SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

þ

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

Or

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from            to

Commission File Number: 001-33771

CHINACAST EDUCATION CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)

20-0178991 (I.R.S. Employer Identification Number)

Suite 08, 20/F, One International Financial Centre, 1 Harbour View Street,

Central, Hong Kong

(Address of Principal Executive Offices) (Zip Code)

(852) 3960 6506

(Registrant’s Telephone Number, Including Area Code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨       No ¨

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

Large accelerated filer  o

Accelerated filer þ

Non-accelerated filer   o (Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o       No þ

 

There were 49,778,952 shares of the Company’s common stock, par value $0.0001 per share, outstanding as of November 5, 2010. 

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CHINACAST EDUCATION CORPORATION

 CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share-related data)

 

										As of
		As of September 30,								December 31,
		2010				2010				2009
		US$				RMB				RMB
		(Note 1)								(Note 1)
Assets
Current assets:
Cash and cash equivalents			60,471				405,153				327,628
Term deposits			89,552				600,000				507,000
Accounts receivable			7,470				50,050				53,828
Inventory			215				1,438				1,386
Prepaid expenses and other current assets			4,303				28,825				19,212
Amounts due from related parties			513				3,438				6,388
Deferred tax assets			102				682				1,010
Current portion of prepaid lease payments for land use rights			484				3,246				3,246
Total current assets			163,110				1,092,832				919,698
Non-current deposits			1,815				12,159				14,550
Property and equipment, net			109,179				731,498				516,938
Prepaid lease payments for land use rights - non-current			26,758				179,281				144,818
Acquired intangible assets, net			17,471				117,055				71,286
Long-term investments			450				3,015				3,101
Non-current advances to related party			14,874				99,665				99,727
Goodwill			114,737				768,741				503,771
Total assets			448,394				3,004,246				2,273,889

 

 

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										As of
		As of September 30,								December 31,
		2010				2010				2009
		US$				RMB				RMB
		(Note 1)								(Note 1)
Liabilities and equity
Current liabilities:
Accounts payable (including accounts payable of the consolidated VIE without recourse to ChinaCast Education Corporation of RMB1,705 and RMB719 as of September 30, 2010 and December 31, 2009, respectively)			5,938				39,782				16,061
Accrued expenses and other current liabilities (including accrued expenses and other liabilities of the consolidated VIE without recourse to ChinaCast Education Corporation of RMB18,210 and RMB16,740 as of September 30, 2010 and December 31, 2009, respectively)			39,290				263,241				215,631
Deferred revenues (including deferred revenues of  the consolidated VIE without recourse  to ChinaCast Education Corporation of nil as of September 30, 2010 and December 31, 2009)			47,626				319,097				156,645
Income taxes payable (including income taxes payable of  the consolidated VIE without recourse  to ChinaCast Education Corporation of RMB4,179 and RMB2,293 as of September 30, 2010 and December 31, 2009, respectively)			13,998				93,793				68,731
Current portion of long-term bank borrowings (including current portion of long-term bank borrowings of  the consolidated VIE without recourse  to ChinaCast Education Corporation of nil as of September 30, 2010 and December 31, 2009)			25,075				168,000				104,400
Current portion of capital lease obligation (including current portion of capital lease obligation of  the consolidated VIE without recourse  to ChinaCast Education Corporation of nil as of September 30, 2010 and December 31, 2009)			196				1,313				1,323
Other borrowings (including other borrowings of  the consolidated VIE without recourse  to ChinaCast Education Corporation of nil as of September 30, 2010 and December 31, 2009)			224				1,500				200
Total current liabilities			132,347				886,726				562,991
Non-current liabilities:
Long-term bank borrowings (including long-term bank borrowings of  the consolidated VIE without recourse  to ChinaCast Education Corporation of nil as of September 30, 2010 and December 31, 2009)			16,418				110,000				134,000
Deferred tax liabilities – non-current (including deferred tax liabilities – non-current of  the consolidated VIE without recourse  to ChinaCast Education Corporation of nil as of September 30, 2010 and December 31, 2009)			8,150				54,606				30,923
Unrecognized tax benefits – non-current (including unrecognized tax benefits of the consolidated VIE without recourse to ChinaCast Education Corporation of RMB5,662 and RMB5,257 as of September 30, 2010 and December 31, 2009, respectively)			15,111				101,244				62,457
Total non-current liabilities			39,679				265,850				227,380
Total liabilities			172,026				1,152,576				790,371
Commitments and contingencies (Note 15)
Equity:
Ordinary shares (US$0.0001 par value; 100,000,000 shares authorized; 49,778,952 and 45,170,698 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively)			5				36				33
Additional paid-in capital			228,379				1,530,140				1,290,651
Statutory reserve			5,842				39,139				39,139
Accumulated other comprehensive loss			(599	)			(4,011	)			(6,055	)
Retained earnings			36,093				241,822				136,583
Total ChinaCast Education Corporation shareholders’ equity			269,720				1,807,126				1,460,351
Noncontrolling interest			6,648				44,544				23,167
Total equity			276,368				1,851,670				1,483,518
Total liabilities and equity			448,394				3,004,246				2,273,889

 

See notes to unaudited condensed consolidated financial statements.

 

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		For the nine months ended September 30,
		2010				2010				2009
		US$				RMB				RMB
		(Note 1)								(Note 1)
Cash flows from financing activities:
Other borrowings raised			13,955				93,500				10,350
Other borrowings raised from related party			-				-				500
Repayment of other borrowings			(13,761	)			(92,200	)			(11,367	)
Bank borrowings raised			11,940				80,000				128,400
Bank borrowings repaid			(14,090	)			(94,400	)			(58,400	)
Guarantee deposit paid			-				-				(3,000	)
Repayment of capital lease obligation			(1	)			(10	)			88
Proceeds from issuance of shares, net of issuance costs			34,772				232,970				-
Net cash provided by financing activities			32,815				219,860				66,571
Effect of foreign exchange rate changes			46				308				-
Net increase in cash and cash equivalents			11,524				77,217				178,181
Cash and cash equivalents at beginning of the period			48,901				327,628				220,131
Cash and cash equivalents at end of the period			60,471				405,153				398,312

See notes to unaudited condensed consolidated financial statements.

 

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										As of
		As of September 30,								December 31,
		2010				2010				2009
		US$				RMB				RMB
Current assets			5,503				36,872				45,388
Non-current assets			577				3,866				5,374
Total assets			6,080				40,738				50,762
Current liabilities			3,596				24,094				19,752
Non-current liabilities			845				5,663				5,257
Total liabilities			4,441				29,757				25,009

		For the three months ended September 30,												For the nine months ended September 30,
		2010				2010				2009				2010				2010				2009
		US$				RMB				RMB				US$				RMB				RMB
Revenues			4,621				30,961				33,557				13,881				93,006				91,974
Net income (loss)			4				26				1,050				13				86				237

		For the nine months ended September 30,
		2010				2010				2009
		US$				RMB				RMB
Net cash provided by /(used in) operating activities			2,214				14,834				(28,964	)
Net cash provided by /(used in) investing activities			(65	)			(434	)			19,625
Net cash provided by/(used in) financing activities			(2,205	)			(14,771	)			11,187

There are no consolidated CCLX assets that are collateral for the CCLX’s obligations and can only be used to settle the CCLX’s obligations.

Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been using the same accounting policies used in the preparation of the audited financial statements included in CEC’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, except for the additional accounting policies adopted as stated in (1) of Note 2.

Convenience Translation

Amounts in United States dollars (“US$”) are presented solely for the convenience of readers and an exchange rate of RMB6.7 to US$1 was applied as of September 30, 2010. Such translation should not be construed to be the amounts that would have been reported under US GAAP.

 

 

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2.	RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

(1)	Newly Adopted Accounting Pronouncements

 

In June 2009, the FASB issued an authoritative pronouncement to amend the accounting rules for variable interest entities. The amendments effectively replace the quantitative-based risks-and-rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has (1) the power to direct the activities of a variable interest entity that most significantly affect the entity’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity. Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. The new guidance also requires additional disclosures about a reporting entity’s involvement with variable interest entities and about any significant changes in risk exposure as a result of that involvement. The new guidance is effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, and all interim and annual periods thereafter.  During the nine months ended September 30, 2010, there were no significant changes in previously adopted accounting policies or their application, with the exception of additional disclosures upon adoption of ASC 810-10-45-25, under which the reporting entity needs to present separately on the face of the condensed consolidated balance sheets the liabilities of a consolidated variable interest entity for which creditors (or beneficial interest holders) do not have recourse to the general credit of the primary beneficiary. As a result, the Company presents the additional disclosures on the face of the unaudited condensed financial statements as of September 30, 2010 and December 31, 2009.

   

In January 2010, the FASB issued authoritative guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than on a net basis as currently required. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This guidance is effective for annual and interim periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which will be effective for annual and interim periods beginning after December 15, 2010. Early application is permitted and, in the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The adoption of this pronouncement did not have a significant impact on its the Company's financial condition or results of operations.

                                             

(2)	Recently Issued Accounting Pronouncements Not Yet Adopted

                                             

In October 2009, the FASB issued amended revenue recognition guidance for arrangements with multiple deliverables. The new guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or third-party evidence (TPE) is unavailable. Prospective application of this new guidance for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an entity can elect to adopt this guidance on a retrospective basis. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results of operations.

                     

In October 2009, the FASB issued authoritative guidance which amends the scope of existing software revenue recognition accounting. Tangible products containing software components and non-software components that function together to deliver the product’s essential functionality would be scoped out of the accounting guidance on software and accounted for based on other appropriate revenue recognition guidance.  Prospective application of this new guidance for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an entity can elect to adopt this new guidance on a retrospective basis. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results of operations.

                   

 

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In April 2010, the FASB issued authoritative guidance on milestone method of revenue recognition. The scope of this consensus is limited to arrangements that include milestones relating to research or development deliverables. The guidance specifies guidance that must be met for a vendor to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance applies to milestones in arrangements within the scope of this consensus regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting. The guidance will be effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early application is permitted. Companies can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results of operations.

In April 2010, the FASB issued authoritative guidance on effect of denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entity's functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should be considered an equity award assuming all other criteria for equity classification are met. The guidance will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. The Company is in the process of evaluating the effect of adoption of this pronouncement.

In July 2010, the FASB issued an authoritative pronouncement on disclosure about the credit quality of financing receivables and the allowance for credit losses. The objective of this guidance is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The guidance requires an entity to provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The guidance includes additional disclosure requirements about financing receivables, including: (1) Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables; (2) The aging of past due financing receivables at the end of the reporting period by class of financing receivables; and (3) The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company is in the process of evaluating the effect of adoption of this pronouncement.

3.	DISCONTINUED OPERATIONS

 

Starting from 2007, the Company provided Modern English training services through Jiangsu English Training Technology Limited (“JSET”).  During 2009, the Company gradually closed all the training centers.  On December 29, 2009, the Company completed the transaction under a sale and purchase agreement with a third party to dispose of its brand name usage right associated with the English training services with a consideration of RMB6,000.  A gain amounting to RMB1,552 was reported for the fiscal year ended December 31, 2009.  The Company ceased all English training services in JSET thereafter.

 

Summarized operating results from the discontinued operations included in the Company's condensed consolidated statements of operations were as follows for the three months and nine months ended September 30, 2009 and 2010, respectively:

 

 

14.	SEGMENT INFORMATION

		For the three months ended September 30,								For the nine months ended September 30,
		2010				2009				2010				2009
		RMB				RMB				RMB				RMB
Revenues from external customers:
ELG			49,881				50,747				143,901				144,631
TUG			75,238				31,438				200,224				89,825
			125,119				82,185				344,125				234,456
Additional analysis of revenues from ELG by product or service:
Service			46,957				48,851				140,946				138,566
Equipment			2,924				1,896				2,955				6,065
			49,881				50,747				143,901				144,631
Additional analysis of revenues from ELG by business lines:
Post secondary education distance learning			28,575				28,857				85,040				81,308
K-12 and content delivery			15,996				16,047				47,977				48,310
Vocational training, enterprise/government training and networking services			5,310				5,843				10,884				15,013
			49,881				50,747				143,901				144,631
Income from operations:
ELG			36,702				27,505				89,537				72,162
TUG			13,445				10,974				45,062				30,188
			50,147				38,479				134,599				102,350

		As of September				As of December
		30, 2010				31, 2009
		RMB				RMB
Segment assets:
ELG			762,631				805,116
TUG			2,241,615				1,468,773
			3,004,246				2,273,889

The Company’s revenues and net income are substantially derived from the PRC. Most of the assets and capital expenditure of the Company are employed in the PRC.

 

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16.	CONTINGENCIES

a)

On March 21, 2006, after obtaining the approval of its shareholders, the Company amended its certificate of incorporation, the effect of which was, among other things, to eliminate the provision of the certificate of incorporation that purported to prohibit the amendment of the “business combination” provisions contained therein and to extend the date before which the Company must complete a business combination, to avoid being required to liquidate, from March 23, 2006 to December 31, 2006. Because extending the period during which the Company could consummate a business combination was not contemplated by the initial public offering (“IPO”) prospectus, shareholders may have securities law claims against the Company for rescission (under which a successful claimant would have the right to receive the total amount paid for his or her shares, plus interest and less any income earned on the shares, in exchange for surrender of the shares) or damages (compensation for loss on an investment caused by alleged material misrepresentations or omissions in the sale of the security). Such claims might entitle shareholders asserting them to up to US$6.00 per share of common stock, based on the initial offering price of the public units comprised of stock and warrants, less any amount received from sale of the original warrants purchased with them and plus interest from the date of the IPO. A successful claimant for damages under federal or state law could be awarded an amount to compensate for the decrease in value of his or her shares caused by the alleged violation (including, possibly, punitive damages), together with interest, while retaining the shares. The Company believes the shareholder claims for rescission or damages are remote. As such, the Company has not recorded a liability for such possible rescission. However, the Company cannot definitively predict whether shareholders will bring such claims, how many might bring them or the extent to which they might be successful.

 

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b)

The Company may be subject to claims for rescission or other securities law claims resulting from the failure to disclose that the charter provision purporting to prohibit certain amendments was possibly inconsistent with Delaware’s General Corporation Law. The Company may also be subject to such claims as a result of inaccuracies in other disclosures, as follows: It may be argued that the IPO prospectus misstated the vote required by its charter to approve a business combination by providing that “[w]e will proceed with a business combination only if the public shareholders who own at least a majority of the shares of common stock sold in [that] offering vote in favor [of it] ...,” and that the Exchange Act reports have been inaccurate in describing ChinaCast as a leading provider of e-learning content (as opposed to being primarily a content carrier). On November 13, 2006, the Company filed a Current Report on Form 8-K with the SEC regarding this last item. The Company is unable to predict the likelihood that claims might be made with regard to the foregoing or estimate any amounts for which it might be liable if any such claim was made. As such, the Company has not recorded a liability for such possible rescission.

 

c)

On August 23, 2010, CEH, the Company's subsidiary in British Virgin Islands, consummated the acquisition of the entire interest in Wintown from the former sole owner of Wintown. Wintown holds the entire interest in Rubao. Rubao holds the entire interest in Jiyang which in turns holds the entire interest in HIUBC.  HIUBC is a private college affiliated with Hubei Industrial University.  The total consideration for the acquisition is up to RMB450,000, of which RMB360,000 was paid during 2010.  The remaining amount of the consideration is to be calculated based on the net profit of HIUBC. For the academic year of 2010 (i.e. from September 1, 2010 to August 31, 2011), if the net profit as determined under the relevant sale and purchase agreement of HIUBC is less than RMB50,000, CEH is entitled to deduct an amount equal to 9 times of the difference between the net profit and RMB50,000 from the remaining amount of consideration. The contingent consideration was recorded as a liability at fair value of RMB78,721 and the change of its fair value was recorded in earnings at each reporting date.  As a result, the expected total consideration was RMB438,721 as of the date of acquisition. There was no change in the fair value of the remaining consideration up to September 30, 2010.

 

17.	RELATED PARTY TRANSACTIONS

The Company had the following balances with related parties as of December 31, 2009 and September 30, 2010, respectively:

(a)

Amounts due to a shareholder

		As of				As of
		December 31,				September 30,
		2009				2010
Mr. Wu Shi Xin		RMB	-			RMB	(74,887	) (i)

i.

The amount represents consideration payable to Mr. Wu for the acquisition of HIUBC (See Note 4).

(b)

Amounts due to/from a unconsolidated VIE

		As of				As of
		December 31,				September 30,
		2009				2010
Due to CCL		RMB	-			RMB	-	(ii)
Due from CCL		RMB	99,727			RMB	99,665	(ii)

ii.

The amount due to CCL represents satellite usage service fee due from CCT Shanghai to CCLBJ. The amount due from CCL represents the technical service fee due from CCLBJ to CCT Shanghai.

18.	SUBSEQUENT EVENTS

The Company has evaluated events subsequent to the balance sheet date of September 30, 2010 through November 9, 2010, the date the unaudited condensed consolidated financial statements were available to be issued.

 

In October, 2010, CEI established a wholly owned subsidiary, ChinaCast(Beijing) Education Technolgy Limited("CET"). The principle activities of CET are to provide educational service. The initial capital inject of US$750 was completed in September 25, 2010, and the capital verfication is still in progress as of November 09, 2010.

 

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