, 2010, compared to net cash used in investing activities of $0 in the comparative period of 2009. The cash was used mainly for the acquisition of fixed assets.

Net cash flow provided by financing activities was $474,316 in the six months ended June 30, 2010 as compared to net cash provided by financing activities of $140,284 in the comparative period of 2009. The increased cash flow provided by financing activities was primarily due to a short-term bank loan received by JIEN and two bridge loans obtained by the Company in the six months ended June 30, 2010.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 4T. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of its management, including the President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rule 13a-15(e)) as of the end of the period covered by this quarterly report. Based upon that evaluation, the President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

-30-

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material changes from the disclosure provided in Part 1, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2009.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

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

On March 24, 2010, Gary Sidhu and the Company entered into a first amendment to a share cancelation and loan agreement pursuant to which Mr. Sidhu agreed to cancel the $100,000 remaining balance on a promissory note and surrender his remaining 500,000 shares of the Company’s common stock in exchange for the Company issuing to him 300,000 shares of common stock of the Company. Subsequently, on May 13, 2010, Mr. Sidhu agreed to accept a revised issuance of 70,000 shares of common stock of the Company pursuant to a second amendment to a share cancelation and loan agreement. The issuance of such shares was exempt from the registration requirements of the Securities Act pursuant to the exemption provided under Section 4(2) of the Securities Act.

On April 8, 2010, the Company’s board approved two issuances of 6,000 shares and 2,000 shares of the Company’s common stock to two of the Company’s vendors as consideration for services rendered. The issuance of such shares was exempt from the registration requirements of the Securities Act pursuant to the exemption provided under Section 4(2) of the Securities Act.

On April 22, 2010, the Company entered into a bridge loan agreement for short-term financing with Sui Generis Capital Partners LLC (“Sui Generis”). As additional consideration for entering into the bridge loan agreement, the Company agreed to issue 200,000 shares of common stock of the Company to Sui Generis. The issuance of such shares was exempt from the registration requirements of the Securities Act pursuant to the exemption provided under Section 4(2) of the Securities Act. Subsequently, on June 30, 2010, Sui Generis agreed to accept, in lieu of the 200,000 shares previously agreed upon, a warrant to purchase up to 14,400 shares of the Company’s common stock at a $3.00 strike price over a 2-year term pursuant to a first amendment to the bridge loan agreement. The issuance of such warrant was exempt from the registration requirements of the Securities Act pursuant to the exemption provided under Section 4(2) of the Securities Act.

On June 10, 2010, the Company entered into a bridge loan agreement for short-term financing with Walston Dupont Global Advisors LLC. As additional consideration for entering into the bridge loan agreement, the Company agreed to issue a warrant to purchase up to 15,600 shares of the Company’s common stock at a $3.00 strike price over a 2-year term. The issuance of such warrant was exempt from the registration requirements of the Securities Act pursuant to the exemption provided under Section 4(2) of the Securities Act.

On June 15, 2010, the Company’s board approved an issuance of 25,000 shares of the Company’s common stock to Southridge Business Solutions LLC as consideration for preliminary assistance with an offering of the Company’s preferred stock. The issuance of such shares was exempt from the registration requirements of the Securities Act pursuant to the exemption provided under Section 4(2) of the Securities Act.

-31-

On July 1, 2010, the Company entered into a bridge loan agreement for $1 million of short-term financing with JD Holdings 1, Inc. (“JDC”). As additional consideration for entering into the bridge loan agreement, the Company agreed to issue warrants to purchase up to 150,000 shares of the Company’s common stock at a $3.00 strike price over a 2-year term. Under the terms of the loan agreement, the warrants will become exercisable pro-rata with the amount the Company draws down against the $1 million loan. As of July 2, 2010, the Company has drawn down $500,000 of this financing, requiring the issuance of a warrant to JDC, currently exercisable, to purchase up to 75,000 shares of the Company’s common stock pursuant to the terms set forth above. The issuance of such warrants was exempt from the registration requirements of the Securities Act pursuant to the exemption provided under Section 4(2) of the Securities Act.

There are no contractual limitations on the payment of cash dividends by the Company, including under any loan agreement.

Item 3. Defaults Upon Senior Securities

None.

Item 4. [Removed and Reserved.]

Item 5. Other Information

None.

Item 6. Exhibits

(a)

Exhibits

Exhibit Number		Description of Exhibit

4.1		Warrant to Sui Generis Capital Partners LLC, dated June 30, 2010

4.2		Warrant to Walston Dupont Global Advisors LLC, dated June 10, 2010

4.3		Warrant to JD Holdings 1, Inc., dated July 2, 2010

10.1		First Amendment to Promissory Note by and between Covenant Group of China Inc. and Sui Generis Capital Partners LLC, dated June 30, 2010

10.2		Bridge Loan Agreement by and between Covenant Group of China Inc. and Walston Dupont Global Advisors LLC, dated June 10, 2010.

10.3		Bridge Loan Agreement by and between Covenant Group of China Inc. and JD Holdings 1, Inc., dated July 1, 2010.

10.4		Second Amendment to Promissory Note by and between Covenant Group of China Inc. and Sui Generis Capital Partners LLC, dated August 13, 2010

31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.

31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended.

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).

-32-

SIGNATURES

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

	COVENANT GROUP OF CHINA INC.

August 16, 2010	By:	/s/ Kenneth Wong
		Kenneth Wong
		President (Principal Executive Officer)



August 16, 2010	By:	/s/ Justin D. Csik
		Justin D. Csik
		Chief Financial Officer (Principal Financial and Accounting Officer)

-33-

Everest Resources Corp. - FORM 10-Q - August 16, 2010

Attached files

Everest Resources Corp. Reports