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EX-21.1 - Tsingda eEDU Corp | c64822_ex21-1.htm |
EX-23.3 - Tsingda eEDU Corp | c64822_ex23-3.htm |
EX-23.1 - Tsingda eEDU Corp | c64822_ex23-1.htm |
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As filed with the Securities and Exchange Commission on March 17, 2011 |
Registration No. 333-171794 |
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UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
Amendment No. 2 to |
FORM S-1 |
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REGISTRATION STATEMENT |
UNDER |
THE SECURITIES ACT OF 1933 |
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TSINGDA EEDU CORPORATION |
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(Exact name of registrant as specified in its charter) |
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Cayman Islands |
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8200 |
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N/A |
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(State or other jurisdiction of |
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(Primary Standard Industrial |
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(I.R.S. Employer |
No. 0620, Yongleyingshiwenhuanan Rd.,
Yongledian Town,
Tongzhou District, Beijing, PR China
86 10-62690222/0288
(Address including zip code, and telephone
number of
registrants principal executive
offices)
Mr. Kang Chungmai
No. 0620, Yongleyingshiwenhuanan Rd., Yongledian Town,
Tongzhou District, Beijing, PR China
86 10-62690222/0288
(Name, address, including zip code,
and
telephone number of Agent for Service)
with copies to
Barry I. Grossman, Esq.
Adam
Mimeles, Esq.
Ellenoff
Grossman & Schole LLP
150
East 42nd Street, 11th Floor
New
York, NY 10017
Tel.
No: 212.370.1300 Fax No: 212.370.7889
Mitchell S. Nussbaum, Esq.
Giovanni
Caruso, Esq.
Loeb
& Loeb LLP
345
Park Avenue
New
York, NY 10154
Tel.
No: 212.407.4159 Fax No: 212.407.4990
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 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 definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
o (Do not check if a smaller reporting company) |
Smaller reporting company |
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CALCULATION OF REGISTRATION FEE
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Title of each class of securities to be registered |
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Proposed |
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Amount of |
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Ordinary Shares, $.000384 par value per share |
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11,500,000 |
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1,335.15 |
(2) |
TOTAL |
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$ |
11,500,000 |
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$ |
1,335.15 |
(2) |
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(1) |
The registration fee for securities to be offered by the Registrant is based on an estimate of the Proposed Maximum Aggregate Offering Price of the securities, and such estimate is solely for the purpose of calculating the registration fee pursuant to Rule 457(o). Includes shares which the underwriter has the option to purchase to cover over-allotments, if any. |
(2) |
$267.03 previously paid |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Preliminary Prospectus
Subject To Completion, Dated March 17, 2011
4,000,000 ORDINARY SHARES
[logo]
TSINGDA eEDU CORPORATION
Tsingda eEDU
Corporation is offering 4,000,000 Ordinary Shares, $.000384 par value per
share. We are a reporting company under Section 13 of the Securities Exchange
Act of 1934, as amended. Prior to this offering, there has been no public
market for our Ordinary Shares.
We expect that the public offering price of our Ordinary Shares will be between $ [--] and $ [---] per share. We have applied to have our Ordinary Shares listed on the NYSE Amex Stock Exchange.
The purchase of the securities involves a high degree of risk. See section entitled Risk Factors beginning on page 8.
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Per Share |
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Total |
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Public offering price |
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$ |
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$ |
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Underwriting discounts and commissions(1) |
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$ |
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$ |
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Proceeds, before expenses, to Tsingda eEDU Corporation |
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$ |
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$ |
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(1) Does not include non-accountable expense allowance in the amount of 1% of the gross proceeds of the Offering. The non-accountable expense allowance is not payable with respect to the Ordinary Shares sold upon exercise of the over-allotment option. The underwriters are also entitled to receive a warrant to purchase Ordinary Shares equal to 5% of the total number of ordinary shares sold in the Offering, including the over-allotment. |
The underwriters have a 45-day option to
purchase up to 600,000 additional Ordinary Shares from us solely to cover
over-allotments, if any.
The underwriters expect to deliver the Ordinary Shares to purchasers on or about [--], 2011.
Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of anyones investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Maxim Group LLC
The date of this prospectus is [--], 2011
1
TABLE OF CONTENTS
Page No. | ||||
PROSPECTUS SUMMARY | 3 |
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SUMMARY CONSOLIDATED FINANCIAL DATA | 7 |
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RISK FACTORS | 8 |
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NOTE REGARDING FORWARD-LOOKING STATEMENTS | 19 |
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USE OF PROCEEDS | 20 |
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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS | 20 |
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TRANSFER AGENT AND REGISTRAR | 20 |
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DIVIDEND POLICY | 21 |
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CAPITALIZATION | 22 |
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DILUTION | 23 |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS | 24 |
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CORPORATE STRUCTURE | 43 |
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OUR BUSINESS AND INDUSTRY AND MARKET OVERVIEW | 45 |
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GOVERNMENT REGULATION | 58 |
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MANAGEMENT | 67 |
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EXECUTIVE COMPENSATION | 69 |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 71 |
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DESCRIPTION OF SECURITIES | 72 |
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 72 |
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TAXATION | 74 |
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UNDERWRITING | 81 |
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LEGAL MATTERS | 84 |
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EXPERTS | 84 |
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WHERE YOU CAN FIND MORE INFORMATION | 84 |
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | F-1 |
2
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this prospectus. This summary does not contain all the information you should consider before investing in the securities. Before making an investment decision, you should read the entire prospectus carefully, including the risk factors section, the financial statements and the notes to the financial statements.
In this prospectus, unless otherwise specified, all monetary amounts are in U.S. dollars. All renminbi, or RMB, amounts have been translated into U.S. dollars at the December 31, 2009 noon buying rate in the City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York, being $1.00 = RMB6.8372.
Except where the context otherwise requires and for the purposes of this prospectus only:
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We, us, our company, our, and the Company refer to the combined business of Tsingda eEDU Corporation and its consolidated subsidiaries and affiliates, but do not include the shareholders of Tsingda eEDU Corporation; |
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Tsingda Technology refers to Tsing Da Century Education Technology Co. Ltd., a British Virgin Islands business company, which is our direct, wholly-owned subsidiary; |
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Tsingda Management refers to Beijing Tsingda Century Management Consulting Ltd., a wholly foreign owned enterprise incorporated under the laws of the PRC, which is our indirect, wholly-owned subsidiary; |
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Tsingda Education refers to Beijing Tsingda Century Investment Consultant of Education Co. Ltd., our contractually controlled affiliate and the PRC operating company; |
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Tsingda Network refers to Beijing Tsingda Century Network Technology Co. Ltd., a wholly owned subsidiary of Tsingda Education; |
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China, Chinese and PRC, refer to the Peoples Republic of China; |
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Renminbi and RMB refer to the legal currency of China; and |
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U.S. dollars, dollars and $ refer to the legal currency of the United States. |
We effected a consolidation of every three shares of our authorized share capital into 1 share on November 15, 2010. Unless otherwise stated, all share and per share amounts in this prospectus have been adjusted to reflect post consolidation amounts.
Our Company
Business Overview
We are an online provider of supplementary educational services in China. All of our courses are broadcast online, and are consumed either in private or at one of our learning centers. As of December 31, 2010, there were 2,346 Tsingda Learning Centers across China, which includes 21 Company-owned learning centers and 2,325 franchised learning centers. Since most of our learning centers are franchised locations, we generate most of our revenues through franchise licensing fees and sales of e-cards by franchisees to students, which are pre-paid credit cards used by our students to purchase our individual courses. Our franchisees pay an initial franchise licensing fee of between $7,000 and $10,000 per location depending on franchise territory, and thereafter, franchisees pay an annual management fee equal to 10% of their initial franchise licensing fee. A franchisee receives e-cards from the Company with a face value equal to five times the amount of franchise and management fees paid. Our franchisees also have the option to purchase additional e-cards at the same 80% discount. Franchisees earn revenues from the sale of e-cards to students at face value. In other words, for every dollar spent by our students, our franchisees receive eighty cents. With respect to the remaining twenty cents, the Company splits this on a 40%-60% basis with teachers in connection with real-time courses and on a 90%-10% basis with teachers in connection with pre-recorded courses. Factoring in the discount taken by our franchisees and revenue splitting with our teachers, the Company earns 18% of revenues generated from sales of e-cards used for pre-recorded courses and 8% of revenues generated from sales of e-cards used for real-time courses from revenues generated from the sale of e-cards. Each e-card has a specific serial number, and our IT server tracks the opening and usage of these cards in real time. We use this information in order to accurately allocate revenues among teachers.
Our online
educational services consist of pre-recorded courses and a web based platform
called the Tsingda Virtual Internet Classroom where students and
teachers can interact remotely in either a one-on-one or classroom setting. As
of December 31, 2010, we had a total of 7,266,731 registered and 1,424,778 active
students. Of these students, 6,838,181 students are registered and 1,340,652 are active
through our learning centers, and 428,550 students are registered and 84,126
are active through our Tsingda Virtual Internet Classroom. We classify students who
have provided us with
their personal information as registered. Registered students who
have purchased an e-card or are using an e-card to purchase our courses are classified
as
active. Students who have purchased an e-card and have not used an
e-card for more than one year are de-classified from active status and classified
as registered.
3
For fiscal
year 2010, we generated $27,447,545 in gross revenues, which represents an 87%
increase from gross revenues of $14,650,863 for fiscal year 2009. Our fiscal
year 2010 pre-tax net income was $12.1 million, which represents a 70.4% increase
from pre-tax net income of $7.1 million for fiscal year 2009.
On September 16, 2010, we completed a unit financing with certain accredited investors pursuant to which we received total gross proceeds of $9.6 million. Each unit consisted of one ordinary share and a stock purchase warrant to purchase 35% of the number of Ordinary Shares purchased in the financing. The warrant exercise price is $2.08 per share, subject to adjustment, and the warrant term is five (5) years.
On November 15, 2010, the Company held a special meeting of its shareholders (Special Meeting) at its principal offices in Beijing, China, pursuant to the Notice of Special Meeting of Shareholders. At the Special Meeting, 33,386,754 shares of the Companys authorized share capital were represented in person or by proxy, which constituted a quorum. At the Special Meeting, shareholders approved two proposals (i) to change the corporate name from Compass Acquisition Corporation to Tsingda eEDU Corporation and (ii) to affect a three-for-one (3 to 1) consolidation of the Companys issued and outstanding Ordinary Shares and to increase the amount of the Companys authorized Ordinary Shares from thirty-nine million sixty-two thousand five hundred shares (39,062,500) to one hundred million (100,000,000) shares. The name change of the Company to Tsingda eEDU Corporation and the three-for-one consolidation and increase in the Companys authorized share capital was effective immediately following shareholder approval.
In November 2010 we began offering live courses through
our company-owned learning centers which are all located in Beijing. Depending
on the initial response to these live courses, we may consider expanding our
live course offerings to Company-owned learning centers in other first-tier cities.
We do not intend to offer live courses through our franchise-owned learning centers,
nor do we intend that any of our Company-owned learning centers will become solely
dedicated to live course offerings.
Live courses are taught on either a one-to-one basis or with up to 10 students. As with all of our course offerings, students purchase live courses by purchasing e-cards. Students can choose any combination of live, online
or pre-recorded courses for all of their education needs. We charge more for live courses than for online or pre-recorded courses. During the year ended December 31, 2010, revenue generated from providing live courses was less than 1% of our total
revenue.
Our headquarters are located at No. 0620, Yongleyingshiwenhuanan Rd., Yongledian Town, Tongzhou District, Beijing, PR China, our phone number is 86 10-62690222/0288, and our English language web-site is www.eeduuol.com.
Our Target Demographic
The Peoples Republic of China (PRC) represents approximately one quarter of the global population. According to information published by the PRC government, our target population market as of December 31, 2010 is approximately 360 million individuals. The group is comprised of: infants and children below school age (6) - 160 million; primary school students - 110 million; junior high school students - 60 million; and senior high school students 30 million.
Organizational History
We were organized under the laws of the Cayman Islands on September 27, 2006. Tsingda Technology was organized under the laws of British Virgin Islands on December 11, 2009. Tsingda Management was organized under the laws of the PRC on November 26, 2007. Tsingda Education was organized under the laws of the PRC on October 23, 2003. Tsingda Network was organized under the laws of the PRC on February 14, 2004.
On May 24, 2010, we acquired Tsingda Technology. The transaction was treated for accounting purposes as a capital transaction and recapitalization by Tsingda Technology, the accounting acquirer, and as a re-organization by Compass, the accounting acquiree. Compass (now Tsingda eEdu Corporation) is the legal acquirer and Tsingda Technology the legal acquiree.
Tsingda Technology owns 100% of the issued and outstanding capital stock of Tsingda Management. On April 26, 2010, Tsingda Management entered into a series of contractual agreements with Tsingda Education, and its shareholders, in which Tsingda Management assumed management of the business activities of Tsingda Education. Namely, these contractual agreements consist of: (i) a consulting services agreement, (ii) an operating agreement, (iii) an equity pledge agreement, (iv) a voting rights proxy agreement, and (v) an option agreement. We rely on these agreements to, among other things, generate all our revenues, control the business activities of Tsingda Education, appoint all of its executives, senior management and the members of its board of directors, and at our option, purchase all the outstanding equity of Tsingda Education. If one or more of these contractual agreements are terminated or ruled unenforceable, we could lose control of Tsingda Education, which will materially and adversely affect our revenues and future growth prospects. See Risk Factors beginning on Page 8.
The Wholly-Foreign Owned Enterprise Law (1986), as amended, and The Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law of the PRC (2006), contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises may pay dividends only
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out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, such companies are required to set aside a certain amount of their accumulated profits each year, if any, to fund certain reserves. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. The PRC central government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from the Companys profits.
Furthermore, if our subsidiaries or affiliates in China incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations through these contractual or dividend arrangements, we may be unable to pay dividends on our Ordinary Shares.
The risks
described above and other risks in connection with an investment in our
securities are found in the Risk Factors section beginning on page
8. You should carefully read and consider the information in the Risk Factors
section before making an investment in our securities.
Corporate Structure
Our organization structure is depicted below:
5
THE OFFERING
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Securities Offered |
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4,000,000 Ordinary Shares |
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Ordinary Shares outstanding before the Offering |
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33,729,862 shares1 |
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Ordinary Shares to be outstanding after the Offering: |
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37,729,862 shares1 |
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Offering price: |
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$ to $ per share (estimated) |
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Use of proceeds: |
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We intend to use the net proceeds of this Offering for working capital and general corporate purposes. See Use of Proceeds on page __ for more information on the use of proceeds. |
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Risk factors: |
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Investing in these securities involves a high degree of risk. As an investor you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the Risk Factors section beginning on page 8 hereof. |
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Listing : |
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We have applied to have our Ordinary Shares listed on the NYSE Amex Stock Exchange. |
1 Does not include outstanding warrants to acquire 2,464,500 Ordinary Shares.
6
Summary Consolidated Financial Information
The following table summarizes selected historical financial data regarding our business and should be read in conjunction with our consolidated financial statements and related notes contained elsewhere in this prospectus and the information under Managements Discussion and Analysis of Financial Condition and Results of Operations.
The summary
consolidated statement of income for the fiscal years ended December 31, 2010
and 2009 respectively and the summary balance sheet data as of December 31,
2010 and 2009 are derived from the audited consolidated financial statements
of Tsingda Technology included elsewhere in this prospectus. Tsingda Technology
conducts all our business operations and became our wholly-owned subsidiary on
May 24, 2010. The results of operations for past accounting periods are not
necessarily indicative of the results to be expected for any future accounting
period.
Balance Sheet
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Cash |
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4,086,214 |
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458,645 |
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Total Assets |
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43,453,932 |
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17,243,696 |
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Liabilities |
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9,792,960 |
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3,732,244 |
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Total Stockholders Equity |
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33,660,972 |
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13,511,452 |
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Statement of Operations
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Year Ended |
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Year Ended |
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Revenues |
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27,447,545 |
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14,650,863 |
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Pre-Tax Net Income |
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12,135,737 |
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7,120,130 |
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7
RISK FACTORS
An investment in our Ordinary Shares is speculative and involves a high degree of risk and uncertainty. You should carefully consider the risks described below, together with the other information contained in this prospectus, including the consolidated financial statements and notes thereto of our Company, before deciding to invest in our Ordinary Shares. The risks described below are not the only ones facing our Company. Additional risks not presently known to us or that we presently consider immaterial may also adversely affect our Company. If any of the following risks occur, our business, financial condition and results of operations and the value of our Ordinary Shares could be materially and adversely affected.
Risks Relating to Our Business
We have a limited operating history and we may not be able to sustain the growth in our business.
Our limited operating history and the early stage of development of the online
education industry in which we operate makes it difficult to evaluate our business
and future prospects. Although our annual growth rate of sales revenue from
2008 to 2009 and 2009 to 2010 was approximately 101% and 87% respectively,
and our annual growth rate of pre-tax income was approximately 77.9% and 70.4%
during these same periods, there is no assurance that we will be able to sustain
such growth in the future. We may have negative growth, which in turn may impair
our business operations and profitability. Furthermore, our largest shareholder,
Tsing Da Century Education Technology Co., Ltd., a Belize corporation controlled
by Zhang Hui, our chairman and CEO, has entered into a securities escrow agreement
with respect to the 6,000,000 Ordinary Shares (the Escrowed Shares)
owned by it. If the Companys net income for the fiscal year 2011 is
less than $13,500,000, the escrow agent shall transfer to the investors in
our 2010 private placement, on a pro-rata basis, an amount of Escrow Shares
equal to the percentage of variation from the 2011 performance threshold times
the total number of Escrow Shares. Any Escrow Shares not distributed to such
investors following the release of fiscal year 2011 information will be returned
to Tsing Da Century Education Technology Co., Ltd. Therefore, if we cannot
meet these performance targets, there may be a significant change in the ownership
of our outstanding shares.
The market for the services that we provide is still emerging and evolving rapidly, and we may not be able to adapt our business.
The market for educational services is still evolving in the PRC. Our success will depend to a large extent on the perceived benefit that our services provide to our customers, who are mainly students. Therefore we will need to increase awareness of our products, protect our reputation and develop customer loyalty among our customers, anticipate and adapt to changing conditions in the markets in which we operate.
Increased funding of educational programs by the local or national government may negatively impact our business.
It is possible that increased funding of educational programs would result in either greater competition or reduced demand for our products and services. For example, increased funding of educational programs may lead to nationwide student access to online educational courses and services, as well as publicly available state-sponsored learning centers. Increased online access could dramatically increase the demand for online supplemental education, which could be expected to lead to an increase in the number of private competitors we face. The government may also determine to compete with us directly by offering supplemental education services, and would be able to undercut our prices and adversely affect the demand for our products and services.
Additional funding of education may also reduce the overall demand for supplemental education in the event such funds are used to better educate students in the primary and secondary schools. To the extent the quality of education in schools increases, the need for supplemental education may decrease. In any of such events, we would expect our results of operations and future growth prospects to be harmed.
We may have difficulty executing our plan to expand our business, which may negatively impact our operations.
In order to
expand our business operations we will need to (i) increase the number of our
learning centers, (ii) scale and adapt our existing network infrastructure to
accommodate increased systems traffic and (iii) increase our marketing efforts.
Through 2011, we expect to open approximately 600 additional franchised
locations. We plan on a broad scale brand promotion campaign, and we will need
significantly more computing power as traffic within our system increases and
our learning center locations expand. We will be required to spend significant
capital and resources to manage our additional franchises, execute our
promotional campaign and to purchase equipment, and upgrade our technology and
network infrastructure to handle increased Internet traffic. In this regard,
we have budgeted approximately $1.2 million for our marketing campaign,
approximately $1.4 million for IT expenditures, and approximately $1.8 million
to add and improve our course content. We expect to generate the funds
necessary for our expansion through our existing cash flow. If we fail to
expend sufficient capital to execute our growth strategy, our operating results
will be harmed.
8
Problems with content delivery services, bandwidth providers, data centers or other third parties could harm our business, financial condition or results of operations.
Our business relies significantly on third-party vendors, such as data centers, content delivery services and bandwidth providers. While no single vendor is material to our operations, if any third-party vendor fails to provide their services or if their services are no longer available to us for any reason and we are not immediately able to find replacement providers, our business, financial conditions or results of operations could be materially adversely affected.
Additionally, any disruption in network access or related services provided by these third-party providers or any failure of these third-party providers to handle current or higher volumes of use could significantly harm our business operations. If our service is disrupted, we may lose revenues due to our inability to provide services to our franchised learning centers and we may be obligated to compensate these franchisees for their loss. Our reputation also may suffer in the event of a disruption. Any financial or other difficulties our providers face may negatively impact our business and we are unable to predict the nature and extent of any such impact. We exercise very little control over these third-party vendors, which increases our vulnerability to problems with the services they provide. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services could negatively impact our relationships with our franchisees and materially adversely affect our brand reputation and our business, financial condition or results of operations and expose us to liabilities to third parties.
Our data centers are vulnerable to natural disasters, terrorism and system failures that could significantly harm our business operations and lead to client dissatisfaction.
In delivering our solutions, we are dependent on the operation of our data centers and bandwidth providers, which are vulnerable to damage or interruption from earthquakes, terrorist attacks, war, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our system, and similar events. We do not have insurance to cover any losses. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a terrorist attack, a providers decision to close a facility we are using without adequate notice or other unanticipated problems at our data centers could result in lengthy interruptions in our service. Interruptions in our service could reduce our revenues and profits, and our brand reputation could be damaged if customers believe our system is unreliable, which could have a material adverse affect on our business, financial condition and results of operations.
Our business may be adversely affected by malicious third-party software applications that interfere with the function of our technology.
Our business may be adversely affected by malicious software applications that make changes to operating computers and interfere with our technology. These applications may attempt to change users experience in using our virtual classrooms or teaching modules at our learning centers, including changing configurations of our user interface, or otherwise interfering with our ability to connect with users. The interference may occur without disclosure to or consent from users, resulting in a negative experience that users may associate with our solutions. These software applications may be difficult or impossible to uninstall or disable, may reinstall themselves and may circumvent other applications efforts to block or remove them. If our efforts to combat these malicious software applications are unsuccessful, our reputation may be harmed, and users may be reluctant to use our services. This could result in a decline in usage of our educational services and corresponding revenues, which would have a material adverse effect on our business, financial condition and results of operations.
If we fail to manage our growth effectively, our business, financial condition and results of operations could be materially adversely affected.
We have experienced, and continue to experience, rapid growth in our operations and headcount, which has placed, and will continue to place, significant demands on our management, operational and financial infrastructure. If we do not effectively manage our growth, the quality of our solutions and services could suffer, which could negatively affect our brand and operating results. To effectively manage this growth, we will need to continue to improve, among other things:
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our information and communication systems to ensure that our operations are well coordinated and that we can effectively communicate with our growing base of franchisees and users; |
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our systems of internal controls to ensure timely and accurate reporting of all of our operations; and |
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our information technology infrastructure to maintain the effectiveness of our systems. |
In order to enhance and improve these systems we will be required to make significant capital expenditures and allocation of valuable management resources. If the improvements are not implemented successfully, our ability to manage our growth will be impaired and
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we may have to make additional expenditures to address these issues, which could materially adversely affect our business, financial condition and results of operations.
If we do not reach certain business milestones, our largest shareholder would suffer contractual penalties which would cause a significant change in the ownership of our outstanding shares.
Our largest
shareholder, Tsing Da Century Education Technology Co., Ltd., a Belize
corporation controlled by Zhang Hui, our chairman and CEO, has entered into a
securities escrow agreement with respect to the Escrowed Shares. If the Companys
net income for fiscal year 2011 is less than $13,500,000, the escrow agent
shall transfer to the investors of our September 2010 private placement, on a
pro-rata basis, an amount of Escrow Shares equal to the percentage of variation
from the 2011 performance threshold times the total number of Escrow Shares.
Any Escrow Shares not distributed to such investors following the release of
fiscal year 2011 information will be returned to Tsing Da Century Education Technology
Co., Ltd. Therefore, if we cannot meet these performance targets, there may be
a significant change in the ownership of our outstanding shares.
We may incur significant costs to ensure compliance with United States corporate governance and accounting requirements.
We may incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, and other rules implemented by the Securities and Exchange Commission. We expect all of the applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. We also expect that these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. We currently estimate our annual costs for such compliance to be approximately $280,000, however we cannot predict the amount of future compliance costs or other additional costs we may incur or the timing of such costs.
We are currently evaluating and monitoring developments with respect to these newly applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
We are dependent upon key personnel and the loss of key personnel, or the inability to hire or retain qualified personnel, could have an adverse effect on our business and operations.
Our success is heavily dependent on the continued active participation of our current executive officers listed under Management. Loss of the services of one or more of our officers could have a material adverse effect upon our business, financial condition or results of operations. Further, our success and achievement of our growth plans depend on our ability to recruit, hire, train and retain other highly qualified technical and managerial personnel. Competition for qualified employees among companies in the PRC is intense, and the loss of any of such persons, or an inability to attract, retain and motivate any additional highly skilled employees required for the expansion of our activities, could have a materially adverse effect on us. The inability on our part to attract and retain the necessary personnel and consultants and advisors could have a material adverse effect on our business, financial condition or results of operations.
As of
December 31, 2010, we had a total of approximately 276 employees in our
offices in the PRC. However, there can be no assurance that we will be able to
maintain a prolonged good relationship with our existing or ex-employees and
that no labor disruptions will occur in the future. Should any industrial
action or labor unrest occur, our business operations could be adversely
affected.
Potential claims alleging infringement of third partys intellectual property by us could harm our ability to compete and result in significant expense to us and loss of significant rights.
Our operations are technology driven, and we have sought patent and copyright protection for our key software packages. However, we may confront, from time to time, third parties that may assert patent, copyright, and other intellectual property rights to these and other software packages which are important to our business. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of such claims, could cause us to incur significant costs in responding to, defending, and resolving such claims, and may divert the efforts and attention of our management and technical personnel away from the business. As a result of such intellectual property infringement claims, we could be required or otherwise decide it is appropriate to pay third-party infringement claims; discontinue using the technology or processes subject to infringement claims which would include the software relating to our learning centers and virtual classrooms; develop other technology not subject to infringement claims, which could be time-consuming and costly or may not be possible; and/or license technology from the third-party claiming infringement, which license may not be available on commercially reasonable terms. The occurrence of any of the foregoing could result in unexpected expenses or require us to recognize an impairment of our assets, which would reduce the value of the assets and
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increase expenses. In addition, if we are required to discontinue the use of existing software, our revenue could be negatively impacted.
Risks Related to our Corporate Structure
Our principal shareholder is able to control substantially all matters requiring a vote of our shareholders and its interests may differ from the interests of our other shareholders.
Tsing Da Century Education Technology Co., Ltd., a Belize corporation (not to be confused with Tsingda Technology, a BVI corporation, which is our direct-wholly-owned subsidiary), is our majority shareholder and beneficially owns approximately 33.8% of our issued and outstanding Ordinary Shares. Mr. Zhang Hui, our Chairman and President, is an officer and majority owner of this company. Therefore, Mr. Zhang is able to exert substantial control on all matters requiring approval by our shareholders, including the election of our directors and officers. This concentration of ownership may also have the effect of discouraging, delaying or preventing a future change of control, which could deprive our Shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our shares.
The contractual agreements with Tsingda Education are not as effective as direct ownership. Because we rely on Tsingda Education for our revenue, any termination of, or disruption to, these contractual arrangements could detrimentally affect our business.
Presently all of our business operations are carried out by Tsingda Education, and its wholly owned subsidiary, Tsingda Network. We do not own any equity interests in Tsingda Education, but control and receive the economic benefits of its business operations through various contractual arrangements. Through these contractual arrangements, we have the ability to substantially control the daily operations and financial affairs of Tsingda Education, as we are able to appoint its senior executives and approve all matters requiring shareholder approval. Accordingly, we consolidate Tsingda Education results, assets and liabilities in our financial statements.
However, these contractual agreements may be terminated under certain circumstances. Generally the PRC has substantially less experience related to the enforcement of contractual rights through its judiciary or the arbitration process as compared to the United States or the Cayman Islands. This inexperience presents the risk that the judiciary or arbitrators in the PRC may be reluctant to enforce contractual rights, interpret these rights and remedies differently than what was intended by the parties to the agreements, or find that such contractual agreements do not comply with restrictions in current PRC laws. A PRC court may also set aside an arbitration award by reason of any defect the court considers to be present in the arbitration proceeding, remedies at law may not be adequate and a PRC court may not order specific performance. In addition, any legal proceeding may result in substantial costs, disruptions to our business, damage to our reputation and diversion of our resources.
If Tsingda Education or its Shareholders fail to perform their obligations under the contractual arrangements, we may have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, and there is a risk that we may be unable to obtain these remedies. Therefore our contractual arrangements may not be as effective in providing control over Tsingda Education as direct ownership. Because we rely on Tsingda Education for our revenue, any termination of or disruption to these contractual arrangements could detrimentally affect our business.
If the PRC government determines that our agreements with these companies are not in compliance with applicable regulations, our business in the PRC could be adversely affected.
The Chinese government restricts foreign investment in education and Internet-related businesses, including distribution of content over the Internet. We cannot be sure that the PRC government would view our operating arrangements to be in compliance with PRC licensing, registration, restrictions on foreign investment or other regulatory requirements, including without limitation the requirements described in the Government Regulations section of this prospectus. If we are determined not to be in compliance, the PRC government could levy fines, revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block our website, require us to restructure our business, corporate structure or operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our business. We may also encounter difficulties in obtaining performance under or enforcement of related contracts.
In addition, our agreements are governed by the PRC laws and regulations. PRC laws and regulations concerning the validity of the contractual arrangements are uncertain, as many of these laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement by the PRC government may involve substantial uncertainty.
We may not be able to consolidate the financial results of some of our affiliated companies or such consolidation could materially adversely affect our operating results and financial condition.
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All of our business is conducted through Tsingda Education which currently is considered for accounting purposes a variable interest entity (VIE), and we are considered the primary beneficiary, enabling us to consolidate our financial results in our consolidated financial statements. We have also received a legal opinion from our PRC legal counsel that the VIE Agreements are valid and enforceable under PRC Laws. In the event that in the future a company we hold as a VIE would no longer meet the definition of a VIE, or we are deemed not to be the primary beneficiary, we would not be able to consolidate line by line that entitys financial results in our consolidated financial statements for PRC purposes. Also, if in the future an affiliate company becomes a VIE and we become the primary beneficiary, we would be required to consolidate that entitys financial results in our consolidated financial statements for PRC purposes. If such entitys financial results were negative, this could have a corresponding negative impact on our operating results for PRC purposes. However, any material variations in the accounting principles, practices and methods used in preparing financial statements for PRC purposes from the principles, practices and methods generally accepted in the United States and in the SEC accounting regulations must be discussed, quantified and reconciled in financial statements for United States and SEC purposes.
We rely on certain contractual agreements between Tsingda Management and Tsingda Education, and if any of these agreements are terminated or unenforceable, our business and operations will be materially and adversely affected. In the event of termination or unenforceability of any of these agreements, our financial condition, results of operations and future growth prospects may be materially harmed.
We rely on the VIE Agreements between our wholly-owned subsidiary, Tsingda Management, and our variable interest entity, Tsingda Education to control Tsingda Education.
Under the terms of the exclusive consulting services agreement, Tsingda Management has the exclusive right to provide business consulting and related services to Tsingda Education in connection with its business operations. Under this agreement, Tsingda Management owns the intellectual property rights arising from the performance of these services, including, but not limited to, any trade secrets, copyrights, patents, know-how, unpatented methods and processes and otherwise, whether developed by Tsingda Management or Tsingda Education based on Tsingda Managements provision of such services under the agreement. Tsingda Education pays quarterly consulting service fees to Tsingda Management that are equal 100% of Tsingda Educations total net profit for such quarter. The consulting services agreement is in effect from April 26, 2010 and continues indefinitely unless terminated by (a) Tsingda Management upon a material breach by Tsingda Education; (b) bankruptcy by either Tsingda Management or Tsingda Education; (c) by either Tsingda Management or Tsingda Education in the event Tsingda Management ceases operations or (d) by either Tsingda Management or Tsingda Education in the event circumstances arise which materially adversely affects the performance of either party under the consulting agreement. Because 100% of our revenues are generated from Tsingda Education pursuant to this agreement, if this agreement is terminated or not enforceable, we will not be able to generate any revenues.
Under the terms of the operating agreement by and among Tsingda Management, Tsingda Education and the shareholders of Tsingda Education, Tsingda Management has the right to direct the corporate policies regarding Tsingda Educations daily operations and financial management, including the power to appoint the members of Tsingda Educations board of directors as well as its executive officers. The operating agreement is effective for an indefinite term under the laws of the PRC, and may only be terminated by Tsingda Management. Because we rely on the operating agreement to control the business operations of Tsingda Education, if this agreement is terminated or not enforceable, we may lose the ability to control the management and operations of Tsingda Education.
Under the terms of the equity pledge agreement, Tsingda Education pledged all of its assets to Tsingda Management for a term of two years following Tsingda Education meeting all of its obligations under the consulting services agreement. If this agreement is terminated or not enforceable, we may not have any adequate security or remedy against Tsingda Education should Tsingda Education breach its obligations under the consulting services agreement.
Under the terms of the voting rights agreement by and among Tsingda Management, Tsingda Education and the shareholders of Tsingda Education, the shareholders of Tsingda Education irrevocably grant and entrust Tsingda Management, for the maximum period of time permitted by PRC law, all voting rights in Tsingda Education. Because we rely on the voting rights agreement to vote on all matters submitted to Tsingda Educations shareholders for their approval, if this agreement is terminated or not enforceable, shareholders of Tsingda Education may take shareholder initiatives that may not be in our best interests.
Under the terms of the option agreement by and among Tsingda Management, Tsingda Education and the shareholders of Tsingda Education, Tsingda Management has the option to purchase from the shareholders of Tsingda Education, all the outstanding shares of Tsingda Education. The option agreement is effective for the maximum period allowable under the laws of the PRC, and may only be terminated by Tsingda Management. In the event we are not able to control Tsingda Education through our other contractual arrangement, we would need to rely on the option agreement to purchase all the outstanding shares of Tsingda Education. In such an event, if the option agreement is terminated or not enforceable, then we may lose control of Tsingda Education.
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Risks Related to Doing Business in China
PRC economic, political and social conditions, as well as changes in any government policies, laws and regulations, could adversely affect the overall economy in China or the prospects of the education market, which in turn could adversely affect our business.
Substantially all of our operations are conducted in China, and substantially all of our revenues are derived from China. Accordingly, our business, financial condition, results of operations, prospects and certain transactions we may undertake are subject, to a significant extent, to economic, political and legal developments in China.
The PRC economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past two to three decades, growth has been uneven, both geographically and among various sectors of the economy. Demand for our services may depend, in large part, on economic conditions in China. Any slowdown in Chinas economic growth may cause families to reduce the use of our services for their children, which in turn could reduce our net revenues.
Although the PRC economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to play a significant role in regulating industry development by imposing ongoing policies. The PRC government also exercises significant control over Chinas economic growth through the allocation of resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Changes in any of these policies, laws and regulations could adversely affect the overall economy in China or the prospects of the education market, which could harm our business.
The PRC government has implemented various measures to encourage foreign investment and sustainable economic growth and to guide the allocation of financial and other resources, which have for the most part had a positive effect on our business and growth. However, we cannot assure you that the PRC government will not repeal or alter these measures or introduce new measures that will have a negative effect on us.
Chinas social and political conditions are also not as stable as those of the United States and other developed countries. Any sudden changes to Chinas political system or the occurrence of widespread social unrest could have negative effects on our business and results of operations. In addition, China has tumultuous relations with some of its neighbors and a significant further deterioration in such relations could have negative effects on the PRC economy and lead to changes in governmental policies that would be adverse to our business interests
Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. To date, we have taken no steps to prevent violations of the FCPA other than the adoption of a code of ethics. Although we intend to adopt a code of ethics to ensure compliance with the FCPA and Chinese anti-corruption laws by all individuals involved with our company, our employees or other agents may engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
PRC regulations regarding offshore financing activities by PRC residents have undertaken continuous changes which may increase the administrative burden we face and create regulatory uncertainties that could adversely affect our business.
On August 8, 2006, the PRC Ministry of Commerce (MOFCOM), joined by the China Securities Regulatory Commission (CSRC), the State Administration of Foreign Exchange (SAFE) as well as other government agencies, released a Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises (M&A Regulation), which took effect September 8, 2006 and was amended in 2009. These new rules significantly revised Chinas regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. These new rules reflect greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range of merger, acquisition and investment transactions. According to the new M&A Regulation, a related-party acquisition in which an offshore Company-owned or controlled by a PRC resident acquires a domestic company controlled by the same PRC resident shall be subject to the approval of MOFCOM.
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Among other things, the M&A Regulation also included new provisions to require that the overseas listing of an offshore company which is directly or indirectly controlled by a PRC resident for the purpose of overseas listing of such PRC residents interests in a domestic company, known as a special purpose company, must obtain the approval of CSRC prior to the listing.
We believe that our current VIE structure avoids the acquisition transaction which is directly the target under scrutiny of the M&A Regulation, including the requirement of CSRC approval. No PRC regulatory authority has stated that this type of structure is subject to the M&A Regulations and we know of no similar VIE structure that has been reviewed under the M&A Regulations. Thus, in its current practice, it appears the M&A Regulation does not apply to our corporate structure.
However, the application of this M&A Regulation remains uncertain since neither MOFCOM nor CSRC has approved any Chinese companys foreign listing. There is no consensus currently existing among the leading PRC law firms regarding the scope and applicability of the MOFCOM or CSRC approval requirements. If the MOFCOM, CSRC or other PRC regulatory body subsequently determines that the new M&A Regulation applies to our situation and CSRCs approval was required for this offering, we may face sanctions by the MOFCOM, CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of funds to our offshore companies, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our securities.
We may be subject to PRC penalties and may be required to forfeit $100,000 if our PRC resident shareholders including Zhang Hui, our chairman and CEO, and Liu Juntao, our Executive Vice President do not obtain SAFE Circular 75 approval of their ownership of our shares.
Under PRC law, a PRC resident is required to obtain approval from SAFE when such PRC resident acquires securities of a foreign company. In that respect, all nineteen of our PRC resident shareholders including Zhang Hui, our chairman and CEO, and Liu Juntao, our Executive Vice President, are required to obtain SAFE approval of the shares indirectly held by them. If they fail to obtain SAFE approval, we may be subject to penalties under PRC law. Failure to obtain the approval may result in restrictions on the Company, including prohibitions on the payment of dividends and other distributions to its offshore affiliates and capital inflow from the offshore entities.
We have requested our shareholders and beneficial owners who may be subject to SAFE rules to make the necessary applications, filings and amendments as required under SAFE rules. We have advised these shareholders and beneficial owners to comply with the relevant requirements. To date, the required filings are underway for all of our PRC resident shareholders. However, we cannot provide any assurance that all of our shareholders and beneficial owners who may be PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by SAFE rules. Under the terms of our Holdback Escrow Agreement, the failure or inability of Zhang Hui or Liu Juntao (but not our other PRC resident shareholders) to make any required registrations or comply with other requirements may result in the forfeiture of $100,000 currently held in escrow for our benefit, may subject such shareholders or beneficial owners to fines and legal sanctions and may also limit our ability to contribute additional capital into or provide loans to our PRC subsidiaries, limit the ability of our PRC subsidiaries to pay dividends or otherwise distribute profits to us, or otherwise adversely affect us.
Under the EIT Law, we may be classified as a resident enterprise of the PRC. Such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.
Under the EIT Law, an enterprise established outside of China with de facto management bodies within China is considered a resident enterprise, meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes, although the dividends paid to one resident enterprise from another may qualify as tax-exempt income. The implementing rules of the EIT Law define de facto management as substantial and overall management and control over the production and operations, personnel, accounting, and properties of the enterprise. The EIT Law and its implementing rules are relatively new and ambiguous in terms of some definitions, requirements and detailed procedures, and currently no official interpretation or application of this new resident enterprise classification is available; therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
We have been advised by our PRC legal counsel that we are, under the EIT Law, likely to be classified as a resident enterprise and that we are exempt from PRC income taxes because income from equity investments (such as dividends and bonuses) between resident enterprises is tax exempt.
If any PRC taxes apply to our non-PRC shareholders, a non-PRC shareholder may be entitled to a reduced rate of PRC taxes under an applicable income tax treaty and/or a foreign tax credit against such shareholders domestic income tax liability (subject to applicable conditions and limitations). You should consult with your own tax advisors regarding the applicability of any such taxes, the effects of any applicable income tax treaties, and any available foreign tax credits. In the event we become subject to the EIT Laws, our tax
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obligations can be expected to increase, which would adversely affect our net income, results of operations and future growth prospects.
Due to various restrictions under PRC laws on the distribution of dividends by our PRC operating companies, we may not be able to pay dividends to our shareholders.
The Wholly-Foreign Owned Enterprise Law (1986), as amended and The Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, such companies are required to set aside a certain amount of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. Tsingda Education and Tsingda Network are regulated by the laws governing foreign-invested enterprises in the PRC. Accordingly, Tsingda Education and Tsingda Network are required to allocate 10% of their after-tax profits based on PRC accounting standards each year to their general reserves until the accumulated amount of such reserves has exceeded 50% of their registered capital, after which no further allocation is required to be made. If a companys legal accumulations fund is not sufficient to make up for the losses of the company from the previous year, the current years profits are first used for making up the losses before the legal accumulations funds is drawn. As of December 31, 2009, the registered capitals of Tsingda Education and Tsingda Network are $4,421,156 and $588,235, respectively, and both companies have made the required allocations to the general reserves. These reserve funds, however, may not be distributed to equity owners except in accordance with PRC laws and regulations. We cannot assure you that the PRC government authorities will not request our subsidiaries to use their after-tax profits for their own development and restrict our subsidiaries ability to distribute their after-tax profits to us as dividends.
The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from the Companys profits.
Furthermore, if our subsidiaries or affiliates in China incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations through these contractual or dividend arrangements, we may be unable to pay dividends on our Ordinary Shares.
Changes in PRC regulations relating to tuitions may adversely affect our business.
Currently, we are not regulated by the Ministry of Education of the PRC due to the fact that we are a non-accredited learning center and do not offer certification programs. The types and amounts of fees charged by private schools offering certification programs must be approved by the relevant governmental authority and be publicly disclosed, and the types and amounts of fees charged by private schools that do not offer certification programs need only be filed with the relevant governmental authority and be publicly disclosed. If the PRC government decides to regulate private schools which do not offer certification programs similar to their regulations of certification programs, set limits on fees chargeable by us, or impose a special tax on our business, such events could significantly affect our operations.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us, our management or the experts named in this current report.
We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, all of our senior executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside of China upon our senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our PRC counsel has advised us that the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current structure, our income is primarily derived from Tsingda Education. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries and our affiliated entity to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also,
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at its discretion, restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.
Fluctuation in the value of RMB may have a material adverse effect on your investment.
The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Our revenues and costs are mostly denominated in RMB, while a significant portion of our financial assets are denominated in U.S. dollars. Our revenue is based entirely on that generated by our affiliated entity in China. Any significant fluctuation in value of RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our stock in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would make any new RMB denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes. An appreciation of RMB against the U.S. dollar would also result in foreign currency translation losses for financial reporting purposes when we translate our U.S. dollar denominated financial assets into RMB, as RMB is our reporting currency.
We face risks related to health epidemics and other outbreaks.
Our business could be adversely affected by the effects of an epidemic or outbreak that will cause social and economic disruptions in China, such as SARS or H1N1 flu. Any prolonged recurrence of SARS, H1N1 or other adverse public health developments in China may have a material adverse effect on our business operations as schools may be closed for an extended period of time. For instance, health or other government regulations adopted in response may require temporary closure of our production facilities or of our offices. Such closures would severely disrupt our business operations and adversely affect our results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreak of SARS, H1N1 or any other epidemic.
Risks Related to an Investment in Our Securities
We are not listed or quoted on any exchange and we may never obtain such a listing or quotation.
There is presently no public market in our shares and there may never be a market for our stock. Stock held by our shareholders may have little or no value. We cannot guarantee that our stock will be listed on a securities exchange or if a market for our stock listed will ever develop. Even if our shares are quoted for sale, buyers may be insufficient in numbers to allow for a robust market, and therefore, it may prove impossible to sell your shares.
To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.
We do not anticipate paying cash dividends on our Ordinary Shares in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We intend to retain all earnings from our operations.
The market price for our Ordinary Shares may be highly volatile.
The market price of our Ordinary Shares may be volatile due to certain factors, including, but not limited to, market trends in PRC stock generally; the limited number of free trading shares; quarterly fluctuations in our financial and operating results; general conditions in the PRC market; or changes in earnings estimates. Such volatility may make it more difficult, if not impossible, to sell your shares in such quantity or at such price as or when you determine. This volatility can be expected to harm our stock price, our ability to raise money in capital markets and our future growth prospects.
The NYSE Amex may delist our Ordinary Shares from listing on its exchange which could limit investors ability to make transactions in our securities and subject us to additional trading restrictions.
Even if our Ordinary Shares are approved for listing on the NYSE Amex, we cannot assure you we will meet the continued listing requirements to remain listed on NYSE Amex in the future we could face significant material adverse.
If the NYSE Amex delists our Ordinary Shares from trading on its exchange, we could face significant material adverse consequences, including:
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a determination that our Ordinary Shares constitute a penny stock which will require brokers trading in our Ordinary Shares to adhere to more stringent rules and likely resulting in a reduced level of trading activity in the secondary trading market for our Ordinary Shares; |
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a limited amount of news and analyst coverage for our company; and |
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a decreased ability to issue additional securities or obtain additional financing in the future. |
If our Ordinary Shares become subject to the SECs penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.
If the NYSE Amex delists our Ordinary Shares from trading on its exchange and if the trading price of our Ordinary Shares is below $5 per share, the open-market trading of our Ordinary Shares will be subject to the penny stock rules. The penny stock rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchasers written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our Ordinary Shares, and may result in decreased liquidity for our Ordinary Shares and increased transaction costs for sales and purchases of our Ordinary Shares as compared to other securities.
The market price for our Ordinary Shares may be volatile and subject to wide fluctuations in response to factors including the following:
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actual or anticipated fluctuations in our quarterly operating results; |
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changes in financial estimates by securities research analysts; |
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announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments; |
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addition or departure of key personnel; |
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fluctuations of exchange rates between RMB and the U.S. dollar; |
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intellectual property litigation;and |
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general economic or political conditions in China. |
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our stock.
We may need additional capital, and the sale of additional shares or other equity securities could result in additional dilution to our shareholders.
We believe that our current cash and cash equivalents, anticipated cash flow from operations and the net proceeds from the private placement of Ordinary Shares on September 16, 2010 will be sufficient to meet our anticipated cash needs for the near future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.
We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such companys internal controls over
17
financial reporting in its annual report, which contains managements assessment of the effectiveness of our internal controls over financial reporting.
Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our stock. Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
Currently, none of our employees, including our Chief Financial Officer, who is responsible for preparing and supervising the preparation of our financial statements, have any formal training in U.S. GAAP or SEC rules and regulations. In that regard, we prepare our financial statements and rely exclusively on our independent accountants and our outside counsel for advice with respect to U.S. GAAP and SEC rules and regulations. Therefore, there is a risk that our current or future financial statements may not be properly prepared in accordance with U.S. GAAP or that our current or future disclosures are not in compliance with SEC rules and regulations.
We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ordinary shares.
Based upon the projected composition of our income and valuation of our assets, including goodwill, and although it is not clear how the contractual arrangements with Tsingda Education will be treated for purposes of the passive foreign investment company rules, we do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our current taxable year ending December 31, 2011. However, we must make a separate determination each year as to whether we are a PFIC after the close of each taxable year. A non-U.S. corporation will be considered a PFIC for any taxable year if either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during the taxable year) is attributable to assets that produce or are held for the production of passive income. Because we expect to continue to hold a substantial amount of cash and other passive assets following this offering, and because the determination of whether we are a PFIC will depend on the character of our income and assets and the value of our assets from time to time, which may be based in part on the market price of our Ordinary Shares, we cannot assure you that we will not be a PFIC for our current taxable year ending December 31, 2011 or any future taxable year. If we were treated as a PFIC for any taxable year during which a U.S. Holder (as defined below) held an Ordinary Share, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. See Taxation U.S. Federal Income Taxation of U.S. Holders Passive Foreign Investment Company Status and Significant Tax Consequences.
Volatility in the price of our Ordinary Shares may subject us to securities litigation.
The market for our Ordinary Shares may be characterized by significant price volatility, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert managements attention and resources.
Our Ordinary Shares may be thinly traded and you may be unable to sell at or near ask prices, or at all, if you need to sell your shares to raise money or otherwise desire to liquidate your shares.
We have applied to have our Ordinary Shares listed on the NYSE Amex. Our Ordinary Shares may be thinly-traded, meaning that the number of persons interested in purchasing our Ordinary Shares at or near bid prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broad or active public trading market for our Ordinary Shares will develop or be sustained.
18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under Prospectus Summary, Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations, Business, and elsewhere in this prospectus constitute forward-looking statements. These statements involve risks known to us, significant uncertainties, and other factors which may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by those forward-looking statements.
You can identify forward-looking statements by the use of the words may, will, should, could, expects, plans, anticipates, believes, estimates, predicts, intends, potential, proposed, or continue or the negative of those terms. These statements are only predictions. In evaluating these statements, you should specifically consider various factors, including the risks outlined above. These factors may cause our actual results to differ materially from any forward-looking statement.
Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
19
USE OF PROCEEDS
We
estimate that the net proceeds from the sale of the 4,000,000 Ordinary Shares
in the Offering will be approximately $[-----------], based on an initial
public offering price of $[--] per share and after deducting the underwriting
discounts and commissions and estimated Offering expenses. We will receive net
proceeds of $[-----------] from the sale of Ordinary Shares pursuant to the
over-allotment option, if exercised in full.
We intend to use the net proceeds from the Offering for working capital and general corporate purposes.
The amounts and timing of our actual expenditures will depend on numerous factors, including the status of our expansion plans, marketing activities, and the amount of cash generated or used by our operations. We may find it necessary or advisable to use portions of the proceeds for other purposes, and we will have broad discretion in the application of the net proceeds. Additionally, we may choose to expand our current business through acquisition of other complimentary businesses, products or technologies, using cash or shares. However, we have not entered into any negotiations, agreements or commitments with respect to any such transactions at this time.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our Ordinary Shares have not been quoted or listed for trading on the OTCBB or on any stock exchange. We have applied to have our Ordinary Shares listed on the NYSE Amex Stock Exchange.
Holders
As the date hereof, we have the following securities issued and outstanding;
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- 33,729,862 Ordinary Shares, and |
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- warrants to acquire 2,464,500 Ordinary Shares. |
The total number of outstanding Ordinary Shares assuming the exercise of all outstanding warrants is 36,194,361 Ordinary Shares.
Rule 144 Shares
None of our issued and outstanding Ordinary Shares are currently available for resale to the public in accordance with the volume and trading limitations of Rule 144 of the Securities Act of 1933, as amended, due to the fact that immediately prior to the business combination transaction with Tsingda Technology, we were a shell company (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934). Accordingly, our Ordinary Shares may not be eligible for resale under Rule 144 until August 17, 2011, which is 12 months after the filing of our Second Amendment to our Current Report on Form 8-K disclosing the business combination.
In general, under Rule 144 as currently in effect, an affiliate who has beneficially owned shares of a companys common stock for at least six months, provided that the company has been subject to the reporting requirements of the Securities Exchange Act of 1934 for a minimum of 90 days, is entitled to sell within any three month period a number of shares that does not exceed the greater of:
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1% of the Ordinary Shares then outstanding which, in our case, will equal approximately 337,298 Ordinary Shares (or 361,943 Ordinary Shares assuming all our outstanding warrants are then exercised); or |
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2. |
the average weekly trading volume of the Ordinary Shares during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. |
Non-affiliates who have beneficially owned shares, for a period of at least six months, of a company that has been subject to the reporting requirements of the Securities Exchange Act of 1934 for a minimum ninety (90) days are not subject to the volume limitations set under rule 144(e).
Sales by affiliates under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about the company. Non-affiliates who have beneficially owned shares for a period of a year or longer are not subject to the currency of information requirements.
Transfer Agent and Registrar
Our transfer agent is Action Stock Transfer Corp., at the address of 7069 S. Highland Drive, Suite 300, Salt Lake City, Utah 84121. Its telephone number is (801) 272-1088.
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Dividend Policy
Since inception, we have not paid any dividends on our Ordinary Shares. We currently do not anticipate paying any cash dividends in the foreseeable future on our Ordinary Shares. Although we intend to retain our earnings, if any, to finance the exploration and growth of our business, our Board of Directors will have the discretion to declare and pay dividends in the future. Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our Board of Directors may deem relevant.
In addition, due to various restrictions under PRC laws on the distribution of dividends by our PRC operating companies, we may not be able to pay dividends to our shareholders. The Wholly-Foreign Owned Enterprise Law (1986), as amended and The Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law of the PRC (2006) contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, such companies are required to set aside a certain amount of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from the Companys profits. Furthermore, if our subsidiaries and affiliates in China incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or our subsidiaries and affiliates are unable to receive all of the revenues from our operations through the current contractual arrangements, we may be unable to pay dividends on our Ordinary Shares.
Securities Authorized for Issuance Under Equity Compensation Plans
We presently do not have any equity based or other long-term incentive programs. In the future, we may adopt and establish an equity-based or other long-term incentive plan if it is in the best interest of the Company and our Shareholders to do so.
21
CAPITALIZATION
The following table summarizes our capitalization as of December 31, 2010, on an actual basis and as adjusted basis to reflect our receipt of estimated net proceeds from the sale of 4,000,000 Ordinary Shares in this offering at an estimated public offering price of $[ ] per share.
You should read this table in conjunction with Use of Proceeds, Summary Consolidated Financial Information, Selected Consolidated Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included elsewhere in this prospectus.
As of December 31, 2010 |
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Actual |
As adjusted (1)
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4,086,214+ [IPO | ||||||||
Cash and cash equivalents | $ | 4,086,214 | $ | proceeds] | ||||
Preferred stock, $0.000128 par, 781,250 shares authorized actual | ||||||||
and as adjusted, none shares issued and outstanding actual and as | ||||||||
adjusted | - | - | ||||||
Ordinary Shares, $0.000384 par, 100,000,000 shares authorized | ||||||||
actual and as adjusted, 33,729,862 and 37,729,862 issued and | ||||||||
outstanding actual and as adjusted | 12,952 | 14,488 | ||||||
13,523,180+ | ||||||||
Additional paid-in capital | 13,523,180 | $ | [ ]*4,000,000*0.000384 | |||||
Statutory reserves | 2,370,615 | 2,370,615 | ||||||
Retained earnings | 16,512,297 | 16,512,297 | ||||||
Accumulated other comprehensive income | 957,262 | 957,262 | ||||||
Total shareholders equity | 33,376,306 | [ ] | ||||||
Total capitalization | $ | 33,376,306 | $ | [ ] | ||||
(1) Gives effect to the completion of the offering at an assumed public offering price of $[ ] per share and to reflect the application of the proceeds after deducting the estimated underwriting discounts and our estimated offering expenses. For purposes of this calculation, we have assumed the offering of 4,000,000 shares.
Pro forma adjusted for offering additional paid in capital reflects the net proceeds we expect to receive, after deducting a 8% underwriting discount, a 1% non-accountable expense allowance and approximately $[ ] in expenses ($[ ] in expenses and $[ ] in accountable expenses of our underwriter). We expect to receive net proceeds of $[ ] ($[ ] offering, less underwriting discount of $[ ], non-accountable expense allowance of $?? and offering expenses of $[ ]).
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DILUTION
If you invest in our securities, your investment will be diluted immediately to the extent of the difference between the public offering price per ordinary share you pay in this Offering, and the pro forma net tangible book value per ordinary share of immediately after this Offering.
Pro forma net tangible book value represents the amount of our total tangible assets reduced by our total liabilities. Tangible assets equal our total assets less goodwill and intangible assets. Pro forma net tangible book value per share represents our pro forma net tangible book value divided by the number of ordinary shares. As of December 31, 2010, our pro forma net tangible book value was $28,638,989 million and our pro forma net tangible book value per share was $0.85.
After giving effect to the sale of 4,000,000 ordinary shares in the offering at a public offering price of $[--] per share, and after deducting the underwriting discount and commission and estimated Offering expenses, our adjusted pro forma net tangible book value as of December 31, 2010 would have been $[--] million, or $[--] per share. This represents an immediate increase in pro forma net tangible book value of $[--] per share to existing stockholders and immediate dilution of $[--] per share to new investors purchasing shares in the Offering.
The following table illustrates this per share dilution:
As of December 31, 2010 |
As Adjusted |
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Public offering price per share | $ | |||||
Pro forma net tangible book value per share as of December 31, 2010 | $ | 28,638,989 |
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Increase in pro forma net tangible book value per share attributable to new | ||||||
investors | ||||||
Adjusted pro forma net tangible book value per share after the Offering | ||||||
Dilution in net tangible book value per share to new investors | $ | |||||
The information above is as of December 31, 2010 and excludes the following: |
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2,100,000 shares of Ordinary shares issuable upon the exercise of options outstanding at December 31, 2010 with an exercise price of $2.08 per share;
Our adjusted pro forma net tangible book value after the offering, and the dilution to new investors in the offering, will change from the amounts shown above if the underwriters over-allotment option is exercised.
A $1.00 increase or decrease in the assumed public offering price per share would increase or decrease our adjusted pro forma net tangible book value per share after this Offering by approximately $[--], and dilution per share to new investors by approximately $[---], after deducting the underwriting discount and estimated offering expenses payable by us.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and financial condition of the Company for the fiscal years ended December 31, 2010 and 2009, should be read in conjunction with the notes to the financial statements that are included elsewhere herein. The consolidated financial statements presented herein (and to which this discussion relates) reflect the results of operations of Tsingda Technology (as defined below) and its variable interest entities, for the fiscal years ended December 31, 2010 and 2009 and reflect the acquisition of the Company pursuant to the Share Exchange Agreement (as defined below) under the purchase method of accounting. Subsequent to May 24, 2010, the operations of the Company reflected the combined operations of the Company and Tsingda Technology (including Tsingda Education and Tsingda Network). Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. We use words such as anticipate, estimate, plan, project, continuing, ongoing, expect, believe, intend, may, will, should, could, and similar expressions to identify forward-looking statements. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this prospectus, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this prospectus, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
COMPANY OVERVIEW
On May 24, 2010, Tsingda eEDU, f/k/a Compass Acquisition Corporation, and its controlling shareholders entered into a share exchange agreement (Share Exchange Agreement) with Tsing Da Century Education Technology Co. Ltd., a British Virgin Islands business company (Tsingda Technology), and its shareholders.
Tsingda Technology owns 100% of the issued and outstanding capital stock of Beijing Tsingda Century Management Consulting Ltd. (Tsingda Management), a wholly foreign owned enterprise incorporated under the laws of the Peoples Republic of China (PRC). On April 26, 2010, Tsingda Management entered into a series of contractual agreements with Beijing Tsingda Century Investment Consultant of Education Co. Ltd (Tsingda Education), a company incorporated under the laws of the PRC, and its shareholders, in which Tsingda Management effectively assumed management of the business activities of Tsingda Education. Beijing Tsingda Century Network Technology Co. Ltd., a PRC company, is a wholly owned subsidiary of Tsingda Education. The contractual arrangements are comprised of a series of agreements, including a Consulting Services Agreement, Operating Agreement, Proxy Agreement, and Option Agreement, through which Tsingda Management has the right to advise, consult, manage and operate Tsingda Education for a quarterly fee in the amount of 100% of Tsingda Educations quarterly, after tax net profits. Additionally, Tsingda Educations shareholders have pledged their rights, titles and equity interest in Tsingda Education as security for Tsingda Management to collect consulting and service fees through an Equity Pledge Agreement. In order to further reinforce Tsingda Managements rights to control and operate Tsingda Education, Tsingda Educations shareholders have granted Tsingda Management the exclusive right and option to acquire all of their equity interests in Tsingda Education through the Option Agreement.
As all of the companies are under common control, this structure has been accounted for as a reorganization of entities and the financial statements have been prepared as if the reorganization had occurred retroactively.
Tsingda
Education, with its subsidiary Tsingda Network, is a leading provider of online
educational services in the PRC, offering classes through pre-recorded lessons
and in real-time via its Tsingda Vitrual Internet Classroom. To the best of its
knowledge, the Company believes it runs the largest chain of learning centers
in China in terms of the number of learning centers, known as Tsingda Learning
Centers. These educational centers principally target elementary school
students and consist mainly of franchised locations. As of December 31, 2010,
there were 2,346 Tsingda Learning Centers across China, which
24
includes 21
Company-owned learning centers and 2,325 franchised learning centers. We also
have developed a robust, interactive educational platform which allows students
to search and subscribe to virtual classrooms offered by a wide range of
teachers in the PRC. Our students may choose to access our courses online
either at one of our learning centers, at home or at any other location that
has a computer with internet access.
We have franchise agreements with each of our franchised locations. These franchise agreements are typically effective for a one year term. The franchised locations must conform to certain operating requirements of the Company, such as the quality of products and services offered and participation of promotional activities. Each franchised location pays an initial franchise licensing fee to the Company as well as an annual management fee at the end of each subsequent year. The Company offers discounted e-cards (used by our students to purchase courses) to the franchised locations. Our franchisees pay an initial franchise licensing fee of between $7,000 and $10,000 per location depending on franchise territory, and thereafter, franchisees pay an annual management fee equal to 10% of their initial franchise licensing fee. A franchisee receives e-cards from the Company with a face value equal to five times the amount of franchise and management fees paid. Our franchisees also have the option to purchase additional e-cards at the same 80% discount. Franchisees earn revenues from the sale of e-cards to students at face value. In other words, for every dollar spent by our students, our franchisees take eighty cents. With respect to the remaining twenty cents, the Company splits this on a 40%-60% basis with teachers in connection with real-time courses and on a 90%-10% basis with teachers in connection with pre-recorded courses. Factoring the discount taken by our franchisees and revenue splitting with our teachers, the Company earns 18% of revenues generated from sales of e-cards used for pre-recorded courses and 8% of revenues generated from sales of e-cards used for real-time courses from revenues generated from the sale of e-cards. Each e-card has a specific serial number, and our IT server tracks the opening and usage of these cards in real time. We use this information in order to accurately allocate revenues among teachers. Beginning August 2010, the Company began to generate revenue via the sale of reference materials and publications.
Our financial statements are prepared in US Dollars and in accordance with accounting principles generally accepted in the United States. See Critical Accounting Policies - Foreign Currency Translation below for information concerning the exchange rates at the Renminbi (RMB) were translated into US Dollars (USD) at various pertinent dates and for pertinent periods.
Recruitment of Students
The following table shows the change in the number of active students from 2008 through 2010.
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2008 |
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104,550 |
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121,394 |
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132,485 |
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115,126 |
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2009 |
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182,239 |
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204,482 |
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250,553 |
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237,357 |
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2010 |
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301,203 |
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328,813 |
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337,440 |
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373,196 |
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Note: We classify students who have provided us with their personal information as registered. Registered students who have purchased an e-card or are using an e-card to purchase our courses are classified as active. Students who have purchased an e-card and have not used an e-card for more than one year are de-classified from active status and classified as registered. The numbers in the table above are calculated based on the number of newly active students minus (-) the number of active students lost in the specified quarter.
Online Content
The Company
has continued to add new courses. For purposes of the following table, new
courses means (i) newly created courses that were not previously available and
(ii) previously available courses which have been revised or updated.
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2008 |
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79,521 |
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150,210 |
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100,154 |
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76,471 |
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2009 |
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60,000 |
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78,652 |
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68,015 |
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15,332 |
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2010 |
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91,200 |
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90,524 |
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74,200 |
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98,496 |
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Courses Sold
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Tsingda Virtual Internet Classroom |
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Total Hours |
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Total Courses Purchased |
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Total Unique |
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2008 |
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175,166.66 |
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289 |
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4,039,013 |
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2,203 |
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2009 |
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772,342.75 |
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481 |
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5,511,754 |
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3,672 |
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2010 |
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2,277,739.71 |
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977 |
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7,176,115 |
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6,869 |
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For our Tsingda Virtual Internet Classroom platform, figures under the column Total Courses Purchases represents the total number of different courses purchased by at least one student and Total Hours represents the number of student-hours purchased by our students. A single student attending a course for one hour equals one student-hour. For example, through December 31, 2010, a total of 977 courses were purchased by at least one student. Because multiple students may be in attendance for our real-time courses, the purchase of these 977 courses by our students resulted in an aggregate of approximately 2,277,739.71 student-hours.
For our Pre-Recorded courses, figures under the column Total Unique Courses Purchased represents the number of different courses purchased by our students and Aggregate Number of Courses Purchases refers the aggregate number of times a pre-recorded course was purchased. For example, through December 31, 2010, a total of 6,869 different courses were purchased by our students. Because pre-recorded courses may be purchased by different students over and over, these 6,869 courses were actually purchased an aggregate of 7,176,115 times.
Sale of e-Cards
The Company has continued to see increased sales of e-cards, which are used by students to purchase our course offerings.
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2008 |
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6,728,626.47 |
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6,372,666.18 |
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8,692,105.88 |
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8,420,047.06 |
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2009 |
|
|
15,428,244.10 |
|
|
16,299,183.82 |
|
|
18,187,279.4 |
|
|
16,907,319.10 |
|
2010 |
|
|
16,835,727.90 |
|
|
26,459,676.47 |
|
|
37,106,079.40 |
|
|
33,077,838.84 |
|
Note: The Company sells e-cards at an average discount of 80% to franchised learning centers who then re-sell e-cards to students at face value. The face value of e-cards sold refers to the amount paid by students.
Revenue Breakdown
For the fiscal
years 2008, 2009 and 2010, the tables below break down the source of our
revenues. We generate most of our revenues through franchise licensing fees,
management fees, sales of e-cards, and, beginning August 2010, the sale of
reference books and materials. Our franchisees pay an initial franchise
licensing fee of between $7,000 and $10,000 per location depending on franchise
territory, and thereafter, franchisees pay an annual management fee equal to
10% of their initial franchise licensing fee. A franchisee receives e-cards
from the Company with a face value equal to five times the amount of franchise
and management fees paid. Our franchisees also have the option to purchase
additional e-cards at the same 80% discount. Franchisees earn revenues from the
sale of e-cards to students at face value. In other words, for every dollar
spent by our students, our franchisees take eighty cents. With respect to the
remaining
26
twenty cents,
the Company splits this on a 40%-60% basis with teachers in connection with
real-time courses and on a 90%-10% basis with teachers in connection with
pre-recorded courses. Factoring the discount taken by our franchisees and
revenue splitting with our teachers, the Company earns 18% of revenues
generated from sales of e-cards used for pre-recorded courses and 8% of
revenues generated from sales of e-cards used for real-time courses from
revenues generated from the sale of e-cards. Each e-card has a specific serial
number, and our IT server tracks the opening and usage of these cards in real
time. We use this information in order to accurately allocate revenues among
teachers.
2008 Revenue Breakdown (in Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
Licensing |
|
Annual |
|
Pre-Recorded |
|
Tsingda |
|
Materials and |
|
Others |
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Q1/2008 |
|
$ |
886,424 |
|
$ |
997 |
|
$ |
595,603 |
|
|
|
|
|
|
|
$ |
51,324 |
|
$ |
1,534,348 |
|
Q2/2008 |
|
$ |
883,146 |
|
$ |
6,612 |
|
$ |
673,168 |
|
|
|
|
|
|
|
$ |
2,069 |
|
$ |
1,564,995 |
|
Q3/2008 |
|
$ |
1,251,769 |
|
$ |
19,772 |
|
$ |
843,076 |
|
$ |
15,294 |
|
|
|
|
$ |
4,691 |
|
$ |
2,134,602 |
|
Q4/2008 |
|
$ |
990,222 |
|
$ |
67,753 |
|
$ |
791,058 |
|
$ |
139,264 |
|
|
|
|
$ |
79,491 |
|
$ |
2,067,788 |
|
Total |
|
$ |
4,011,561 |
|
$ |
95,134 |
|
$ |
2,952,905 |
|
$ |
154,558 |
|
|
|
|
$ |
137,575 |
|
$ |
7,301,733 |
|
2009 Revenue Breakdown (in Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
Licensing |
|
Annual |
|
Pre-Recorded |
|
Tsingda |
|
Materials and |
|
Others |
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Q1/2009 |
|
$ |
1,568,720 |
|
$ |
28,634 |
|
$ |
1,484,116 |
|
$ |
220,205 |
|
|
|
|
$ |
50,247 |
|
$ |
3,351,922 |
|
Q2/2009 |
|
$ |
1,705,551 |
|
$ |
26,494 |
|
$ |
1,514,852 |
|
$ |
258,088 |
|
|
|
|
$ |
83,335 |
|
$ |
3,588,320 |
|
Q3/2009 |
|
$ |
1,732,691 |
|
$ |
37,553 |
|
$ |
1,638,605 |
|
$ |
254,374 |
|
|
|
|
$ |
279,184 |
|
$ |
3,942,407 |
|
Q4/2009 |
|
$ |
1,806,543 |
|
$ |
29,706 |
|
$ |
1,645,104 |
|
$ |
275,970 |
|
|
|
|
$ |
10,891 |
|
$ |
3,768,214 |
|
Total |
|
$ |
6,813,505 |
|
$ |
122,387 |
|
$ |
6,282,677 |
|
$ |
1,008,637 |
|
|
|
|
$ |
423,657 |
|
$ |
14,650,863 |
|
27
2010 Revenue Breakdown (in Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
Licensing |
|
Annual |
|
Pre- |
|
Tsingda |
|
Materials and |
|
Others |
|
Total |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Q1/2010 |
|
$ |
1,308,823 |
|
$ |
37,968 |
|
$ |
2,136,709 |
|
$ |
161,697 |
|
|
|
|
$ |
4,961 |
|
$ |
3,650,158 |
|
Q2/2010 |
|
$ |
1,854,665 |
|
$ |
41,388 |
|
$ |
3,040,743 |
|
$ |
820,653 |
|
|
|
|
$ |
7,862 |
|
$ |
5,765,311 |
|
Q3/2010 |
|
$ |
2,947,794 |
|
$ |
42,067 |
|
$ |
3,865,578 |
|
$ |
1,095,375 |
|
$ |
1,361,622 |
|
$ |
4,366 |
|
$ |
9,316,802 |
|
Q4/2010 |
|
$ |
2,293,865 |
|
$ |
43,504 |
|
$ |
3,670,276 |
|
$ |
1,037,906 |
|
$ |
1,284,110 |
|
|
|
|
$ |
8,329,660 |
|
Total |
|
$ |
8,405,148 |
|
$ |
164,928 |
|
$ |
13,098,915 |
|
$ |
3,115,633 |
|
$ |
2,645,731 |
|
$ |
17,190 |
|
$ |
27,447,545 |
|
(1): Materials and publications include reference books and materials, either self-branded or cooperative. Sales of reference books and materials began in August, 2010.
Students must use e-cards to purchase all online content, while the purchase of reference books and materials are transacted in cash. The sales of reference books and materials began in August, 2010, and account for approximately 9.6% of total revenue in 2010. While the sale of e-cards continues to be the single biggest source of revenue, franchise licensing fees and sales of reference materials make up a substantial portion of our revenue.
PRC Regulation of Franchise Business
We have made all required filings and met all requirements under PRC law to legally operate a franchise business in the PRC. The required filings include (i) copies of the business license or enterprise registration certificate; (ii) a sample franchise contract; (iii) a brochure for franchise operations; (iv) a marketing plan; (v) written commitment and relevant materials proving that the relevant provisions have been followed; and (vi) other documents and materials required by relevant governing authorities.
The legal requirements to operate a franchise business in the PRC under the Regulation on the Administration of Commercial Franchises require the franchisor to possess a mature business model and the ability to provide long-term business guidance, technical support, business training and other services to its franchisees. The franchisor must have at least two direct sales stores, and have been engaged in the business for more than a year. If this franchisor conducts its operations within the scope of a single province, autonomous region, or municipality directly under the PRC Central Government, it is required to file the required legal documents with the relevant governing authorities of the province, autonomous region or municipality directly under the PRC Central Government; and if the franchisor conducts its operations within the scope of two or more provinces, autonomous regions, or municipalities directly under the PRC Central Government, it is required to file the required legal documents with the competent commercial authority of the State Council.
Our Growth Strategy
Our growth and expansion strategy for the next 6 to 12 months includes the following measures, the cost of which is expected to come from our existing revenue stream:
|
|
|
Increase the number of Company-owned learning centers. As of December 31, 2010, we have 21 Company-owned locations. Due to the size of our Company-owned locations, we are able to absorb higher student traffic and generate higher overall revenues compared to franchised locations. We also recognize 100% of the revenue stream from these locations. For the year 2011, we plan to complete construction of 9 Company-owned locations that currently are under |
28
|
|
|
construction and open another 30 Company-owned locations. The aggregate estimated cost to open these locations is $4,000,000. |
|
|
|
Increase the number of franchised learning centers. As of December 31, 2010, we had 2,346 locations with over 1,400 of them located in 2nd and 3rd tier cities. We estimate there are approximately 50,000 2nd and 3rd tier cities in the PRC. Our plan is to increase the number of franchised learning centers by increasing our advertising and marketing initiatives in an effort to attract more franchisees. We plan on spending approximately $1.2 million on a broad scale brand promotional campaign. This campaign will target a number of media outlets, including advertisements on regional television and in local newspapers in select markets, as well as holding periodic regional events in these markets, all of which will be designed to attract franchisees. Through early 2011, the Company has agreements to open approximately 600 new franchised learning centers. |
|
|
|
Increase traffic to our virtual classrooms. We plan to allocate more capital resources to the marketing and promotion of our virtual classrooms. The above mentioned brand promotion campaign will include sponsoring events at prominent high schools designed to promote our virtual classrooms, advertising in school newspapers, and to a lesser extent, subscribing to more per click ad space on selected Internet sites, such as Sina.com and Yahoo.com.cn. We also expect to experience increased traffic to our virtual classrooms coincident with our franchise expansion efforts. Since introduction of this platform, historical results have indicated that a majority of our virtual classroom subscribers have originated from our learning centers. |
We plan to establish additional learning centers in 2011 as follows:
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
New company-owned learning centers |
|
|
39 |
|
Total company-owned learning centers |
|
|
60 |
|
New franchised learning centers |
|
|
600 |
|
Total franchised learning centers |
|
|
2,900 |
|
Total Learning Centers |
|
|
2,960 |
|
On average, the total cost of opening a Company-owned learning center is approximately $100,000, as described in further detail in the following table:
|
|
|
|
|
Interior decoration |
|
$ |
22,059 |
|
Equipments and facilities |
|
$ |
5,882 |
|
6-month Rent (paid up front) |
|
$ |
44,118/6 month |
|
Deposit |
|
$ |
7,353/month |
|
Miscellaneous |
|
$ |
22,059 |
|
Total |
|
$ |
101,471 |
|
In order to execute our plan of expanding our business operations, we will need to (i) increase the number of our learning centers, (ii) scale and adapt our existing network infrastructure to accommodate increased systems traffic and (iii) increase our marketing efforts. Through 2011 we plan open approximately 600 additional franchised locations; in the next six months, we plan on spending approximately $1.2 million on a broad scale brand promotional campaign; and we will need significantly more computing power as traffic within our system increases and our learning center locations expand. We will be required to spend significant capital and resources to manage our additional franchises, execute our promotional campaign and to purchase equipment, and upgrade our technology and network infrastructure to handle increased Internet traffic. In this regard, we have budgeted approximately $1.2 million for our market campaign, approximately $1.4 million for IT expenditures, and approximately 1.8 million to add and improve our course content in 2011.
In November 2010 we began offering live courses through our company-owned learning centers which are all located in Beijing. Depending on the initial response to these live courses, we may consider expanding our live course
offerings to Company-owned learning centers in other first-tier cities. We do not intend to offer live courses through our franchise-owned learning centers, nor do we intend that any of our Company-owned learning centers will become solely dedicated
to live course offerings.
Live courses are taught on either a one-to-one basis or with up to 10 students. As with all of our course offerings, students purchase live courses by purchasing e-cards. Students can choose any combination of live, online or pre-recorded courses for all of their education needs. We charge more for live courses than for online or pre-recorded courses. During the year ended December 31, 2010, revenue generated from providing live courses was less than 1% of our total revenue.
Marketing and Promotion
Our marketing
efforts target three principal areas; franchisees, students for our
Company-owned learning
29
centers, and
students for our virtual classrooms.
We attract franchisees by conducting regional seminars on a periodic basis in areas that we have targeted for expansion, as well as advertising on regional television and in local newspapers in these areas. These efforts have produced in excess of 2,300 operating franchisees. Our Company-owned learning centers are in close proximity to schools and large residential areas. We have been able to attract students to our learning centers principally through the distribution of leaflets in the nearby areas.
Traffic to our virtual classrooms has been driven principally by students from our learning centers. We expect to increase traffic to our virtual classrooms commensurate with the numerical increase in our learning centers.
We will continue these marketing measures for the foreseeable future.
Through December 31, 2011, we plan to spend approximately $4.7 million on marketing, as described in further detail in the following table:
|
|
|
|
|
Recruitment of students |
|
$ |
1,764,706 |
|
Recruitment of franchise |
|
$ |
735,294 |
|
Brand promotion |
|
$ |
441,176 |
|
Online Platform |
|
$ |
1,764,706 |
|
Total |
|
$ |
4,705,882 |
|
30
Results of Operations (Unaudited) for the
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
The following table sets forth key components of the Tsingda Educations results of operations for the periods above indicated in dollars. The discussion following the table addresses these results.
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITOIN CORPORATION)
Consolidated Statements of Operations and Comprehensive Income
(Stated in US dollars)
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
||||
|
|
|
|
||||
|
|
2010 |
|
2009 |
|
||
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
Revenue |
|
$ |
27,447,545 |
|
$ |
14,650,863 |
|
Cost of revenue |
|
|
6,011,094 |
|
|
2,231,202 |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
21,436,451 |
|
|
12,419,661 |
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses |
|
|
6,199,618 |
|
|
3,460,803 |
|
General and administrative expenses |
|
|
3,205,802 |
|
|
1,900,063 |
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9,405,420 |
|
|
5,360,866 |
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
12,031,031 |
|
|
7,058,795 |
|
|
|
|
|
|
|
|
|
Interest income |
|
|
31,102 |
|
|
80,973 |
|
Realized gain from short-term investment |
|
|
73,861 |
|
|
|
|
Other expense |
|
|
(257 |
) |
|
(19,638 |
) |
|
|
|
|
|
|
|
|
Income before income tax |
|
|
12,135,737 |
|
|
7,120,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses |
|
|
1,834,541 |
|
|
1,068,020 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,301,196 |
|
$ |
6,052,110 |
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss) |
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
721,997 |
|
|
(40,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
11,023,193 |
|
$ |
6,011,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basic and diluted |
|
$ |
0.36 |
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
Weighted average number of shares, basic and diluted |
|
|
28,242,518 |
|
|
24,402,278 |
|
Revenues. For the year ended December 31, 2010, we had revenues of $27,447,545 as compared to revenues of $14,650,863 for the year ended December 31, 2009, an increase of approximately 87%. Our revenue growth is due to an increase of the number of franchised locations, along with the continued growth of the Companys Tsingda Virtual Internet Classroom platform.
Cost of revenue. For
the year ended December 31, 2010, we had cost of revenue of $6,011,094 as
compared
31
to cost of
$2,231,202 for the year ended December 31, 2009, an increase of approximately
169%. Our cost growth is due to increases of depreciation of leasehold
improvement, amortization, rent expense for company owned learning centers, and
other cost items.
Expenses. For the year ended December 31, 2010, we had expenses, which are comprised of selling and general and administrative expenses, of $9,405,420 as compared to expenses of $5,360,866 for the year ended December 31, 2009, an increase of approximately 75%.
Selling expenses include salaries, advertising, and printing and meetings. For the year ended December 31, 2010, we had selling expenses of $6,199,618 as compared to $3,460,803 for the comparable period from the prior year, an increase of 79%. The increase in selling expenses is mainly a result of the Companys efforts to increase its business through increased advertising.
General and administrative expenses include rent, corporate salaries, and related expenses. For the year ended December 31, 2010, we had general and administrative expenses of $3,205,802 as compared to $1,900,063 for the comparable period from the prior year. The increase is mainly driven by the increases in depreciation, amortization and consulting expenses.
Realized gain on short-term investment. Other income for year ended December 31, 2010 was $104,706 compared with $61,335 for the comparable period from the prior year. The increase in other income was due to the realized gain of $73,861 from selling a matured short-term investment during the year ended December 31, 2010 and decrease in interest income.
Income Before Taxes. Income before taxes for the year ended December 31, 2010 was $12,135,737 compared with $7,120,130 for the comparable period from the prior year, which represents an increase of 70%. The increase was due to the various reasons stated above.
Net Income. We had net income for the year ended December 31, 2010 of $10,301,196 compared with $6,052,110 for the prior twelve month period, an increase of 70%. The increase in net income was due to the various reasons stated above.
Other Comprehensive Income. We had other comprehensive income of $721,997, and other comprehensive loss of $40,113 for the year ended December 31, 2010 and December 31, 2009, respectively. The increase in other comprehensive income was the result of foreign currency translation gain.
Total Comprehensive Income. We had total comprehensive income of $11,023,193 and $6,011,997 for the year ended December 31, 2010 and December 31, 2009, respectively, representing an increase of 83%. The increase in total comprehensive income was due to the various reasons stated above.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to Shareholders.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2010, we had working capital of $11,381,531 compared with working capital of $7,900,299 as of December 31, 2009.
Changes in our working capital are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
Increase in |
|
|||
|
|
|
|
|
|
|
|
|||
Total current assets |
|
$ |
21,174,491 |
|
$ |
11,632,543 |
|
$ |
9,541,948 |
|
Total current liabilities |
|
|
9,792,960 |
|
|
3,732,244 |
|
|
6,060,716 |
|
Working Capital |
|
$ |
11,381,531 |
|
$ |
7,900,299 |
|
$ |
3,481,232 |
|
|
|
|
|
|
|
|
|
|
|
|
32
Our increase
in working capital is primarily attributable to a net increase in cash of
approximately $3,627,569,
the result of retaining operating cash flows, an increase in advances to
suppliers of $4,488,039, and an
increase in accounts receivable of $2,196,217,
partially offset by an increase in taxes payable of $3,063,977. Further, the increase in our working capital is
primarily as a result of increased net profits for the twelve month period
ending December 31, 2010. The increase in advances to suppliers was mainly for
prepayment of construction and renovation costs at Company-owned locations. The
increase in net profits is partially due to increasing scale of franchise system and partially due to
increased efforts to collect our accounts receivable. We experienced increased
consumption of our courses throughout the summer months. Revenue generated
during the summer months accounted for approximately 33.8% and 31% for 2010 and 2009, respectively.
Our primary uses of cash have been for selling and marketing expenses, employee compensation, and working capital. The main sources of cash have been revenues from franchisees and from our Company-owned locations.
We believe the following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
|
|
|
|
|
An increase in working capital requirements to finance the growth of our Company-owned locations, |
|
|
|
|
|
Addition of administrative and marketing personnel as the business grows, |
|
|
|
|
|
Increases in advertising, public relations and sales promotions for our franchising efforts in new and existing markets, |
|
|
|
|
|
Software development and the purchase of servers commensurate with student population growth, and |
|
|
|
|
|
The cost of being a public company and the continued increase in costs due to governmental compliance activities. |
The Company currently generates cash flow through operations which we believe will be sufficient to sustain current operations for at least the next year.
Cash flows from operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
The following summarizes the key components of our cash flows for the year ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
||||
|
|
2010 |
|
2009 |
|
||
|
|
|
|
|
|
||
Net cash provided by operating activities |
|
$ |
10,972,626 |
|
$ |
3,159,852 |
|
Net cash consumed by investing activities |
|
$ |
(16,630,096 |
) |
$ |
(4,887,929 |
) |
Net cash provided by financing activities |
|
$ |
8,606,327 |
|
$ |
(131,562 |
) |
Effect on cash of foreign exchange rates |
|
$ |
678,712 |
|
$ |
4,022 |
|
Net change in cash |
|
$ |
3,627,569 |
|
$ |
(1,855,617 |
) |
Cash Balance (Beginning of Period) |
|
$ |
458,645 |
|
$ |
2,314,262 |
|
Cash Balance (End of Period) |
|
$ |
4,086,214 |
|
$ |
458,645 |
|
The net cash provided by operating activities for the year ended
December 31, 2010 was $10,972,626,
compared with $3,159,852 for
the year ended December 31, 2009. The increase in cash inflow was the primary
cause of the increase in net income for the year ended December 31, 2010
compared with the year
33
ended December
31, 2009.
The net cash consumed by investing activities for year ended December 31, 2010 was $16,630,096, compared with $4,887,929 for the year ended December 31, 2009. The increase was primarily due to the additions to fixed assets and intangible assets, which were primarily composed of on-line teaching software and materials and payments for leasehold improvements not completed on company-owned learning centers.
The net cash provided by financing activities for the year ended December 31, 2010 was $8,606,327 compared with $(131,562) for the year ended December 31, 2009. The increase was primarily due to the closing of a private placement of gross proceeds of about US $9.6 million in September 2010.
The effect on cash of exchange rates was a gain of $678,712 for the year ended December 31, 2010, compared with a gain of $4,022 for the year ended December 31, 2009.
The difference between the closing balance of cash and cash equivalents for the year ended December 31, 2010 and 2009 is due to the reasons mentioned above.
As of December 31, 2010, we had working capital of $11,381,531 compared with working capital of $7,900,299 as of December 31, 2009.
Our primary uses of cash have been for selling and marketing expenses and employee compensation. The main sources of cash have been revenues from franchisees and from our Company-owned locations. The Company currently generates its cash flow through operations which it believes will be sufficient to sustain current level operations for at least the next twelve months.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements.
A summary of significant accounting policies is included in Note 2 to the audited consolidated financial statements for the year ended December 31, 2010. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.
Variable Interest Entities
Pursuant to
Financial Accounting Standards Board Interpretation ASC 810,
Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51 we are required to include in our consolidated financial statements
the financial statements of variable interest entities. ASC 810 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss for the variable interest entity or
is entitled to receive a majority of the variable interest entitys
34
residual
returns. Variable interest entities are those entities in which we, through
contractual arrangements, bear the risk of, and enjoy the rewards normally
associated with, ownership of the entity, and therefore we are the primary
beneficiary of the entity.
Tsingda Education is considered a variable interest entity (VIE), and we are the primary beneficiary. On April 26, 2010, we entered into agreements with Tsingda Education pursuant to which we receive a quarterly fee in an amount equal to all of Tsingda Educations quarterly, after tax net profits. Tsingda Management will supply the technology and administrative services needed to service Tsingda Education.
The accounts of Tsingda Education are consolidated in the accompanying financial statements pursuant to ASC 810. As a VIE, Tsingda Educations sales are included in our total sales, its income from operations is consolidated with ours, and our net income includes all of Tsingda Educations net income. We do not have any non-controlling interest and accordingly, did not subtract any net income in calculating the net income attributable to us. Because of the contractual arrangements, we have pecuniary interest in Tsingda Education that requires consolidation of Tsingda Educations financial statements with our financial statements.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements
have been prepared in accordance with U.S, Generally Accepted Accounting
Principles (US GAAP).The Companys functional currency is the Chinese
Renminbi (RMB); however the accompanying financial statements have been
translated and presented in United States Dollars ($).
Consolidated Statements
The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, (Tsingda Technology, and Tsingda Management), and Tsingda Century and its subsidiaries, Tsingda Network and Tsingda Century Training School. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the allowance for doubtful accounts; the fair value determination of financial and equity instruments, the reliability of deferred tax assets; the recoverability of, intangible asset and property, plant and equipment; and accruals for income tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
Reclassification
Certain amounts in the consolidated financial statements for the prior
year have been reclassified to conform to the presentation of the current year
for the comparative purposes.
Risk and Uncertainties
Tsingda
Century and Tsingda Network operate under the authority of business
licenses which were granted in 2003, and expire in 2023. Renewal of these
licenses will depend on the result of government inspections which are made to
ensure environmental laws are not breached.
The officers
of the Company control through direct ownership of most of the equity interests
of the Company. As a result, insiders will be able to control the outcome of
all matters requiring approval of
35
equity owners
and will be able to elect all of the Company directors.
Cash and Cash Equivalents
For Statement of Cash Flows purposes, the Company considers all cash
on hand and in banks, including accounts in book overdraft positions,
certificates of deposit and other highly-liquid investments with original
maturity of three months or less, when purchased, to be cash and cash
equivalents. The Company maintains cash with various banks and trust companies
located in China. Cash accounts are not insured or otherwise protected. Should
any bank or trust company holding cash deposits become insolvent, or if the
Company is otherwise unable to withdraw funds, the Company would lose the cash
on deposit with that particular bank or trust company.
Short-Term
Investments
The Company invested in a financial product, which is
similar to notes receivable, with maturity of four months, provided by a small
investment company in China in the year ended December 31, 2009. The short-term
investment is recorded at cost which approximates the fair market value. As of
December 31, 2010, the short-term investment has been matured and fully
collected with a gain.
Accounts
Receivable and Allowance For Doubtful Accounts
Accounts receivable are recognized and carried at the
invoiced amount less an allowance for uncollectible accounts, as needed. In
establishing the required allowance, management considers historical losses
adjusted to take into account current market conditions and the customers
financial condition, the amount of receivables in dispute, and the current receivables
aging and current payment patterns. The Company reviews its allowance for
doubtful accounts monthly. Past due balances are reviewed individually for
collectability. Account balances are charged off against the allowance after
all means of collection have been exhausted and the potential for recovery is
considered remote.
Advance
to Suppliers
Advance to suppliers represents the payments made and
recorded in advance for goods and services to be received. The Company makes
advances to suppliers for advertising, printing and other services and
products.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial
instruments, which include cash, short term investments, accounts receivable
and other receivables, advances to suppliers, accounts payable, accrued
liabilities, and other liabilities, approximate their fair values at December
31, 2010.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation on property and equipment other than leasehold improvements is calculated on the straight-line method over the estimated useful lives of the assets as set out below:
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Residual Value |
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Estimated Useful Life |
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Office furniture and equipment |
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5 |
% |
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5 years |
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Vehicles |
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5 |
% |
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5 years |
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Intangible Assets
Intangibles are the cost of computerized video lessons
delivered both online and offline developed by the Company and the acquired
intangible assets with finite lives consist of courseware. All costs incurred
to establish the technological feasibility of a computer software product to be
sold, leased, or otherwise marketed are charged to expenses as incurred.
Development costs incurred after technological feasibility of a product has
been established and before product sales begin are capitalized and amortized
over the estimated life of the product, which thus far has been three
years, starting when product sales begin. Technological feasibility is deemed
to have been achieved when all the planning, designing, coding, and testing
activities necessary to establish that the product can be produced to meet its
design specifications
36
have been completed, including functions, features, and technical
performance requirements. Acquired coursewares with finite lives are carried at
cost, less accumulated amortization and impairment. Amortization of acquired
coursewares is calculated on a straight-line basis over three years.
Impairment
of Long-Lived Assets
In accordance with Impairment or Disposal of
Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment - Overall,
long-lived assets, such as property, plant and equipment, and purchased
intangible assets subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If circumstances require a long-lived asset or
asset group be tested for possible impairment, the Company first compares
undiscounted cash flows expected to be generated by that asset or asset group
to its carrying value. If the carrying value of the long-lived asset or asset
group is not recoverable on an undiscounted cash flow basis, impairment is
recognized to the extent that the carrying value exceeds its fair value. Fair
value is determined through various valuation techniques including discounted
cash flow models, quoted market values and third-party independent appraisals,
as considered necessary.
Customer Deposits
The Company required certain amount of deposits from
its customers and franchised locations. The customer deposits are recorded as a liability
when the Company receives it and will be recognized as revenue after the
service is rendered.
Concentrations of Credit Risk
Financial instruments which potentially subject the
Company to concentrations of credit risk consist of cash, short term
investments, accounts receivable and advances to suppliers. However, all
Company assets are located in the PRC and Company cash balances are on deposit
at financial institutions in the PRC, the currency of which is not free
trading. Foreign exchange transactions are required to be conducted through
institutions authorized by the Chinese government and there is no guarantee
that Chinese currency can be converted to U.S. or other currencies.
Recognition of Revenue
Online Courses
The Company provides online education programs to its franchisees, agents and individual customers. Revenue is realized through sales to franchisees and other agents of rights to conduct education services. The Company authorized the franchised locations to use its logo, all education programs and products and the Company receives a onetime licensing fee, annual management fee, and 20% of student generated revenue from the franchised location by providing them prepaid e-cards of 5 times the cash amount. All the mentioned fees are revenues or unearned revenues from the sale of e-cards. Revenue is recognized until the services are consummated upon the e-cards are opened and used by the students to purchase online education courses and is reported net of business tax. The opening of cards is tracked by our IT system automatically and the revenue is proportionally recognized based on the progress of the e-cards usage.
Virtual Internet Classroom
The Company sold prepaid e-cards to the customers. Revenue is recognized until the services are consummated upon the e-cards are opened and used by the students to purchase online education courses and is reported net of business tax. The opening of cards is tracked by our IT system automatically and the revenue is proportionally recognized based on the progress of the e-cards usage.
Sales of Materials and Publications
The Company started the sales of self-branded reference books and
materials from August 2010. The revenue is recognized upon the products are
delivered to the customers. During the year ended December 31, 2010, the
revenue generated from sales of materials and publications was less than 10% of
the total revenue.
37
Live courses
Live courses are provided by teachers at the Company owned learning centers and the sales was started from November 2010. The revenue is recognized based on the progress of courses the students completed during the period. During the year ended December 31, 2010, revenue generated from providing live courses was less than 1% of our total revenue.
Advertising
The Company expenses advertising costs as incurred.
Advertising is included in selling expenses for financial reporting. The
Company incurred advertising costs of $3,150,215 and $2,086,405 for the years
ended December 31, 2010 and 2009, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method
pursuant to ASC 740 Income Taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and tax loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the consolidated
statements of income in the period that includes the enactment date. A
valuation allowance is provided to reduce the amount of deferred tax assets if
it is considered more likely than not that some portion or all of the deferred
tax assets will not be realized.
ASC 740-10-25 clarifies the accounting for uncertain tax positions and requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as a component of income tax expense in the consolidated statements of income.
Other Taxes
The Company generates its income in China where
Business Tax, Income Tax, City Construction and Development Tax, and Education
Surcharge taxes are applicable.
Earnings per Share
Basic earnings per share are computed by dividing net
income by weighted average number of Ordinary Shares outstanding
during each period. Diluted earnings per share is computed by dividing net income
by the weighted average number of Ordinary Shares, Ordinary Share equivalents
and potentially dilutive securities outstanding during each period. At December
31, 2010 and 2009, the Company had no common stock equivalents that could
potentially dilute future earnings per share.
The Companys board of directors approved a three-for-one reverse stock split (the Reverse Stock Split) of the Companys outstanding Ordinary Shares on October 19, 2010. References to shares in the consolidated financial statements and the accompanying notes, including, but not limited to, the number of shares and per share amounts, have been adjusted to reflect the Reverse Stock Split on a retroactive basis.
Foreign Currency Translation
The financial position and results of operations of the Companys
subsidiaries in the PRC are measured using the Chinese currency Renminbi as the
functional currency, while the Companys reporting currency is the US dollar.
Balance sheet accounts with exception of equity of the subsidiaries are
translated at the prevailing exchange rate in effect at each period end, income
statement accounts are translated at the average rate of exchange during the
period, and equity accounts were stated at their historical exchange rate.
Exchange gains or losses arising from foreign currency transactions are
included in the determination of net income (loss) for the respective periods.
Translation adjustments are included in the accumulated other comprehensive income in the consolidated statements of
stockholders equity and comprehensive income.
38
Other Comprehensive Income
The Company has adopted ASC220, Reporting Comprehensive Income, which
establishes standards for reporting and displaying comprehensive income, its
components, and accumulated balances in a full-set of general-purpose financial
statements. The Companys accumulated other comprehensive income represents the
accumulated balance of foreign currency translation adjustments.
Fair
Value of Financial Instruments
ASC 820 Fair Value Measurements and Disclosures,
adopted January 1, 2008, defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosure requirements for fair value measures. The carrying amounts reported
in the balance sheets for current receivables and payables qualify as financial
instruments. Management concluded the carrying values are a reasonable estimate
of fair value because of the short period of time between the origination of
such instruments and their expected realization and if applicable, their stated
interest rate approximates current rates available. The three levels are
defined as follows:
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Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
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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 assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
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Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value. |
It is managements opinion that as of December 31, 2010 and 2009, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet dates. The carrying amounts of short-term loans approximate their fair values because the applicable interest rates approximate current market rates.
Related
Parties
A party is considered to be related to the Company if
the party directly or indirectly or through one or more intermediaries,
controls, is controlled by, or is under common control with the Company.
Related parties also include principal owners of the Company, its management,
members of the immediate families of principal owners of the Company and its
management and other parties with which the Company may deal if one party
controls or can significantly influence the management or operating policies of
the other to an extent that one of the transacting parties might be prevented
from fully pursuing its own separate interests. A party which can significantly
influence the management or operating policies of the transacting parties or if
it has an ownership interest in one of the transacting parties and can
significantly influence the other to an extent that one or more of the
transacting parties might be prevented from fully pursuing its own separate
interests is also a related party.
Products Warranties
Refunds to students who withdraw from courses are
rarely made and are made only at the discretion of the Company. For this reason
and, since revenue is recognized only as services are provided, no provision is
needed for possible withdrawals.
Segment Reporting
The Company uses the management approach in
determining reportable operating segments. The management approach considers
the internal organization and reporting used by the Companys chief operating
decision maker for making operating decisions and assessing performance as the
source for determining the Companys reportable segments. The Companys chief
operating decision maker has been identified as the chief executive officer of the Company who reviews
financial information of separate operating segments based on US GAAP. The
chief operating decision maker now reviews results analyzed by service line.
This analysis is only presented at the revenue level with no allocation of
direct or indirect costs. Consequently, the Company has determined that it has
only one operating segment.
39
Recently Adopted Accounting Pronouncements
Management believes that none of the recently adopted accounting pronouncements will have a material affect on the Companys financial position, results of operations, or cash flows.
Effective July 1, 2008, the Company adopted ASC 820, Fair Value Measurements, which provides guidance on how to measure assets and liabilities that use fair value. ASC 820 applies whenever another U.S. GAAP standard requires (or permits) measurement of assets or liabilities at fair value, but does not expand the use of fair value to any new circumstances. The Company also adopted FASB Staff Position (FSP) No.FAS 157-2, which allows the Company to partially defer the adoption of ASC820. This FSP defers the effective date of ASC 820 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15,2008, and interim periods within those fiscal years. Nonfinancial assets and nonfinancial liabilities include all assets and liabilities other than those meeting the definition of a financial asset or financial liability as defined in paragraph 6 of Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The adoption of ASC 820 did not have an impact on our financial statements.
In May 2009, the FASB issued ASC 855, Subsequent Events, which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. ASC 855 is effective for interim and annual periods ending after June 15, 2009. The adoption of ASC 855 did not have a material impact on the Companys financial position, results of operations or cash flows.
In June 2009, the FASB issued Update No. 2009-01, Generally Accepted Accounting Principles (ASU 2009-01). ASU 2009-01 establishes The FASB Accounting Standards Codification, or Codification, which became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non grandfathered non-SEC accounting literature not included in the Codification will become non authoritative. ASU 2009-01 is effective for interim and annual periods ending after September 15, 2009. The adoption did not have any impact on the Companys operating results, financial position or cash flows.
In December 2009, the FASB codified Consolidations Improvements to Financial Reporting by Enterprises Involved with VIEs (ASU 2009-17), guidance which was issued by the FASB in June 2009. The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance and has (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. ASU 2009-17 is effective as of the beginning of the interim period ended June 30, 2010. The adoption of this standard did not have any material impact on the Companys consolidated financial statements.
As part of the
restructuring, on April 26, 2010, Tsingda Management entered into a series of
agreements with Tsingda Century and its shareholders, including an Operating
Agreement, Proxy Agreement, Consulting Services Agreement, Equity Pledge
Agreement and Option Agreement, which entitled Tsingda Management to receive
substantially all of the economic benefits of Tsingda Century in consideration
for consulting services provided by Tsingda Management to Tsingda Century. The Option
Agreement allows Tsingda Management to acquire the shares of Tsingda Century
when permitted by the PRC laws. The Proxy Agreement provides Tsingda Management
with the voting rights of Tsingda Centurys shareholders and the Equity Pledge
Agreement pledges the shares in Tsingda Century to Tsingda Management without
transferring legal ownership in Tsingda Century to Tsingda Management. Under
the Consulting Services Agreement, Tsingda Management is the exclusive service
provider to Tsingda Century for services, including general business
operations, human resources and business development and Tsingda Century is
obligated to make regular payments
40
for such
services provided. Under the Operating Agreement, Tsingda Century shall not
conduct any transactions which may materially affect its assets, obligations,
rights or operations without the written consent of Tsingda Management.
Further, Tsinda Century adopted a corporate policy suggested by Tsingda
Management in connection with Tsingda Centurys daily operations, financial
management and the employment and dismissal of its employees. Through these
agreements, Tsingda Management has the power to direct the activities that most
significantly impact the economic performance of Tsingda Century and Tsingda
Century became a variable interest entity (VIE) and is included in the
consolidated Group.
Recent Financing
On September 16, 2010, we entered into a Securities Purchase Agreement (Securities Purchase Agreement) with certain accredited investors (Investors) pursuant to which we completed an offering (Offering) of units (Units) for total gross proceeds of $9,600,000. Each Unit is priced at $1.60 and consists of one (1) Ordinary Share, and a Series A Stock Purchase Warrant (Warrants) to purchase 35% of the number of Ordinary Shares purchased in the Offering. The initial Warrant exercise price is $2.08 per share and the Warrant term is five (5) years. The Warrant may be exercised on a cashless basis three (3) months after the Ordinary Shares are listed on a major stock exchange or other exchange or market described therein.
We entered into a Hold Back Escrow Agreement with Zhong Hui Rong (Fujian) Fund Ltd, (the Lead Investor) and an escrow agent under which we deposited $520,000 of the Offering proceeds with the escrow agent. Increments of the escrowed amount will be released to the Company upon the Company attaining the following respective milestones: (i) $120,000 upon engaging an investor relations firm reasonably acceptable to the lead Investor; (ii) $100,000 upon providing the lead Investor with evidence that is reasonably satisfactory to the Lead Investor indicating that Circular 75 filings have been approved by the PRC Government, (iii) $100,000 upon providing the Lead Investor with documentation demonstrating that the business license of Beijing Tsingda Century Investment Consultant of Education Co., Ltd. has been amended to clarify to the lead investors reasonable satisfaction that the VIE Subsidiaries are properly authorized to engage in its current business; and (vii) $200,000 upon providing the Lead Investor with written confirmation that (a) an independent accounting firm reasonable satisfactory to the Lead Investor has been engaged, and (b) a law firm reasonably satisfactory to the Lead Investor has been retained in connection with our initial public offering. If on June 30, 2011, any portion of the escrowed amount remains in escrow as a result of our failure to satisfy any of the milestones, then the Lead Investor can cause the release of the balance of the escrowed amount to the Investors, on a pro rata basis. As of the date hereof, the $100,000 remains in escrow subject to the Companys satisfaction of approval from the PRC Government on Circular 75 filings.
In connection with the Offering, our largest shareholder, Tsing Da Century Education Technology Co., Ltd., a Belize corporation, placed preferred shares equal to 6,000,000 Ordinary Shares in escrow on post three-for-one split basis (the Escrow Shares) and agreed to transfer the Escrow Shares, in whole or in part as described below, to the Investors on a pro rata basis in the event that we do not meet certain performance targets for our fiscal years ending December 31, 2010 and December 31, 2011.
If the Companys net income for fiscal year 2011 is less than $13,500,000, the escrow agent shall transfer to the investors of our 2010 private placement, on a pro-rata basis, an amount of Escrow Shares equal to the percentage of variation from the 2011 performance threshold times the total number of Escrow Shares. Any Escrow Shares remaining will be returned to the Companys largest shareholder. Net income is as defined under United States generally accepted accounting principles, provided, however, that net income as used for these purposes for each of fiscal years 2010 and 2011 shall be increased by any cash or non-cash charges incurred (i) as a result of the financing, including without limitation, as a result of the issuance, exercise or any anti-dilution adjustment of the Warrants and (ii) as a result of the release of the Escrow Shares pursuant to the terms of the Securities Escrow Agreement.
We also
entered into a Founding Shareholder Lock-Up Agreement with our largest
shareholder pursuant to which the shareholder agreed to restrict the transfer
of its Ordinary Shares for 12 months from the listing date on any of: the NYSE,
any tier of the NASDAQ Stock Market, or the NYSE Amex (Listing Date), except
that during the lock up period, such shareholder may transfer an amount up to
5% of the Ordinary
41
Shares held by
such shareholder. We also entered into a Six Month Lock Up Agreement with
various other shareholders pursuant to which these shareholders agreed to
restrict the transfer of their respective shares in the Company for 6 months
from the Listing Date, except that during the lock up period, each of these
shareholders may transfer an amount up to 5% of the Ordinary Shares held by
such shareholder. Finally, we entered into Initial Shareholder Lock-Up
Agreements with certain other shareholders pursuant to which these shareholders agreed to
restrict the transfer of their shares in the Company for nine (9) months from
the Listing Date, except that during the (i) initial 6 months of the lock up
period, each of these shareholders may transfer an amount up to 5% of the
Ordinary Shares held by such shareholder, and (ii) final three months of the
lock up period, each of these shareholders may transfer an amount up to 20% of
the Ordinary Shares held by such shareholder.
Placement Agent
Maxim Group,
LLC (Maxim), a FINRA broker/dealer, acted as our placement agent in
connection with the Offering. On March 12, 2010, Beijing Tsingda Century
Investment Consultant of Education Co., Ltd., our variable interest entity,
entered into an exclusive placement agent agreement, as amended, with Maxim
which had a term through October 31, 2010. Since the initial term is now
completed, either party may terminate the agreement with 30 days advance
notice. Maxim received an effective cash commission of $411,000 (or
approximately 4.3% of the proceeds of the Offering) and warrants equal to 4.5%
of the number of Ordinary Shares sold in the Offering (or 364,500 Ordinary
Shares). The warrant term is five years and is exercisable at any time
beginning on March 16, 2011. The exercise price is $110% of the offering price
of the Units (or $1.76). We are required to register the Maxim warrants. We
also agreed to indemnify Maxim against certain liabilities, including
liabilities under the Securities Act. In addition, we reimbursed Maxim for
$25,000 as reasonable out of pocket expenses.
42
CORPORATE STRUCTURE
Our organization was structured to abide by the laws of the PRC. Its structure is depicted below:
43
We were organized under the laws of the Cayman Islands on September 27, 2006. Tsingda Technology was organized under the laws of British Virgin Islands on December 11, 2009. Tsingda Management was organized under the laws of the PRC on November 26, 2007. Tsingda Education was organized under the laws of the PRC on October 23, 2003. Tsingda Network was organized under the laws of the PRC on February 14, 2004.
On May 24, 2010, we acquired Tsingda Technology. The transaction was treated for accounting purposes as a capital transaction and recapitalization by the accounting acquirer and as a re-organization by the accounting acquiree.
Tsingda Technology owns 100% of the issued and outstanding capital stock of Tsingda Management. On April 26, 2010, Tsingda Management entered into a series of contractual agreements with Tsingda Education, and its shareholders, in which Tsingda Management effectively assumed management of the business activities of Tsingda Education and has the right to appoint all executives and senior management and the members of the board of directors of Tsingda Education. The contractual arrangements are comprised of a series of agreements, including a Consulting Services Agreement, Operating Agreement, Voting Rights Proxy Agreement, Equity Pledge and Option Agreement, through which Tsingda Management has the right to advise, consult, manage and operate Tsingda Education for an quarterly fee equal to its quarterly, after tax net profits. Additionally, Tsingda Educations Shareholders have pledged their rights, titles and equity interest in Tsingda Education as security for Tsingda Management to collect consulting and services fees provided to Tsingda Management through an Equity Pledge Agreement. In order to further reinforce Tsingda Managements rights to control and operate Tsingda Education, Tsingda Educations shareholders have granted Tsingda Management the exclusive right and option to acquire all of their equity interests in Tsingda Education through an Option Agreement.
44
OUR BUSINESS
Market Information
General
Chinas education market is substantial based on the sheer size of its population. According to information published by the PRC Chinas education market is substantial based on the sheer size of its population. According to information published by the PRC government, it appears that our target population market as of December 31, 2010 is approximately 200 million individuals. The group is comprised of: primary school students - 110 million; junior high school students - 60 million; and senior high school students 30 million.
The importance of education in China is grounded upon a number of factors. Confucian doctrines placed high importance on education. Another factor which placed significant import on education arose from Chinas one child policy implemented in 1979 in an effort to control its population. As a result of the one child policy, many Chinese families believe that their future rests with the success of their only child and, consequently, there is a strong parental push towards education. Another factor contributing to the demand for education in China is the need to support the economic growth China has experienced and is continuing to experience.
In the PRC, school attendance is mandatory through junior high school. Beyond junior high school, schooling is voluntary and students must pay for senior high school and any post-secondary school. Senior high school students typically range in age from 15 to 19. Students in post-secondary schools (or any educational institution beyond senior high school) typically range in age from 20 to 24.
The use of online education is increasing in China. Based on industry data, the market size of online education in 2008 in the PRC was approximately $5.1 billion with 2012 projections reaching $10.6 billion. Moreover, the number of online education learners in China will climb to 23.1 million in 2010, twice as many as that in 2007. The Chinese online education market is expected to experience average growth of 150% in the next five years.
45
Shortage of funding
Chinas educational system historically has been under-funded compared to the rest of the world. In 2008, Chinas fiscal education expenditure was 3.48% of GDP compared with the world average of 4.5% Recently, the PRC government has taken initiatives to improve its educational system countrywide due principally to the recognition that the countrys technological development ultimately rests on the level of competency, or level of education, of its workforce. Yet despite these initiatives, there remains a severe disparity in educational funding between rural and urban areas in China as discussed below.
Funding disparity
Chinas vast territory and large population have led to a significant disparity in public educational offerings between urban and rural areas. According to official statistics, there is a significant gap in the average education investment of students between rich and poor provinces. The public funding disparity for primary schools, junior high schools and senior high schools can range between 6-8 times more in the rich, urban areas compared with the poorer, rural areas. Compared with first-tier cities in PRC, many rural areas lack qualified teacher and training resources due principally to lack of funding from local governments. In recent years, a series of positive measures have been taken by related authorities to support the development of distance education. However, the problem is still quite pronounced, and massive input from the private sector is in demand.
The Tsindga Learning Concept
General
We are an online provider of supplementary educational services in China. Our Chinese website is http://www.eeduol.com and our English language web-site is www.eeduuol.com. The information contained on our websites does not form a part of this prospectus. We rolled out our Tsingda Learning Center concept in 2006, and more recently in late 2008, we introduced our web-based real-time interactive learning platform called Tsingda Virtual Internet Classroom.
Our educational model is depicted below:
Our educational services are not accredited by the PRC Ministry of Education or any other governmental agency. As such, our learning concept does not function as a substitute or alternative to traditional government run schools, which are accredited by the PRC Ministry of Education to grant diplomas and/or degrees, rather it has been shaped to supplement learning provided by government run schools in the PRC. No accrediting learning centers compete with us in our industry. Accredited learning centers are traditional degree-granting schools and we are not at a competitive disadvantage because we are not an accredited learning center.
For the year ended December
31, 2010, we had revenues of $27,447,545, as compared to revenues of $14,650,863
for the year ended December 31, 2009, an increase of approximately 87%.
46
Learning Centers
As
of December 31, 2009 and after three years of operations, we had approximately
1,750 operating Tsingda Learning Centers located in 1,300 cities and 23
provinces throughout the PRC. Of the total amount, three were Company-owned
with the remainder being franchised operations. As of December 31, 2010, we
had over 2,346 operating Tsingda Learning Centers in 1,400 cities and 23
provinces. Of the total amount, 21 were Company-owned with the remainder being
franchised operations. As of December 31, 2010 we have 6,838,181 registered students and 1,340,652 active students through our learning centers.
Our Tsingda Learning Centers principally target elementary school (grades K-8) students and in most instances are located in close proximity of a local elementary school. We designed the rollout of our franchised learning centers to generally avoid the tier one cities of Shanghai, Beijing, Chengdu, and Guangzhou. Instead, we are geographically concentrated on the second and third tier cities. We believe there are 50,000 2nd and 3rd tier cities in the PRC. We employed this strategy because we believe that competition in these lower tier cities would be less intense than first tier cities, but more importantly, we anticipated stronger product demand in the rural areas due to disparity in educational funding between the two areas.
While we concentrate our franchise development efforts in the rural areas for reasons discussed above, we located our initial Company-owned centers in close proximity to our headquarters in Beijing. This allows us to exert greater operating control over our own centers, as well as provide a nearby training center for new franchisees. We plan on opening future Company-owned centers in other tier one cities which will serve as regional training centers.
Our target customers are students ranging from 6 to 18 years of age studying at elementary, junior and senior high schools. Of our customers, 70% are elementary school students, 20% are middle school students and 10% are high school students. Our marketing methods consist of:
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Referrals from teachers. Approximately 50% of our franchisees are school teachers and they encourage their students to attend learning centers after school. |
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Concentrated Advertising. Learning centers generally distribute leaflets in front of school and advertise on bulletin boards in high density residential areas. |
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Activities. Learning centers periodically hold recruitment conferences and free tours of online content, etc. in public areas where parents and teachers are invited. |
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Mass Advertising. We advertise on local and national television, local newspapers and magazines, and on the Internet. |
Although we do not recruit students based on prior academic performance, regulations prohibiting a PRC educational institution from recruiting students based on prior academic performance do not apply to us.
Teaching at our learning centers is solely delivered electronically via desktop computers housed at our locations, either taught in live real time by a teacher at a remote location, or from a pre-recorded course. Our proprietary courses provide two core curriculums: synchronous (or sync) courses and featured courses. Sync courses match textbooks from local schools and are delivered synchronously with the curriculum for these schools. Featured courses consist of learning programs designed to bolster skills in core subjects such as math and English, among others. Featured courses prepare students for the highly competitive high school and college entrance exams. Our courses provide a broad learning experience to the student. Learning modules includes classes directed by a wide range of teachers, including renowned teachers from tier one cites, Q&A sessions, and one on one teaching. Our courses also feature regular mock tests and exams, and gap detection which determines student weakness and automatically generates subsequent teaching aids. We also have digitized textbooks for 97% of our targeted schools in the PRC. We believe our courses are the most advanced in the industry and is a compelling learning regime particularly for students from less populated areas where teaching resources are limited.
In China, high school exams and college entrance exams are conducted on a local and provincial level, and are not standardized on a national level, such as the SAT in the United States. In that regard, there are many different exams and our students prepare for high school entrance exams by taking our courses that are synchronized with the textbooks they are studying. The most popular of our synchronous courses are keyed to the following textbooks:
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Subject |
|
Textbook Editions/Publisher |
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|
|
Chinese Language |
|
Remin University, Jiangsu
Edition, Beijing Normal University |
Mathematics |
|
Remin University, Jiangsu
Edition, Beijing Normal University |
English |
|
Remin University, Jiangsu
Edition |
Physics |
|
Remin University, Jiangsu
Edition, Beijing Normal University |
Chemistry |
|
Remin University, Jiangsu Edition, Beijing Normal University |
47
|
|
|
|
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Zhejiang Edition, Shanghai Edition, Hebei Edition, Hunan Edition |
Our students prepare for their college entrance exam by consuming our featured courses on subjects that are typically covered in a provincial college entrance exam:
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Subject |
|
Contents |
|
|
|
Chinese
Language |
|
Composition, Reading |
Special
Subject |
|
Nan Kai University Chair,
Mock test, Simulation Questions Analysis |
Psychological |
|
Psychological Counseling before University Entrance Exam, Case Study |
In November 2010 we began offering live courses through our company-owned learning centers which are all located in Beijing. Depending on the initial response to these live courses, we may consider expanding our live course
offerings to Company-owned learning centers in other first-tier cities. We do not intend to offer live courses through our franchise-owned learning centers, nor do we intend that any of our Company-owned learning centers will become solely dedicated
to live course offerings.
Live courses are taught on either a one-to-one basis or with up to 10 students. As with all of our course offerings, students purchase live courses by purchasing e-cards. Students can choose any combination of live, online
or pre-recorded courses for all of their education needs. We charge more for live courses than for online or pre-recorded courses. During the year ended December 31, 2010, revenue generated from providing live courses was less than 1% of our total
revenue.
Online Virtual Classrooms
In the fourth quarter of 2008, we successfully developed an interactive, real-time, and personalized learning platform called the Tsingda Internet Classroom. Tsingda Internet Classroom has been designed to be an online marketplace whereby buyers (students) and sellers (teachers) are linked through our proprietary software interface for the sole purpose of transacting educational related services. The target audience is mainly high school students; however some classrooms are oriented towards junior high and other students. Course subjects along with pricing and presentations dates are posted to a presentation page on our web-site by company qualified teachers. Our teacher roster includes approximately 2,350 renowned teachers from tier one cities. These teachers have achieved recognition based on awards from the Ministry of Education. Interested students can browse presentation web-pages by teacher or subject matter. Teacher credentials, course outline, pricing, presentation times, and presentation mode (live or pre-recorded) also are displayed. Course purchases are made electronically, and are delivered through a video feed which can be viewed electronically by the student. More popular courses are recorded for later presentation. Our online learning platform offers students from less developed regions the opportunity to be able experience the teaching disciplines of more experienced, including these renowned teachers from tier one cities. Unlike the courses provided at a learning center, virtual classroom courses have not been designed to be synchronous. In most courses, students can communicate electronically with teachers.
The Tsingda virtual
classroom was first launched for high school students, and later included
junior high and elementary students. As of the December 31, 2010, total
registered students and active students for our virtual classroom platform were
428,550 and 84,126, respectively, and the number of certified teachers
was 16,000. A significant portion of our existing student base and current
revenues of our virtual classroom is attributable to students who have attended
or are attending our learning centers.
Our Revenue Model
We generate revenues both from our Company-owned and franchised learning centers and from the sale of e-cards which are used to purchase our courses.
48
Tsingda Learning Centers
From franchised locations, we receive (a) a one time, franchise licensing fee, (b) annual management fees equal to 10% of the initial franchise licensing fee, (c) 18% of student generated revenue from pre-recorded courses and 8% of student generated revenue from real-time courses, and (d) 10% from the sale of reference books and stationery products sold in the centers. We retain 100% of the revenue generated at Company-owned locations.
Tsingda Learning Centers
As of December 31, 2010, approximately 2,346 Tsingda Learning Centers are in operation in 1,400 cities and 23 provinces in China. The map below depicts the concentration of Tsingda Learning Centers by region as of December 31, 2010.
49
The following table reflects the concentration of our learning center locations by city and province:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
City |
|
Zibo |
|
Fuzhou |
|
Qingdao |
|
Taiyuan |
|
Binzhou |
|
Nanchong |
|
Zhenzhou |
|
Chendu |
|
Nantong |
|
Wenzhou |
Number |
|
32 |
|
27 |
|
26 |
|
22 |
|
21 |
|
20 |
|
19 |
|
18 |
|
18 |
|
17 |
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|
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|
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|
|
|
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|
|
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|
|
|
|
|
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|
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|
|
|
|
|
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|
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|
|
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|
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|
Province |
|
Shandon |
|
Jiangsu |
|
Sichuan |
|
Henan |
|
Zhejiang |
|
Fujian |
|
Guangdong |
|
Shanxi |
|
Hubei |
|
Anhui |
Number |
|
229 |
|
157 |
|
137 |
|
121 |
|
108 |
|
105 |
|
103 |
|
83 |
|
82 |
|
81 |
Key Features of Our Courses
Key features of our proprietary courses are categorized as follows:
|
|
|
|
o |
Comprehensive Reference Library: We have digitized 97% of the teaching materials of all elementary, junior high and high schools in the PRC. The library allows for easy student reference to the familiar teaching materials. |
|
|
|
|
o |
Curriculum Matching Courses: Early in its product development, we recognized that in the PRC, like most other developed or developing countries, teaching curriculum for the identical subject matter varies by region or province. Apart from digitizing substantially all of the relevant teaching materials, we have customized our teaching courses to match local teaching materials. This means that a student in a Sichuan city learning center and a student in Nanjing city learning center will receive different courses material on the same subject matter. We developed these customized learning materials in collaboration with regional teachers. |
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|
|
|
o |
Synchronous Courses Delivery: The courses deliver teaching materials to the student synchronously with curriculums from local schools. Students can drill down to lessons which coincide with current school classes. |
|
|
|
|
o |
Diverse Teaching Disciplines. For any subject in our curriculum, students can select presentations from numerous teachers, including renowned teachers. |
|
|
|
|
o |
Gap Detection: Our proprietary courses detect weaknesses in a students aptitude. During testing and Q&A sessions, incorrect answers generate subsequent questions specifically aimed at bolstering student weaknesses. |
|
|
|
|
o |
Results Evaluation. The courses are result oriented and thus provides scores on mock tests and practice sessions so that students or their parents can gauge performance. It also delivers progress reports on demand which indicate a students progress in a given subject over a period of time. |
Our Curriculum
Learning centers provide two core curriculums: synchronous (or sync) courses and featured courses, and both are depicted below;
|
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|
|
|
Basic Curriculums |
|
Module |
|
|
|
|
|
Sync courses |
|
Match local textbooks in subjects like English and math. |
|
|
|
|
|
Featured courses |
|
Primary school English |
|
|
|
Primary school math |
|
|
|
|
|
|
|
Primary school Olympic math |
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|
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|
|
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Primary school literature |
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|
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|
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Kid English series |
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|
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Intensive teaching and drill series |
|
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|
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Composition series |
|
|
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Video from famous school |
|
|
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High school admission exam preparatory channel |
|
|
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College admission exam preparatory channel |
|
|
|
Traditional Chinese cultures workshop |
|
|
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Science and discovery |
50
We also have entered into licensing arrangements with third parties to provide extracurricular materials that are delivered through video, audio and animation. These presentations relate to such matters as Chinese and worldwide culture, geography and history. While these extracurricular products do not provide meaningful revenues to a learning center, they provide students with an educational diversion from core subjects.
PRC Regulation of Franchise Business
We have made all required filings and met all requirements under PRC law to legally operate a franchise business in the PRC. The required filings include (i) copies of the business license or enterprise registration certificate; (ii) a sample franchise contract; (iii) a brochure for franchise operations; (iv) a marketing plan; (v) written commitment and relevant materials proving that the relevant provisions have been followed; and (vi) other documents and materials required by relevant governing authorities.
The legal requirements to operate a franchise business in the PRC under the Regulation on the Administration of Commercial Franchises require the franchisor to possess a mature business model and the ability to provide long-term business guidance, technical support, business training and other services to its franchisees. The franchisor must have at least two direct sales stores, and have been engaged in the business for more than a year. If this franchisor conducts its operations within the scope of a single province, autonomous region, or municipality directly under the PRC Central Government, it is required to file the required legal documents with the relevant governing authorities of the province, autonomous region or municipality directly under the PRC Central Government; and if the franchisor conducts its operations within the scope of two or more provinces, autonomous regions, or municipalities directly under the PRC Central Government, it is required to file the required legal documents with the competent commercial authority of the State Council.
Franchise and Company-owned Center Details
A typical franchised learning center is approximately 100 to 300 square meters while Company-owned locations are almost double in size at 300 to 800 square meters. Each franchise center is staffed with 4-5 employees, while Company-owned centers are staffed with 8-10 employees. The staff generally includes one supervisor, with the remainder of staff consisting of counselors. Our experience to date has been that most centers are owned and operated by former teachers in the respective regions. Thus, these operators often times are familiar with many of the families in the area and are able to promote the centers attributes the local market.
Generally, learning centers are located within close proximity of an elementary school, and most students are able to walk from their school to the learning center. Hours of operation are between 9:00 am to 8:30 pm each school day, however, high student traffic generally occurs between 3:00 pm to 6:00 pm during the school day. During winter recess (4 weeks) and summer recess (8 weeks), many children of single or dual income parents arrive at the learning center in the morning and leave in the evening. While at the learning centers, students can access the learning center curriculum or our virtual classrooms. A typical franchise center receives approximately 40-80 students per day, while a Company-owned center receives approximately 80-100 students per day.
Each learning center consists of three segregated areas, online learning, counselor guidance, and educational products depicted as follows:
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|
o |
Online Learning Area. Each franchised and Company-owned center generally supports between 15 and 50 computers, respectively, in the online learning area. During periods of high student traffic, computers are accessible to students for a maximum of one hour. Students pay for courses exclusively through the Tsingda e-card, a re-chargeable debit card which may be purchased at any learning center with cash or via electronic bank transfer. Once a student enters his name, ID and password, our proprietary software immediately recognizes the students school, grade level, and proficiency, and instantaneously delivers a menu of teaching materials designed to match the students current curriculum. The menu includes sync and featured courses, practice sessions, online question and answer database, mock tests, and interactive question and answer sessions. |
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|
o |
Counselor Guidance Area. Students utilize the counselor guidance area to complete homework, take exams, or to perform workshop materials. The guidance area is supervised by counselor to ensure that students are not distracted by other students. In addition, parent meeting are held in this area. |
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|
o |
Education Product Area. Each center provides an array of products available for sale to students, which include teaching materials complimentary to courses, DVDs, books, learning toys, and general office supplies. Students also are able to purchase Tsingda e learning cards in this area. |
Courses can be purchased under a variety of packages and pricing, including by day, by month, and by semester. Typically, our learning centers hold four hour sessions for elementary school students and three hour sessions for our middle and high school students for our Monday through Friday programs. For our weekend program, all sessions for all students are bifurcated into two separate two hour segments.
51
Franchise Arrangements
Each franchise agreement grants a specific territory to a franchisee which in turn requires the franchisee to open a corresponding number of centers commensurate with such territory as follows:
|
|
|
Typical Number of Centers |
|
Territory |
|
|
|
3 |
|
County |
5 |
|
Perfecture City |
8* |
|
Provincial Capital City |
50* |
|
Province |
* The actual number of centers for a Provincial Capital City and Province may vary depending on certain factors determined by the Company and the franchisee.
For reference purposes, the PRC consist of 23 provinces, 4 municipalities, 5 autonomous regions and 2 special administrative regions. These administrative divisions are further divided into prefectures with each prefecture consisting of numerous counties and townships.
52
The term of each franchise agreement is one year, and renewable annually by the parties. Under the agreement, franchisees are required to pay an initial franchise licensing fee of between $7,000 and $10,000 per location depending on franchise territory, and thereafter franchisees pay an annual management fee equal to 10% of their initial franchise licensing fee. Franchisees must maintain a standardized signage, storefront and interior design, adhere to company pricing policies for courses, unified promotion activities and exclusively use company generated materials, among other terms. Franchisees are required to bear all the costs of owing and operating each center, including rent, staffing, and marketing. The estimated cost to open a learning center for a franchisee ranges from $40,000 to $60,000 inclusive of franchise payments to the company, lease deposits, leasehold improvements, furniture, fixtures and equipment (10-40 desktop computers). Franchisees also are required to obtain necessary operating permits, and comply with applicable laws and regulations. Our franchise attrition rate for 2008 and 2009 was 5.2% and 4.1%, respectively.
Tsingda Virtual Classroom
The Tsingda Internet Classroom is a robust, multi-faceted on line educational platform delivering educational services in the PRC. The virtual classroom has been designed to be an online marketplace whereby buyers (students) and sellers (teachers) are linked through its proprietary software for the sole purpose of transacting educational related services. The platform currently targets mainly high school students and to a lesser extent junior high school students. We expect to apply this platform to other educational areas, such as a Chinese language learning program that can be accessed worldwide, and adult vocational training classes for use in the PRC. We do not have a timetable as when we plan to introduce these other educational programs.
The Tsingda virtual classroom was first
launched for high school students, and later included junior high and elementary
students. As of December 31, 2010, total registered students and active
students for our virtual classroom platform were 428,550 and 84,126, respectively,
and the number of certified teachers was 20,163 (approximately 3,044 of which
are renowned).
A significant portion of our existing student base and current revenues of our
virtual classroom is attributable to students who have attended or are attending
our learning centers.
Students enroll in the system by providing relevant personal and educational information, along with electronic bank information. Students log on to the platform by entering an assigned user name and password. The software interface allows students to browse the system by subject matter and teacher name. An interested subscriber can enter the virtual classroom for a free trial of the first 5 minutes, after which the student can either log out or remain online and his/her account will be charged for the class.
Our various classrooms are depicted in the graphic below:
|
|
|
|
o |
Renowned Teacher Classroom: The Company has attracted approximately 3,044 teachers who are classified as renowned, out of our 20,163 total teachers (approximately 15%) to prepare and develop courses. A renowned teacher is generally one who has received a distinguished teacher award from the Ministry of Education and in our opinion has developed an outstanding reputation in the teaching community. These courses are well attended with attendance ranging from 1,000-10,000 students. The renowned teacher classroom enables student from the rural regions to experience the teaching disciplines of these teachers. Renowned teacher classrooms are often recorded for subsequent viewing by students. |
|
|
|
|
o |
General Classroom: These classes are presented by qualified, albeit not renowned teachers. These classrooms are designed for 30 to 50 students. These classrooms are used for general courses, including mathematics, English, and physics. |
|
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|
|
o |
One-on-One Classroom: These are real time classrooms specially designed for students desiring personalized and private tutoring space. |
All of the classrooms are designed to be interactive whereby teacher and student can communicate electronically through text messaging, audio feeds, and email, however, due to the size of the Renowned Teacher Classroom, interactive communications are limited. Our system also maintains records of the teacher/student communications.
53
As mentioned elsewhere herein, we recognized the disparity in the level of educational services delivered by the government to the various regions in China. We believe that our platform attempts to bridge the education gap by allowing students from the poorer, less funded regions, to experience the disciplines of other qualified teachers, including renowned teachers.
Teacher Arrangements
Qualifications of Teachers
We believe the strength and future success of our virtual classroom is dependent upon the qualifications of our faculty. As a result, we have implemented the following practices designed at attain and maintain high teacher and subject matter integrity;
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|
o |
Background. We perform a series of background checks to verify academic credentials and employment history of each teacher. These checks include obtaining transcripts from schools and universities as well as phone interviews with colleagues. |
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|
o |
Experience. Each teacher must have at least a degree from a university or college recognized by the Ministry of Education. |
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|
o |
Course Subjects. Course subjects and course outlines are approved in advance to ensure that courses presented avoid sensitive political and social issues. |
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|
o |
Quality Control. We frequently monitors live sessions to ensure that teachers adhere to pre-approved course outlines and to assess overall teacher performance. We also monitor email exchanges between students and teachers. |
As of
December 31, 2010, we had over 20,000 qualified teachers.
Financial Arrangements with Teachers
We enter into formal agreements with our qualified
teachers. Under our agreements, qualified teachers receive a percentage of
subscription revenue from virtual classroom
courses and any courses that are pre-recorded
for later use. The percentage inuring to the teacher is 60% for virtual classroom
courses and 10% for all pre-recorded classes. All course materials prepared
by teachers are property of the Company.
Qualified teachers are afforded the flexibility to develop course content which they perceive as receptive to students, subject to our approval. Teachers are then able to post to the platform, specific information concerning one or more classes offered to students. Relevant information includes the subject matter of the class, date and time of the class, price of the class, and the qualifications of the teacher. On any given day, a student can browse over hundreds of classes on a variety of subject matters. More popular classes are English, math and physics. However, specialized subjects are also offered by some teachers. Courses are presented live or pre-recorded from a prior live session. Classes range between 0.5 to 1 hours longs. Pricing ranges between $1.5 and $50 per hour, again dependent upon class subject matter, level of difficulty, and teacher qualification. The following table shows the average price for three different types of courses we offer.
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Type |
|
Elementary |
|
Middle School |
|
High School |
|
|||
|
|
|
|
|
|
|
|
|||
One-to-one classroom |
|
$ |
11.76 |
|
$ |
14.71 |
|
$ |
17.65 |
|
Renowned Teacher Classroom |
|
$ |
5.88 |
|
$ |
7.35 |
|
$ |
8.82 |
|
General Classroom |
|
$ |
8.82 |
|
$ |
11.76 |
|
$ |
14.71 |
|
Our Growth Strategy
Our growth and expansion strategy for the next 6 to 12 months includes the following measures:
|
|
|
Increase the number of Company-owned learning centers. As of December 31, 2010, we have 21 Company-owned locations. Due to the size of Company-owned locations, we are able to absorb higher student traffic and generate higher overall revenues compared to franchised locations. We also recognize 100% of the revenue stream from these locations. For the year 2011, we plan to complete construction of 9 Company-owned locations that are currently under construction and open another 30 Company-owned locations by December 2011. The aggregate estimated cost to open these locations is $4,000,000. |
54
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|
|
Increase the number of franchised learning centers. As of December 31, 2010, we had over 2,346 locations within 1,400 2nd and 3rd tier cities throughout China. We estimate that there are approximately 50,000 2nd and 3rd tier cities in the PRC. Our plan is to increase the number of franchised learning centers by increasing our advertising and marketing initiatives in an effort to attract more franchisees. As of November 15, 2010, the Company has agreements to open 544 new franchised learning centers. In the next six months, we plan on spending approximately $1.2 million on a broad scale brand promotional campaign. This campaign will target a number of media outlets, including advertisements on regional television and in local newspapers in select markets, as well as holding periodic regional events in these markets, all of which will be designed to attract franchisees. |
|
|
|
On average, the total cost of opening a Company-owned learning center is approximately $100,000 as described in further detail in the following table: |
|
|
|
|
|
Interior decoration |
|
$ |
22,059 |
|
Equipments and facilities |
|
$ |
5,882 |
|
6-month Rent (paid up front) |
|
$ |
44,118/6 month |
|
Deposit |
|
$ |
7,353/month |
|
Miscellaneous |
|
$ |
22,059 |
|
Total |
|
$ |
101,471 |
|
|
|
|
Increase traffic to our virtual classrooms. We plan to allocate more capital resources to the marketing and promotion of our virtual classrooms. The above mentioned brand promotion campaign will include sponsoring events at prominent high-schools designed to promote our virtual classrooms, advertising in school newspapers, and to a lesser extent, subscribing to more per click ad space on selected Internet sites, such as Sina.com and Yahoo.com.cn. We also expect to experience increased traffic to our virtual classrooms coincident with our franchise expansion efforts. Since introduction of this platform, historical results have indicated that a majority of our virtual classroom subscribers have originated from our learning centers. |
We plan to establish additional learning centers in 2011 as follows:
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|
|
|
|
|
||
|
|
|
2011 |
|
|||
|
|
|
|
||||
New company-owned learning centers |
|
|
|
39 |
|
||
Total company-owned learning centers |
|
|
|
60 |
|
||
New franchised learning centers |
|
|
|
600 |
|
||
Total franchised learning centers |
|
|
|
2,900 |
|
||
Total Learning Centers |
|
|
|
2,960 |
|
In order to
execute our plan of expanding our business operations we will need to (i)
increase the number of our learning centers, (ii) scale and adapt our existing
network infrastructure to accommodate increased systems traffic and (iii)
increase our marketing efforts. Through 2011, we expect to open approximately
600 additional franchised locations; in the next six months, we plan on spending
approximately $1.2 million on a broad scale brand promotional campaign; and we
will need significantly more computing power as traffic within our system
increases and our learning center locations expand. We will be required to
spend significant capital and resources to manage our additional franchises,
execute our promotional campaign and to purchase equipment, and upgrade our
technology and network infrastructure to handle increased Internet traffic. In
this regard, we have budgeted approximately $1.2 million for our market
campaign, approximately $1.4 million for IT expenditures, and approximately 1.8
million to add and improve our course content in 2011. If we fail to expend
sufficient capital to execute our growth strategy, our operating results will
be harmed.
In November 2010, we began offering live courses through our company-owned learning centers which are all located in Beijing. Depending on the initial response to these live courses, we may consider expanding our live course offerings to Company-owned learning centers in other first-tier cities. We do not intend to offer live courses through our franchise-owned learning centers, nor do we intend that any of our Company-owned learning centers will become solely dedicated to live course offerings.
Live courses are taught on either a one-to-one basis or with up to 10 students. As with all of our course offerings, students purchase live courses by purchasing e-cards. Students can choose any combination of live, online
or pre-recorded courses for all of their education needs. We charge more for live courses than for online or pre-recorded courses. During the year ended December 31, 2010, revenue generated from providing live courses was less than 1% of our total
revenue.
Marketing and Promotion
Our marketing efforts target three principal areas; franchisees, students for our Company-owned learning centers, and students for our virtual classrooms.
We attract franchisees by conducting regional seminars on a periodic basis in areas that we have targeted for expansion, as well as advertising on regional television and in local newspapers in these areas. These efforts have produced in excess of 2,200 operating franchisees.
Our Company-owned learning centers are in close proximity to schools and large residential areas. We have been able to attract students to our learning centers principally through the distribution of leaflets in the nearby areas. We do not recruit students based on academic performance.
55
Traffic to our virtual classrooms has been driven principally by students from our learning centers. We expect to increase traffic to our virtual classrooms commensurate with the numerical increase of our learning centers.
We will continue the above stated marketing measures for the foreseeable future. In addition, however, as mentioned herein, we plan on spending approximately $1.2 million on a broad scale brand promotional campaign during the next six months. This campaign will create an overall brand awareness for our company and our products, and we expect the program to reach potential franchisees and students alike. Specifically, we intend to advertise on regional television and in local newspapers in select markets, hold periodic regional events in these specific markets, subscribe to more per click ad space on selected Internet sites, such as Sina.com and Yahoo.com.cn, and advertise in school newspapers.
Through December 31, 2011, we plan to spend approximately $4.7 million on marketing, as described in further detail in the following table:
|
|
|
|
|
Recruitment of students |
|
$ |
1,764,706 |
|
Recruitment of franchises |
|
$ |
735,294 |
|
Brand promotion |
|
$ |
441,176 |
|
Online Platform |
|
$ |
1,764,706 |
|
Total |
|
$ |
4,705,882 |
|
Competition
We do not have direct competition from others with a business model of offering online educational services at home and at learning centers. We face competition from online web schools with respect to our virtual classroom model, such as China Edu, although these schools are generally limited by the scope of classes offered and the number of teachers available for presentation. China Edu offers only pre-recorded courses broadcast online, targeting students aged three to eighteen in tier 1 and tier 2 cities in China. The price point of China Edu is between $176 to $426 per year. We differentiate our business from China Edu by targeting students aged six through eighteen in tier 2 and tier 3 cities at a substantially lower price point, by offering pre-recorded as well as live, real-time online courses, consumable both at home and at franchised or Company-owned learning centers.
Our business also faces competition from traditional offline cram schools. However, these schools are fragmented throughout the country with concentration mainly in tier one cities. The largest of such cram schools are Xueda, Juren and China TAL Education, which are focused on serving the tier 1 cities. Because these schools are fragmented, they have no more than 200 locations, none of which are franchised. Further, they do not offer online courses, and their teaching materials are not synchronized with official textbooks. We compete with these cram schools by offering online courses at home and at learning centers, courses synchronized with textbooks, a lower price point, and because of our franchise model, are able to expand more quickly and to more markets than the cram school business model.Accredited learning centers are traditional degree-granting schools. As we are not an accredited learning center, we do not compete with these institutions.
We believe our current competitive advantages which will lead to potential future success are as follows:
|
|
|
Business Footprint and Reputation. We believe we are the largest provider of supplementary educational teaching in the PRC and we have achieved industry acclaim for products and services. |
|
|
|
Management Experience. We have developed a strong management team which has demonstrated the ability to operate a highly successful business model. |
|
|
|
Scalability of Franchise Model. We believe that we have standardized an innovative, high quality teaching platform at our learning centers which allows for substantial geographical expansion. |
|
|
|
Attributes of our Virtual Classrooms. Our virtual classrooms have numerous attributes, including |
|
|
|
|
|
No geographical limits. We allow students from anywhere in the PRC or elsewhere to subscribe to a wide menu of courses, many of which are presented by renowned teachers. |
56
|
|
|
|
|
Real-time Interaction. Many of our classrooms allow real-time interaction between the student and teacher. |
|
|
|
|
|
Learning on demand. We provide a wide menu of live and pre-recorded courses with a broad scheduling format, including weekends and holidays. |
Employees
As of December 31, 2010, we had approximately
276 full time employees and seven officers, including our chairman and chief
executive officer. Our employees are not represented by any collective bargaining
agreement, and we have never experienced a work stoppage. We believe we have
good relations with our employees. We also have contracts with third party
software providers from time to time to develop software applications in
accordance with our specifications.
Properties
Our corporate offices are located at No. 0620, Yongleyingshiwenhuanan Rd., Yongledian Town, Tongzhou District Beijing under three year lease agreement terminating in 2012. The office space consists of approximately 1,868 square meters. Annual rent for fiscal year 2010 is expected to be approximately $360,963.
Equipment and Equipment Suppliers
Presently, the Company owns over 281 servers which are located in Beijing, Sichun, Shandong, Zhejiang and Tiejing. These servers are maintained under service agreements with third parties. For each Company-owned learning center, the Company owns between 40 to 50 desktop computers.
The Company purchases its servers and computers from various large suppliers like Dell and Lenovo, among others. The Company purchase products from its suppliers on an as needed basis and presently does not believe the loss of any one supplier will have an adverse effect on its business.
Software Development
Our learning center and virtual classroom software has been developed internally by our engineers and developers and through collaboration with third party developers. We retain ownership to all work product developed internally and by third parties. We will maintain this development strategy for future software products. Our development team has expertise in software and database programming, web application, browser, and desktop technologies.
Intellectual Property
We were granted trademark protection from PRC authorities for the names and logo of Tsingda Century and Tsingda Xiaoboshi.
A total of eight patents have been filed with the PRC authorities with respect to various aspects of our business, of which four of the applications have been granted and four applications are pending.
|
|
|
|
|
|
|
Description Appearance Design |
|
Patent No |
|
Term of the Patent |
|
Date Issued/Filed |
|
|
|
|
|
|
|
Card (all-in-card for entrepreneurship training) |
|
200730161941.4 |
|
July 27, 2007 to July 26, 2017 |
|
Issued: June 25, 2008 |
Card (Tsingda Learning Center) |
|
200730161942.9 |
|
July 27, 2007 to July 26, 2017 |
|
Issued: July 16, 2008 |
Card (all-in-card for early education) |
|
200730161943.3 |
|
July 27, 2007 to July 26, 2017 |
|
Issued: June 25, 2008 |
Card (all-in-card for China education) |
|
200730161944.8 |
|
July 27, 2007 to July 26, 2017 |
|
Issued: May 21, 2008 |
Computer-aided Children Evaluation and Guiding System |
|
2007101298785 |
|
Pending |
|
Filed: February 20 2009 |
Computer-aided Children Care Pattern System |
|
2007101298770 |
|
Pending |
|
Filed: February 20 2009 |
Distant Network Education Interactive Platform |
|
2007101298766 |
|
Pending |
|
Filed: February 20 2009 |
Evaluation and Monitoring Method of Distant Online Education Platform |
|
2007101298751 |
|
Pending |
|
Filed: February 20 2009 |
We have registered four software applications with the PRC authorities with respect to various aspects of our business. Under PRC Copyright Law, a copyright protects both the design of a software product and the name of the product. Copyrights are granted for a term of 50 years from the date of first publication.
|
|
|
|
|
Name of the Software |
|
Date of Filing |
|
Registration No. |
|
|
|
|
|
Network Baomu Software V1.0 |
|
May 20, 2007 |
|
2007SR14359 |
Tsingda Shouhushen Software V2.0 |
|
December 1, 2008 |
|
2009SR014243 |
Tsingda Learning Center Software V1.0 |
|
April 20, 2007 |
|
2009SR014242 |
Tsingda Internet Classroom Software V1.0 |
|
July 15, 2008 |
|
2009SR014244 |
Litigation
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to
57
time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
Government Regulation
The Chinese government regulates the education services industry and the substance of Internet content. This section summarizes the principal Chinese regulations relating to our businesses. We operate our business in China under a legal framework that consists of the State Council, which is the highest executive authority of the Chinese central government, and several ministries and agencies under its authority, including the Ministry of Education, or MOE, the State Administration of Foreign Exchange, or SAFE, the Ministry of Information Industry, or MII, the State Administration for Industry and Commerce, or SAIC, the Ministry of Civil Affairs, or MCA, and their respective authorized local counterparts.
We have been advised by our PRC counsel that, except for the license for broadcasting audio-video programs through the Internet discussed below, for which we have already applied, no consent, approval or license other than those already obtained by our Chinese subsidiaries and affiliates is required under any of the existing laws and regulations of China for our business and operations.
Regulations on Broadcasting Audio-Video Programs through the Internet or Other Information Network
The State Administration of Radio, Film and Television, or SARFT, and MII promulgated the Rules for Administration of Internet Video-Audio Programs Service, or the Video-Audio Programs Rules, which became effective on January 31, 2008. The Video-Audio Programs Rules apply to the activities of broadcasting, integration, transmission, downloading of audio-video programs with computers, televisions or mobile phones as the main terminals and through various types of information networks. Pursuant to the Video-Audio Programs Rules, a permit for broadcasting audio-video programs through an information network is required to engage in these Internet broadcasting activities. On April 13, 2005, the State Council announced a policy on private investments in businesses in China that relate to cultural matters, which prohibits private investments in businesses relating to the dissemination of audio-video programs through information networks. On December 24, 2010, we obtained the License for Broadcasting Audio-Video Program through the Internet issued by the State Administration of Radio Film and Television (license No. 0110588).
Educational websites refers to websites of organizations providing education or education-related information services to website visitors by means of a database or online education platform connected via the Internet or an educational television station. Online education schools refers to education websites that issue educational certificates in connection with their providing academic education services or training services.
On June 29, 2004, the State Council issued the Decision on Setting Down Administrative Licenses for the Administrative Examination and Approval Items Really Necessary to be Retained, which provides that an administrative license is required for online education schools that provide degrees to students, but not for educational websites that do not provide degrees to students, such as Tsingda Education.
Regulations on Operating Private Schools
The principal regulations governing private education in China consist of the Education Law of China, The Law for Promoting Private Education (2003), The Implementation Rules for the Law for Promoting Private Education (2004) and the Regulations on Chinese-Foreign Cooperation in Operating Schools. These regulations are summarized below.
Education Law of China
The Education Law of China, or the Education Law, was enacted on March 18, 1995. The Education Law sets forth provisions relating to the fundamental education systems of China, including a system of pre-school education, primary education, secondary education and higher education, a system of nine-year compulsory education and a system of education certificates. The Education Law requires the government to formulate plans for the development of education and the establishment and operation of schools and other education institutions. In principle, enterprises, social organizations and individuals are encouraged to operate schools and other types of educational organizations in accordance with Chinese laws and regulations. Nevertheless, no school or any other accredited educational institution may be established for profit-making purposes. However, private schools may be operated for reasonable returns, as described in more detail below.
The Law for Promoting Private Education (2003) and The Implementation Rules for the Law for Promoting Private Education (2004)
The Law for Promoting Private Education (2003) became effective on September 1, 2003, and its implementing regulations, The Implementation Rules for the Law for Promoting Private Education (2004), became effective on April 1, 2004. Under these regulations, private schools are defined as schools established by individuals or private social organizations using private funds. Private schools providing degree education, pre-school education, education for self-study aid and other academic education are subject to approval by the education authorities, while private schools engaging in occupational qualification training and occupational skill training are subject to approvals from the authorities in charge of labor and social welfare. An approved private school will be granted an operating permit, and it must be registered with the MCA or its local counterpart as a privately run non-enterprise legal person.
58
The operation of private schools is highly regulated. For example, the types and amounts of fees charged by private schools offering certifications must be approved by the relevant governmental authority and be publicly disclosed, and the types and amounts of fees charged by private schools that do not offer certifications need only be filed with the relevant governmental authority and be publicly disclosed.
Private education is treated as a public welfare undertaking under the regulations. Nonetheless, investors in a private school may elect to require reasonable returns from the schools. Under the regulations, an election to establish a private school as one requiring reasonable returns must be made in the articles of association of the school. For schools that have made this election, the amount of reasonable return that can be distributed to investors each year is determined based on a percentage of the schools operating surplus, which is equal to the schools annual net income less the aggregate amount of donations received, government subsidies, if any, the amount required to be reserved for the schools development fund and other expenses as required by the regulations. This percentage is determined by the schools board of directors, taking into consideration the following factors: (i) the schools tuition and other fees, (ii) the ratio of the schools expenses used for educational activities and improving the educational conditions to the total fees collected; and (iii) the schools admission standards and educational quality. Information relating to these factors must be publicly disclosed before the schools board determines the percentage of the schools annual net balance that can be distributed as reasonable returns. This disclosed information and the decision to distribute reasonable returns must also be filed with the approval authorities within 15 days from the decision made by the board. However, none of the current Chinese laws and regulations provides a formula or other guidelines for determining reasonable returns. In addition, none of the current Chinese laws and regulations sets forth different requirements or restrictions on a private schools ability to operate its education business based on such schools status as a school that requires reasonable returns or a school that has not made this election. At the end of each fiscal year, private schools are required to allocate a certain amount to their development fund for the construction and maintenance of the school and the procurement and upgrade of educational equipment. For private schools that require reasonable returns, this amount must be no less than 25% of the annual net income or the annual increase in the net assets of the school, while for other private schools, this amount must be no less than 25% of the annual increase in the net assets of the school, if any. Private schools that have not elected to require reasonable returns are entitled to the same preferential tax treatment as public schools. The regulations require that preferential tax treatment policies applicable to private schools requiring reasonable returns to be formulated by the finance authority, taxation authority and other authorities under the State Council, but to date no such regulations have been promulgated by the relevant authorities. We have received a legal opinion from our PRC counsel stating that we are not a private school.
The Company, through its subsidiary Beijing Tsingda Century Training School, acquired a license from the PRC government to issue course completion certificates to students. These certificates are not equivalency degrees, but rather these certificates acknowledge that a student has passed a particular course offered by Tsingda.
Regulations on Chinese-Foreign Cooperation in Operating Schools
Chinese-foreign cooperation in the operation of schools and training programs is governed by the Regulations on Operating Chinese-Foreign Schools, issued by the State Council in 2003 in accordance with the Education Law, the Occupational Education Law and the Law for Promoting Private Education.
The Regulations on Operating Chinese-foreign Schools and its implementing regulations, the Implementing Rules for the Regulations on Operating Chinese-foreign Schools, or the Implementing Rules, which were issued by the MOE in 2004, encourage substantive cooperation between overseas educational organizations, which are required to have relevant qualifications and experience in providing high-quality education, and Chinese educational organizations to jointly operate various types of schools in China.
Permits for Chinese-foreign cooperation in operating schools must be obtained from the relevant education authorities or the authorities that regulate labor and social welfare in China. Since all of our learning centers are operated by our Chinese affiliated entity and not by us, we believe, based on an opinion received from our PRC counsel, that we are not required to apply for these permits.
Additionally, the Regulations on Operating Chinese-Foreign Schools and its Implementing Rules require that the foreign party to Chinese-foreign cooperative educational institutions or programs be a foreign educational institution, and under those regulations, a for-profit company, such as us, cannot qualify as a foreign educational institution. As a result, we cannot direct our affiliates in China, and instead we are a service provider to these affiliates.
In August 2004, the MOE promulgated the Announcement Regarding Re-Approval of Chinese-foreign Cooperative Educational Institutions and Programs, which requires Chinese-foreign cooperative educational institutions and programs that were established before July 1, 2004 (the effective date for the Implementing Rules) to obtain re-approval from the MOE.
In April 2007, the MOE issued the Circular on Further Regulating Chinese-foreign Cooperative Education Programs. The circular directs the local education authorities generally to suspend the approval of any new Chinese-foreign cooperative polytechnic education programs until the end of 2008. To ensure the quality of the Chinese-foreign education programs, the circular emphasizes the regulatory supervision of these programs and advises local education authorities to closely supervise and monitor the existing programs, especially in recruiting materials, advertisement, and issuance of degrees and diplomas, and directs them to report and remedy any non-compliance by existing programs of the applicable regulations.
59
Regulations on Internet Information Services
The State Council issued the Telecom Regulations and the Internet Information Services Administrative Measures, or the Internet Information Measures, on September 25, 2000.
The Internet Information Measures require that commercial Internet content providers, or ICPs, must either obtain a license for Internet information services, or an ICP license, from, or make an ICP filing with, the appropriate telecommunications authorities to carry on any commercial Internet information services in China. Generally, an ICP license is required to provide Internet information services for profit-making purposes, whereas only an ICP filing is required to provide Internet information services on a non-profit basis. We have received all necessary approvals in this regard.
In July 2006, the MII issued the Notice on Strengthening Management of Foreign Investment in Operating Value-Added Telecom Services. The notice prohibits Chinese ICPs engaged in providing value-added telecom services from leasing, transferring or selling their ICP licenses or providing facilities or other resources to illegal foreign investors. The notice requires Chinese ICPs to directly own the trademarks and domain names for the websites they operate, as well as servers and other infrastructure used to support these websites. The notice also requires Chinese ICPs to evaluate their compliance with the notice by November 1, 2006 and correct any non-compliance. A Chinese ICPs failure to complete the procedures by November 1, 2006 could be the basis for revocation of its ICP license.
Regulations Relating to Information Security
On December 28, 2000, the National Peoples Congress enacted the Decisions Regarding Maintaining Internet Security, which prohibits any use of the Internet that results in a breach of public security, dissemination of socially destabilizing content or divulgence of state secrets. The conduct prohibited is broadly defined under the decisions.
According to other relevant regulations, ICPs must complete mandatory security filing procedures with local public security authorities and must also report any public dissemination of prohibited content.
Regulations on Protection of the Right of Dissemination through Information Networks
On May 18, 2006, the State Council issued the Regulations on Protection of the Right of Dissemination through Information Networks, and they became effective on July 1, 2006. These regulations require that every organization or individual who disseminates a third partys work, performance, audio or visual recording products to the public through an information network must obtain permission from, and pay compensation to, the copyright owner of these products, unless otherwise provided under relevant laws and regulations. The copyright owner may take technical measures to protect his or her right of dissemination through information networks and any organization or individual may not intentionally evade, destroy or otherwise assist others in evading these protective measures unless permissible under law. These regulations also provide that permission from and compensation for the copyright owner are not required in the event of limited dissemination to teaching or research staff for the purpose of school teaching or scientific research.
Regulations on Copyright and Trademark Protection
China has adopted legislation governing intellectual property rights, including copyrights and trademarks. China is a signatory to the main international conventions on intellectual property rights and became a member of the Agreement on Trade Related Aspects of Intellectual Property Rights, or TRIPS, upon its accession to the World Trade Organization in December 2001.
Copyright. The National Peoples Congress amended its Copyright Law in 2001 to widen the scope of works and rights that are eligible for copyright protection. The amended Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center.
Trademark. The Chinese Trademark Law, adopted in 1982 and revised in 2001, protects the proprietary rights to registered trademarks. The Trademark Office, which is under the SAIC, handles trademark registrations and grants a ten-year term to registered trademarks, subject to renewal for another ten years. Trademark license agreements must be filed with the Trademark Office for recording. We have registered nine trademarks with the Trademark Office and are in the process of registering additional marks. In addition, if a registered trademark is recognized as a well-known trademark, the proprietary right of the trademark holder may be extended beyond the registered sphere of products and services of the trademark.
On November 5, 2004, the MII amended the Measures for Administration of Domain Names for the Chinese Internet, or the Domain Name Measures. The Domain Name Measures regulate the registration of domain names, such as the first tier domain name .cn. In February 2006, China Internet Network Information Center, or CINIC, issued the Implementing Rules for Domain Name Registration and the Measures on Domain Name Disputes Resolution, pursuant to which CINIC can authorize a domain name dispute resolution institution to decide disputes.
60
Regulation of the Software Industry
Policies to Encourage the Development of Software
On June 24, 2000, the State Council issued Certain Policies to Encourage the Development of Software and Integrated Circuit Industries, or the Policies, to encourage the development of software and integrated circuit industries in China and to enhance the ability of PRC information technology companies to compete in the international market. The Policies facilitate the development of software and integrated circuit industries in China through various methods, including:
|
|
|
encouraging venture capital investments in the software industry and providing capital to software enterprises or assisting such software enterprises to raise capital overseas; |
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|
|
providing tax incentives, including an immediate tax rebate for taxpayers who sell self-developed software products before 2010 in the amount of the statutory value-added tax that exceeds 3%, and a number of exemptions and reduced corporate income tax rates; |
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|
providing government support, such as government funding in the development of software technology; |
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|
providing preferential treatments, such as credit facilities with low interest rates to enterprises that export software products; |
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|
|
adopting various strategies to ensure that the software industry has sufficient expertise; and |
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|
|
implementing measures to enhance intellectual property protection in China. |
To qualify for preferential treatments, an enterprise must be recognized as a software enterprise by governmental authorities. A software enterprise is subject to annual inspection, failure to pass such inspection in a given year would cause the enterprise to lose the relevant benefits
Software Products Administration
On October 27, 2000, the MIIT issued the Measures Concerning Software Products Administration to regulate and administer software products and facilitate the development of the software industry in China. Pursuant to the Measures Concerning Software Products Administration, all software products operated or sold in China must be duly registered with and recorded by the relevant authorities, and no entity or individual is allowed to sell unregistered and unrecorded software products. In order to produce software products in China, a software producer is required to have:
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|
|
the status of an enterprise legal person, which scope of operations must include computer software business (including technology development of software or production of software products); |
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|
a fixed production site; |
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necessary conditions and technologies for producing software products; and |
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|
quality control measures and capabilities for the production of software products. |
Software developers or producers are allowed to sell their registered and recorded software products independently or through agents, or by way of licensing. Software products developed in China must be registered with local provincial governmental authorities in charge of the information industry and subsequently filed with the taxation authority at the same level and the MIIT. Imported software products, i.e., software developed overseas and sold or distributed into China, must be registered with the MIIT. Upon registration, the software products will be granted registration certificates. Each registration certificate is valid for five years from the issuance date and may be renewed upon expiry. The MIIT and other relevant authorities may carry out supervision and inspection over the development, production, operation and import/export of software products in and out of China.
On March 5, 2009, the MIIT promulgated the new Measures Concerning Software Products Administration, or the New Measures, which became effective on April 10, 2009. Under the New Measures, software products operated or sold in China are not required to be registered or recorded by relevant authorities, and software products developed in China (including those developed in China on the basis of imported software) can enjoy certain favorable policies when they have been registered and recorded. The New Measures also eliminated the previous requirements set forth above.
Software Copyright
The State Council promulgated the Regulations on the Protection of Computer Software, or the Software Protection Regulations, on December 20, 2001, which became effective on January 1, 2002. The Software Protection Regulations were promulgated, among
61
other things, to protect the copyright of computer software in China. According to the Software Protection Regulations, computer software that is independently developed and attached to physical goods will be protected. However, such protection does not apply to any ideas, mathematical concepts, processing and operation methods used in the development of software solutions. Under the Software Protection Regulations, PRC citizens, legal persons and organizations will enjoy copyright protection for computer software that they have developed, regardless of whether the software has been published. Foreigners or any person without a nationality will enjoy copyright protection over computer software that they have developed, as long as such computer software was first distributed in China. Software of foreigners or any person without a nationality will enjoy copyright protection in China under these regulations in accordance with a bilateral agreement, if any, executed by and between China and the country to which the developer is a citizen of or in which the developer resides, or in accordance with an international treaty to which China is a party. Under the Software Protection Regulations, owners of software copyright will enjoy the rights of publication, authorship, modification, duplication, issuance, lease, transmission on the information network, translation, licensing and transfer. Software copyright protection takes effect on the day of completion of the softwares development. The protection period for software developed by legal persons and other organizations is fifty years and ends on December 31 of the fiftieth year from the date the software solution was first published. However, the Software Protection Regulations will not protect the software if it is not published within fifty years from the date of the completion of its development. Civil remedies available under the Software Protection Regulations against copyright infringements include cessation of the infringement, elimination of the effects, apology and monetary compensation. The copyright administrative authorities may order the infringer to stop all infringing acts, confiscate illegal gains, confiscate and destroy infringing copies, and may impose a fine on the offender under certain circumstances.
Software Copyright Registration
On February 20, 2002, the State Copyright Administration of the PRC promulgated and enforced the Measures Concerning Registration of Computer Software Copyright Procedures, or the Registration Procedures, to implement the Software Protection Regulations and to facilitate the development of Chinas software industry. The Registration Procedures apply to the registration of software copyrights and software copyright exclusive licensing contracts and assignment contracts. The registrant of a software copyright will either be the copyright owner or another person (a natural person, legal person or an organization) in whom the software copyright becomes vested through succession, assignment or inheritance. Upon registration, the registrant should be granted a registration certificate by the China Copyright Protection Center.
Limitations on Foreign Ownership of Our Businesses
The Foreign Investment Industry Guidance Catalogue (amended in 2007), the Regulations on Chinese-Foreign Cooperation in Operating School, the Implementation Measures for the Regulations on Sino-Foreign Cooperation in Operating Schools and other applicable laws and regulations limit foreign ownership in entities, or foreign participation in entities, engaging in specified education activities by:
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requiring that the foreign party in any Chinese-foreign cooperation in operating schools be a qualified foreign educational institution; |
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requiring regulatory approval for any Chinese-foreign cooperation in operating schools; |
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prohibiting foreign investment in schools providing compulsory education (that is, the first grade through the ninth grade, or primary school and junior high school education); and |
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restricting foreign investment in educational websites. |
Moreover, from a practical perspective, the MOE will not approve any foreign investment or participation in online degree education.
Our corporate structure is designed to comply with current regulatory limitations on foreign ownership and participation while engaging in our core business activities.
Operating License
Our business is subject to regulation by governmental agencies in the PRC. Business and company registrations are certified on a regular basis and must be in compliance with the laws and regulations of the PRC and provincial and local governments and industry agencies, which are controlled and monitored through the issuance of licenses and certificates.
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Tsingda Education has received a license from the Beijing Administration for Industry and Commerce. This business license enables us to conduct our business of providing non-certified educational services. The registration No. is 10112006225438, and it is valid from October 24, 2003 through October 23, 2013. Tsingda Management has received a license from the Beijing Administration for Industry and Commerce which enables us to engage in business consulting, education information services and organizing cultural exchanges activities (excluding shows). This license is valid from November 26, 2007 to November 25, 2027. Once the terms expire, all the business licenses are renewable.
SAFE regulations on overseas investment of Chinese residents and employee stock options
The SAFE issued The Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies in October 2005, which became effective in November 2005, and an implementing rule in May 2007, collectively SAFE Rules. According to SAFE Rules, Chinese residents, including both legal persons and natural persons and Chinese citizens and foreign citizens who reside in China, are required to register with SAFE or its local branch before establishing or controlling any company outside China, referred to in SAFE rules as an offshore special purpose company, for the purpose of financing that offshore company with their ownership interests in the assets of or their interests in any Chinese enterprise. In addition, a Chinese resident that is a shareholder of an offshore special purpose company is required to amend its SAFE registration with the local SAFE branch with respect to that offshore special purpose company in connection with the injection of equity interests or assets of a Chinese enterprise in the offshore company or overseas fund raising by the offshore company, or any other material change in the capital of the offshore company, including any increase or decrease of capital, transfer or swap of share, merger, division, long-term equity or debt investment or creation of any security interest. The SAFE Rules apply retroactively. As a result, Chinese residents who have established or acquired control of offshore companies that have made onshore investments in China in the past were required to complete the relevant registration procedures with the competent local SAFE branch. If any resident of China failed to file its SAFE registration for an existing offshore entity, any dividends remitted by the onshore entity to its overseas parent since April 21, 2005 will be considered to be an evasion of foreign exchange purchase rules, and the payment of the dividend will be illegal. As a result of any illegal action of this type, both the onshore entity and its actual controlling person(s) can be fined. In addition, failure to comply with the registration procedures may result in restrictions on the relevant onshore entity, including prohibitions on the payment of dividends and other distributions to its offshore parent or affiliate and capital inflow from the offshore entity. Chinese resident shareholders of the offshore entity may also be subject to penalties under Chinese foreign exchange administration regulations.
We have asked our shareholders and beneficial owners who are Chinese residents to make the necessary applications and filings as required under Circular 75 and other related rules, as well as pursuant to the Escrow Agreement we entered into in connection with our September 2010 private placement. However, due to uncertainty concerning the reconciliation of Circular 75 with other approval or registration requirements, it remains unclear how Circular 75, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We will attempt to comply, and attempt to ensure that our shareholders and beneficial owners who are subject to these rules comply, with the relevant requirements. However, we cannot provide any assurances that all of our shareholders and beneficial owners who are Chinese residents will comply with our request to make or obtain any applicable registrations or comply with other requirements required by Circular 75 or other related rules. In addition, certain of the holders of options to purchase our Ordinary Shares are Chinese residents. We have been advised that it is unclear under SAFE Rules whether these option holders would be deemed to be beneficial owners of our company for the purposes of these rules as a result of holding these options. The failure or inability of our Chinese resident shareholders or beneficial owners to register with SAFE in a timely manner pursuant to SAFE Rules, or the failure or inability of any future Chinese resident shareholders or beneficial owners to make any required SAFE registration or comply with other requirements under SAFE Rules may subject these shareholders or beneficial owners to fines or other sanctions and may also limit our ability to contribute additional capital into or provide loans to our Chinese subsidiaries, limit our Chinese subsidiaries ability to pay dividends to us, repay shareholder loans or otherwise distribute profits or proceeds from any reduction in capital, share transfer or liquidation to us, or otherwise adversely affect us.
On March 28, 2007, SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Option Holding Plan or Stock Option Plan of Overseas Listed Company, or the Stock Option Rule. The purpose of the Stock Option Rule is to regulate foreign exchange administration of Chinese citizens who participate in employee stock holding plans and stock option plans of offshore listed companies. According to the Stock Option Rule, if a Chinese citizen participates in any employee stock holding plan or stock option plan of an offshore listed company, a Chinese domestic agent or the Chinese subsidiary of the offshore listed company is required to file, on behalf of the individual, an application with SAFE to obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection with stock holding or stock option exercises. This restriction exists because a Chinese citizen may not directly use offshore funds to purchase stock or exercise stock options. Concurrent with the filing of the required application with SAFE, the Chinese domestic agent or the Chinese subsidiary must obtain approval from SAFE to open a special foreign exchange account at a Chinese domestic bank to hold the funds required in connection with the stock purchase or option exercise, any returned principal profits upon sales of stock, any dividends issued on the stock and any other income or expenditures approved by SAFE. The Chinese domestic agent or the Chinese subsidiary also is required
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to obtain approval from SAFE to open an offshore special foreign exchange account at an offshore trust bank to hold offshore funds used in connection with any employee stock holding plans.
All proceeds obtained by a Chinese citizen from dividends acquired from the offshore listed company through employee stock holding plans or stock option plans, or sales of the offshore listed companys stock acquired through other methods, must be remitted back to China after relevant offshore expenses are deducted. The foreign exchange proceeds from these sales can be converted into Renminbi or transferred to the individuals foreign exchange savings account after the proceeds have been remitted back to the special foreign exchange account opened at a Chinese bank. If stock options are exercised in a cashless exercise, the Chinese individuals exercising them are required to remit the proceeds to the special foreign exchange account.. If we or our Chinese employees fail to comply with the Stock Option Rule, we and/or our Chinese employees may face sanctions imposed by foreign exchange authority or any other Chinese government authorities.
Foreign Exchange Control and Administration
Foreign exchange in China is primarily regulated by:
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The Foreign Currency Administration Rules (1996), as amended; and |
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The Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules. |
Under the Administration Rules, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, and trade and service-related foreign exchange transactions. Conversion of Renminbi into foreign currency for capital account items, such as direct investment, loans, investment in securities and repatriation of funds, however, is still subject to the approval of SAFE. Under such rules, foreign-invested enterprises may only buy, sell and remit foreign currencies at banks authorized to conduct foreign exchange transactions after providing valid commercial documents and, in the case of capital account item transactions, only after obtaining approval from SAFE.
Under the Foreign Currency Administration Rules, foreign invested enterprises are required to complete the foreign exchange registration and obtain the registration certificate. Tsingda Management has not complied with these requirements. Tsingda Education and Tsingda Network are domestic enterprises and do not have to comply with these requirements.
The value of the Renminbi against the US dollar and other currencies may fluctuate and is affected by, among other things, changes in Chinas political and economic conditions. Historically, the conversion of Renminbi into foreign currencies, including US dollars, has been based on rates set by the Peoples Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the US dollar. Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain foreign currencies. There remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the US dollar.
Regulation on Mergers and Acquisitions
On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, or CSRC, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006. This new regulation, among other things, has certain provisions that purport to require offshore special purpose vehicles, or SPVs, formed for the purpose of listing and controlled by PRC individuals or companies, to obtain the approval of the CSRC prior to listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval.
In addition, under this new regulation, mergers and acquisitions of equity or assets involving PRC enterprises by foreign investors are subject to approval by the Ministry of Commerce or local branches or other competent government authorities. If we continue our expansion through acquiring PRC domestic companies by our offshore affiliates, we will be subject to such approval requirement.
Failure to comply with this new regulation may lead to sanctions by the Ministry of Commerce or other PRC regulatory authorities that are provided for in other relevant regulations governing foreign investment, foreign exchange, taxation, business registration, securities, and administration of state-owned assets.
Dividend Distributions
Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 1997 and 2008, respectively, and various regulations issued by SAFE, and other relevant PRC government authorities, the PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China.
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Tsingda Education and Tsingda Network are regulated by the laws governing foreign-invested enterprises in the PRC. Accordingly, they are required to allocate 10% of their after-tax profits based on PRC accounting standards each year to their general reserves until the accumulated amount of such reserves has exceeded 50% of their registered capital, after which no further allocation is required to be made. As of December 31, 2009, the registered capitals of Tsingda Education and Tsingda Network are $4,421,156 and $588,235, respectively, and both companies have made the required allocations to the general reserves. These reserve funds, however, may not be distributed to equity owners except in accordance with PRC laws and regulations. We cannot assure you that the PRC government authorities will not request our subsidiaries to use their after-tax profits for their own development and restrict our subsidiaries ability to distribute their after-tax profits to us as dividends.
Pursuant to the new EIT law and its implementing regulations, dividends payable by a foreign-invested enterprise to its foreign investors will be subject to a 10% withholding tax if the foreign investors are considered as non-resident enterprises without any establishment or place within China or if the dividends payable have no connection with the establishment or place of the foreign investors within China, to the extent that the dividends are deemed China sourced income, unless any such foreign investors jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The Marshall Islands, where our immediate holding company is incorporated, does not have such a tax treaty with China. In addition, pursuant to a notice jointly promulgated by the Ministry of Finance and the State Administration of Taxation of the PRC on February 22, 2008, distribution of accumulated profits of foreign-invested enterprises arising before January 1, 2008 will be exempt from withholding tax even if the distribution is made after January 1, 2008 but the distribution of profits arising after January 1, 2008 will be subject to withholding tax.
Regulation of Employment
On June 29, 2007, the National Peoples Congress promulgated the Employment Contract Law of the Peoples Republic of China, or ECL, which became effective on January 1, 2008. On September 18, 2008, the State Council issued the Peoples Republic of China Employment Contract Law Implementation Rules, or ECL Implementation Rules, which became effective on September 18, 2008, the date of issuance. The ECL and ECL Implementation Rules require employers to enter into written contracts with their employees, restrict the use of temporary workers and aim to give employees long-term job security.
Pursuant to the ECL, employment contracts lawfully entered into prior to the implementation of the ECL and continuing as of the date of its implementation will continue to be valid. Where an employment relationship was established prior to the implementation of the ECL but no written employment contract was entered into, a contract must be entered into within one month after the ECLs implementation.
Regulations on Franchise Businesses
On February 6, 2007, the State Council promulgated the Regulation on the Administration of Commercial Franchisees, which became effective on May 1, 2007. This regulation requires that any enterprise engaging in trans-provincial franchise business shall register with the Ministry of Commerce, or MOC, and any enterprise engaging in franchise business within one province shall register with the provincial counterparts of MOC. On April 30, 2007, the MOC promulgated the Administrative Measures for the Filing of Commercial Franchises, which set forth in detail the procedures and documents required for the filing, including among other things the franchise agreement, market plan trademarks, and patents relating to the franchise.
According to the Regulation on the Administration of Commercial Franchises, a franchisor conducting franchise activities shall possess a mature business model and the ability to provide long-term business guidance, technical support, business training and other services to the franchisee. It shall have at least two direct sales stores and have done the business for more than a year. If a franchisor conducts its operations within the scope of a province, autonomous region, or municipality, it must file legal documents with the competent commercial authorities of the province, autonomous region or municipality. If a franchisor conducts its operations within the scope of two or more provinces, autonomous regions, or municipalities, it must file legal documents with the competent commercial authority of the PRC state council. A franchisor must submit the following documents and materials:
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copies of its business license or enterprise registration certificate; |
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a sample franchise contract; |
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a brochure for franchise operations; |
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a market plan; |
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written commitments and relevant materials proving that the relevant filing provisions have been followed; and |
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other documents and materials required by the relevant commercial authorities. |
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Prior to our reverse acquisition transaction with Tsingda Technology, our independent registered public accounting firm was PMB Helin Donovan, LLP (PMB), while Tsingda Managements independent registered public accounting firm was Jeffrey & Company.
On August 23, 2010, we dismissed PMB Helin Donavan, LLP (PMB) as our independent registered public accounting firm. The Board of Directors of the Company approved such dismissal on August 19, 2010. The Companys Board of Directors participated in and approved the decision to change our independent registered public accounting firm. PMBs reports on the financial statements of the Company for the years ended June 30, 2009 and 2008 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audit and review of the financial statements of the Company through August 23, 2010, there were no disagreements on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with PMBs opinion to the subject matter of the disagreement. In connection with the audited financial statements of the Company for the years ended June 30, 2009 and 2008 and interim unaudited financial statement through August 23, 2010, there have been no reportable events with the Company as set forth in Item 304(a)(1)(v) of Regulation S-K.
Engagement of Jeffrey & Company.
On August 19, 2010, the Board appointed Jeffrey & Company as the Companys new independent registered public accounting firm. The decision to engage Jeffrey & Company was approved by the Companys Board of Directors on August 19, 2010. Prior to August 19, 2010, we did not consult with Jeffrey & Company regarding (1) the application of accounting principles to a specified transactions, (2) the type of audit opinion that might be rendered on our financial statements, (3) written or oral advice was provided that would be an important factor considered by us in reaching a decision as to an accounting, auditing or financial reporting issues, or (4) any matter that was the subject of a disagreement between us and its predecessor auditor as described in Item 304(a)(1)(iv) or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.
Dismissal of Jeffrey & Company and Engagement of Malone & Bailey LLP
On October 14, 2010, Compass Acquisition Corporation (the Company) dismissed Jeffrey & Company, as its independent registered public accounting firm and appointed Malone Bailey LLP as its new independent registered public accounting firm. Since the Company does not have an audit or similar committee, the termination of Jeffrey & Company and the appointment of Malone Bailey LLP as the Companys new independent registered public accounting firm was approved by the Companys board of directors.
Jeffrey & Companys report on the financial statements of the Company for the fiscal years ended December 31, 2009 and 2008 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principle. During the fiscal years ended December 31, 2009 and 2008 and through October 14, 2010, there have been no disagreements with Jeffrey & Company (as defined in Item 304(a)(1)(iv) of Regulation S-K) on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Jeffrey & Company, would have caused it to make reference thereto in any of its reports. During the fiscal years ended December 31, 2009 and 2008 and through October 14, 2010, there were no reportable events as defined in Regulation S-K Item 304(a)(1)(v). During the fiscal years ended December 31, 2009 and 2008 and through October 14, 2010, neither the Company nor anyone on behalf of the Company has consulted with Malone Bailey LLP regarding either:
1. The application of accounting principles to specified transactions, either completed or proposed; or the type of audit opinion that might be rendered on the Companys financial statements, and neither was a written report provided to the Company nor was oral advice provided that Malone Bailey LLP concluded was an important factor considered by the Company in reaching a decision as to an accounting, auditing or financial reporting issue; or
2. Any matter that was either the subject of a disagreement or a reportable event, as each term is defined in Items 304(a)(1)(iv) or (v) of Regulation S-K, respectively.
MANAGEMENT
Directors and Executive Officers
The following table sets forth the name, age, and position of our executive officers and directors. Executive officers are elected annually by our Board of Directors. Each executive officer holds his office until he resigns, is removed by the Board, or his successor is elected and qualified. Directors are elected annually by our Shareholders at the annual meeting. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal.
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NAME |
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AGE |
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POSITION |
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Zhang Hui |
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44 |
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Chairman of the Board of Directors, Chief Executive Officer and President |
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Liu Juntao |
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48 |
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Executive Vice President and Director |
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Kang Chungmai |
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40 |
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Secretary and Chief Financial Officer |
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Norm Klein |
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60 |
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Director |
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David Bolocan |
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46 |
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Director |
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Bi Cheng |
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53 |
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Director |
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Zhang Hui has been the Companys chairman, chief executive officer and president since May 2010 and established Tsingda Education in 2003, and has been its chairman, chief executive officer since its inception. From 1999 to 2003, he was vice president of Singapore Holding Group, during when he has integrated management methods and cultural diversity under different background efficiently, and then setting up a new branch for Singapore Holding Group-Holding Technology (Shenzhen) Co., Ltd. From 1995 to 1999, Mr. Zhang worked as the newsroom director and vice chief editor of a China technology information magazine. He graduated from Wuhan University of Technology in 1989.
Liu Juntao has been the Companys executive vice president and Director since May 2010 the executive vice-president of Tsingda Education since its inception. Prior to his employ with Tsingda, he had over 10 years of administrative work for government. He also spent 5 years in private industry in the PRC where worked in product development, market exploiting and customer service. Mr. Liu graduated from Huazhong Agriculture University in 1983.
Kang Chungmai has been the Companys secretary and chief financial officer since May 2010 and chief financial officer and secretary of Tsingda Education since January 2010. From 2004 to 2007, he worked as managing director in Zero2IPO Group in Beijing a financial consulting firm. From 1999 to 2002, he served as CFO in Optoma Electronics (the largest TFT-LCD backlight and DLP projector producer in the world). From 1996 to 1999, he served as financial manager in Far Eastern Department Stores (the largest chain of department stores in the Greater China Region) based in Taipei. He had broad experiences in general financial management, debt and equity financing, foreign exchange hedging, offshore holding structure design, and investment evaluation. Mr. Kang holds his master degree in International Finance from the University of Westminster, London, UK in 1996. He also expects to receive the PhD degree in Management from the University of Edinburgh, Edinburgh, Scotland in 2010.
Norm Klein, director, has over twenty years of experience working in manufacturing and process controls with major companies. Since 2001, Mr. Klein has acted as the Chief Financial Officer, Chief Operating Officer, and Investor Relations Officer for Eastbridge Investment Group Corporation [OTCBB: EBIG], a consulting firm. Prior to that, Mr. Klein worked with corporations such as Clorox, Honeywell, Dreyers Ice Cream, and Ingersol Rand Corporation, where Mr. Klein provided consulting expertise in strategic planning, financial management, marketing and selling, manufacturing and process controls. Mr. Klein holds a Bachelors Degree in Mechanical Engineering from Rose Hulman Institute and a Masters Degree in Business Administration from the University of Iowa.
David Bolocan, director, is a retail banking and marketing executive who has held positions at Sun Trust, Washington Mutual, JPM Chase and Bank of America. Since 2008, Mr. Bolocan has been a consumer banking products executive at Sun Trust. Previously, Mr. Bolocan was a consumer banking products executive at Washington Mutual (2007 to 2008) and JP Morgan Chase (2006 to 2007). From 2001 to 2006, Mr. Bolocan was an Executive Vice President at Bank of America, and its predecessor, MBNA. Mr. Bolocan is the author of ten books on popular business software packages. Mr. Bolocan holds a Masters Degree in management sciences from the Massachusetts Institute of Technology and a Bachelors Degree in Computer Science and Economics from Harvard University.
Bi Cheng director, has been a professor and doctoral advisor at Peking University since 2004. Mr. Bi is also a researcher in the China National Institute for Educational Research and a member of the Academic Committee and vice principal of the China Principal Development School. During his career, Mr. Bi has hosted and participated in more than 40 state level projects, published twelve scholarly treatises, compiled educational documents and dictionaries, and released over 200 thesis papers. Mr. Bi received his Ph.D. from the Education Department of Beijing Normal University in 1988.
We believe that Zhang Hui, as chairman and chief executive officer, and Liu Juntao as executive vice president of our business since its inception in 2003, are each qualified to and each should be a director of Tsingda eEDU Corporation. Mr. Zhang and Mr. Liu have both been instrumental in establishing Tsingda Education and overseeing its operations. We also believe Mr. Klein, Mr. Bolocan and Mr. Bi are each qualified and should be on our board of directors. Mr. Klein and Mr. Bolocan bring to the Company valuable expertise and knowledge of United States corporate governance, and Mr. Bi is a respected academic in the field of education that would contribute to the Boards diversity.
Directors are elected until their successors are duly elected and qualified.
There are no family relationships among our directors or officers.
To the best of our knowledge, none of our directors or executive officers, including Nautilus Global Partners and Mid-Ocean Consulting, who were promoters of the Company from the time of its inception to the time of its merger with Tsingda Technology, and Eastbridge Investment Group Corp. who is a promoter of the Company since our merger with Tsingda Technology, has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in Certain Relationships and Related Transactions, none of our directors, director nominees or executive officers has been involved in any transactions with us or any of
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our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Code of Ethics
We currently do not have a code of ethics that applies to our officers, employees and directors, including our Chief Executive Officer and Chief Financial Officer, however, we intend to adopt one in the near future.
EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officer received total annual salary and bonus compensation in excess of $100,000.
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Name and Principal Position |
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Stock |
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Option |
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All Other |
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Zhang Hui(1) |
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2010 |
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$ |
55,385 |
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0 |
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0 |
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0 |
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0 |
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$ |
55,385 |
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Chairman,
President, and |
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2009 |
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$ |
55,385 |
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0 |
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0 |
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0 |
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0 |
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$ |
55,385 |
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Kang Chungmai(1) |
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2010 |
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$ |
46,225 |
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0 |
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0 |
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0 |
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0 |
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$ |
46,225 |
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Chief Financial Officer |
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2009 |
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0 |
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0 |
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0 |
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0 |
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0 |
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0 |
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Joseph Rozelle(2) |
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2009 |
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0 |
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0 |
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0 |
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0 |
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0 |
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0 |
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Former
President and Chief |
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2008 |
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0 |
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0 |
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0 |
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0 |
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0 |
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0 |
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Karl
Brenza(3) |
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2009 |
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0 |
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0 |
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0 |
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0 |
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0 |
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0 |
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(1) |
On May 24, 2010, we acquired Tsingda Technology in a reverse acquisition transaction that was structured as a share exchange and in connection with that transaction, Mr. Zhang Hui became our Chief Executive Officer and President and Kang Chungmai became our Chief Financial Officer. Prior to the effective date of the reverse acquisition, Mr. Zhang and Mr. |
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Kang held the same positions with Tsingda Education, respectively. The 2009 annual compensation shown in this table includes the amounts Mr. Zhang received from Tsingda Education prior to the consummation of the reverse acquisition. |
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(2) |
Mr. Joseph Rozelle resigned from the offices of President and Chief Financial Officer on May 20, 2010, and resigned as Secretary on May 24, 2010. |
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(3) |
Mr. Karl Brenza was appointed as Chief Executive Officer on May 20, 2010, and resigned from such office on May 24, 2010. |
Employment Agreements.
Except as noted below, there are no agreements or understandings for any of our executive officers or directors to resign at the request of another person and no officer or director is acting on behalf of nor will any of them act at the direction of any other person.
On January 1, 2010, we entered into an employment agreement with Mr. Zhang, our President and Chairman. Pursuant to the agreement, Mr. Zhang has agreed to work exclusively for the Company during the term and will receive a monthly salary of approximately $4,400. The agreement expires on December 31, 2019.
Grants of Plan-Based Awards
No plan-based awards were granted to any of our named executive officers during the fiscal year ended December 31, 2010.
Outstanding Equity Awards at Fiscal Year End
No unexercised options or warrants were held by any of our named executive officers at December 31, 2010. No equity awards were made during the fiscal year ended December 31, 2010.
Option Exercises and Stock Vested
No options to purchase our capital stock were exercised by any of our named executive officers, nor was any restricted stock held by such executive officers vested during the fiscal year ended December 31, 2010.
Pension Benefits
No named executive officers received or held pension benefits during the fiscal year ended December 31, 2010.
Nonqualified Deferred Compensation
No nonqualified deferred compensation was offered or issued to any named executive officer during the fiscal year ended December 31, 2010.
Potential Payments Upon Termination or Change in Control
Our executive officers are not entitled to severance payments upon the termination of their employment agreements or following a change in control.
Compensation of Directors
No member of our Board of Directors received any compensation for his services as a director during the fiscal year ended December 31, 2010.
Compensation Committee Interlocks and Insider Participation
During the fiscal year 2010 we did not have a standing compensation committee. Our Board of Directors was responsible for the functions that would otherwise be handled by the compensation committee. All directors participated in deliberations concerning executive officer compensation, including directors who were also executive officers, however, none of our executive officers received any compensation during the last fiscal year. None of our executive officers has served on the Board of Directors or compensation committee (or other committee serving an equivalent function) of any other entity, any of whose executive officers served on our Board or Compensation Committee.
70
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of the date hereof, with respect to the beneficial ownership of the outstanding Ordinary Shares by (i) any holder of more than five percent (5%); (ii) each of our executive officers and directors; and (iii) our directors and executive officers as a group. Except as otherwise indicated, each of the Shareholder listed below has sole voting and investment power over the shares beneficially owned.
|
|
|
|
|
|
|
|
Name and Address of |
|
Number of Ordinary Shares |
|
Percent |
|
||
|
|
|
|
|
|
||
|
|
Officers and Directors |
|
|
|
||
Zhang Hui
(3) |
|
|
11,422,706 |
|
|
33.8 |
% |
Liu
Juntao(3) |
|
|
11,422,706 |
|
|
33.8 |
% |
Kang
Changmai |
|
|
0 |
|
|
0 |
|
Norm Klein
(6) |
|
|
2,079,740 |
|
|
6.2 |
% |
David
Bolocan |
|
|
0 |
|
|
0 |
|
Bi Cheng |
|
|
0 |
|
|
0 |
|
All officers and directors as a group (3 persons) |
|
|
13,502,446 |
|
|
40.0 |
% |
|
|
|
|
|
|
|
|
5% or greater shareholders |
|||||||
Zhong Hui Rong Fund Ltd. (4) |
|
|
2,531,250 |
|
|
7.5 |
% |
Yangyi Yu(5) |
|
|
2,193,750 |
|
|
6.4 |
% |
Eastbridge Investment Group Corp.(6) |
|
|
2,079,740 |
|
|
6.2 |
% |
Tsing Da Century Education Technology Co., Ltd. (3) |
|
|
11,422,706 |
|
|
33.8 |
% |
|
|
(1) |
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has ownership of, and voting power and investment power with respect to, our Ordinary Shares. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator. |
|
|
(2) |
Based on 33,729,862 Ordinary Shares issued and outstanding as of the date hereof. |
|
|
(3) |
Tsing Da Century Education Technology Co., Ltd., a Belize corporation, is the record owner of such shares. Mr. Zhang, our Chairman and President, and Mr. Liu, our Executive Vice President and Director, own 81.7% and 18.3%, respectively, of this entity. Accordingly, both Mr. Zhang and Mr. Liu may be deemed to be the beneficial owner of shares owned by such reporting person. |
|
|
(4) |
Mr. Su Jie is the President of Zhong Hui Rong Fund Ltd. The amount includes stock purchase warrants to acquire 656,250 Ordinary Shares. |
|
Address of the person is: |
|
Room1803, Building13, Court 58, |
|
Qingta West Road, Fengtai District, Beijing,100071 |
|
|
(5) |
The amount includes stock purchase warrants to acquire 568,750 Ordinary Shares. |
|
Address of the person is: |
|
c/o Tsingda Century Invest Tech. Co. Ltd. |
|
7th Fl Capital |
|
Devel Twr, Zhongguangchun |
|
Haidian Dist, Beijing PRC 100080 |
|
|
(6) |
Norm Klein is Chief Operating Officer, Chief Financial Officer and Investor Relations Officer of Eastbridge Investment Group Corp. |
|
Address of the person is: |
|
8040 E. Morgan Trail Unit 18 |
|
Scottsdale, Arizona 85258 |
Eastbridge Investment Group Corp. is a promoter of the Company since the Companys merger with Tsingda Technology.
71
DESCRIPTION OF SECURITIES
We are authorized to issue 100,000,000 Ordinary Shares, $.000384 par value, and 537,227.22 preferred shares, $.000384 par value. As of the date hereof, 33,729,862 Ordinary Shares are outstanding. No preferred shares are outstanding.
(a) Ordinary Shares. Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding Ordinary Shares are entitled to receive dividends out of assets legally available therefore at times and in amounts as our board of directors may determine. Each shareholder is entitled to one vote for each Ordinary Share held on all matters submitted to a vote of the shareholders. Cumulative voting is not provided for in our amended articles of incorporation, which means that the majority of the shares voted can elect all of the directors then standing for election. The Ordinary Shares are not entitled to preemptive rights and is not subject to conversion or redemption. Upon the occurrence of a liquidation, dissolution or winding-up, the holders of Ordinary Shares are entitled to share ratably in all assets remaining after payment of liabilities and satisfaction of preferential rights of any outstanding preferred stock. There are no sinking fund provisions applicable to the Ordinary Shares. The outstanding Ordinary Shares are, and the Ordinary Shares to be issued upon exercise of the Warrants will be, fully paid and non-assessable.
(b) Preferred Stock. As of the date of hereof, no preferred shares are issued and outstanding. We were authorized to issue 781,249 preferred shares, and in connection with our acquisition of Tsingda Technology, we issued 244,022.78 preferred shares, which converted into 24,402,278 Ordinary Shares. Once issued, preferred shares may not be re-issued. With respect to the 537,227.22 authorized preferred shares that are still issuable, the Board of Directors is empowered to designate and issue from time to time one or more classes or series of Preferred Stock and to fix and determine the relative rights, preferences, designations, qualifications, privileges, options, conversion rights, limitations and other special or relative rights of each such class or series so authorized. Such action could adversely affect the voting power and other rights of the holders of the Companys capital shares or could have the effect of discouraging or making difficult any attempt by a person or group to obtain control of the Company.
(c) Warrants. In connection with the September 16, 2010 financing, we issued warrants to the Investors to purchase 2,100,000 of our Ordinary Shares. Each Warrant entitles the holder to purchase one Ordinary Share. The Warrants are exercisable in whole or in part, at an initial exercise price equal to $2.08 per share or on a cashless basis. The warrant term is five years from issuance and may be exercised at any time after we effect the 3 for 1 consolidation of our Ordinary Shares.
We also issued to the Maxim Group, LLC as placement agent for the financing, warrants to purchase 364,500 of our Ordinary Shares. Each Warrant entitles the holder to purchase one Ordinary Share. The Warrants are exercisable in whole or in part, at an exercise price equal to $1.76 per share or on a cashless basis. The warrant term is five years from issuance and may be exercised at any time after February 16, 2011.
The exercise price and number of Ordinary Shares to be received upon the exercise of Warrants are subject to adjustment upon the occurrence of certain events, such as stock splits, stock dividends or our recapitalization. In the event of our liquidation, dissolution or winding up, the holders of Warrants will not be entitled to participate in the distribution of our assets. Holders of Warrants have no voting, pre-emptive, subscription or other rights of shareholders in respect of the Warrants, nor shall the Holders be entitled to receive dividends.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to acquisition of Tsingda Technology
On September 27, 2006, the Company issued 1,000,000 and 100,000 Ordinary Shares, respectively, to Nautilus Global Partners and Mid-Ocean Consulting Limited (subsequently adjusted to 781,250 and 78,125) at a price of $0.0001 per share. Mr. Rozelle, a former director, is the President of Nautilus Global Partners, LLC.
On March 1, 2008, the Company consolidated the authorized ordinary share capital of the Company from 50,000,000 Ordinary Shares of $0.0001 par value each to 39,062,500 Ordinary Shares of $0.000128 par value each. This resulted in every shareholder as of March 1, 2008 receiving 0.78125 Ordinary Shares for every ordinary share previously held. This was treated as a stock split for U.S. GAAP purposes, and all share and per share data is presented as if the consolidation took place as of the date of inception, September 27, 2006. On March 1, 2008, we also consolidated our authorized preference share capital from 1,000,000 preference shares of $0.0001 par value each to 781,250 preference shares of $0.000128 par value.
72
Promoters and certain control persons.
On September 27, 2006, the Company issued 1,000,000 and 100,000 Ordinary Shares, respectively, to Nautilus Global Partners and Mid-Ocean Consulting Limited (subsequently adjusted to 781,250 and 78,125) at a price of $0.0001 per share. Mr. Rozelle, a former President and director of the Company, is the President of Nautilus Global Partners, LLC. Nautilus Global Partners and Mid-Ocean Consulting Limited were promoters of the Company from of the time of the Companys incorporation to the time of the Companys merger with Tsingda Technology. Eastbridge Investment Group Corp. is a promoter of the Company since the Companys merger with Tsingda Technology.
On March 12, 2010, Tsingda Education entered into an agreement with Maxim Group, LLC (Maxim), a FINRA registered broker dealer, to act as a placement agent on a best efforts basis in connection with a proposed private placement offering of Tsingda Education and its affiliates and subsidiaries. Under the Agreement, Maxim is entitled to receive 8% of the gross proceeds of the offering and stock purchase warrants equal to eight percent of the number of securities sold in the offering. The term of the warrants is five years, although not exercisable for the initial six months, and are exercisable at 110% of the per share offering price. We are required to register the Maxim warrants. Tsingda Education also is obligated to pay reasonable fees and expenses of Maxim not to exceed $50,000. We also agreed to indemnify Maxim against certain liabilities, including liabilities under the Securities Act. As a result of the September 16, 2010 financing, we paid Maxim as full compensation under the agreement, cash commissions of $411,000 (or 4.3% of the proceeds from the offering) and issued a stock purchase warrant to acquire 364,500 Ordinary Shares. The warrant term is five years and is exercisable at any time after six months from closing at an exercise price is $1.76. In addition, we reimbursed Maxim for $25,000 as its reasonable out of pocket expenses.
On May 17, 2010, we issued an aggregate of 915,086 Ordinary Shares (adjusted to reflect the 3 for 1 reverse split) to MJR Holdings, Inc., Christopher Fiore, Clifford Teller and Karl Brenza, our former Chief Executive Officer, for an aggregate purchase price of $30,000. The forgoing parties are affiliates of Maxim.
Tsingda Transactions
Tsingda Technology owns 100% of the issued and outstanding capital stock of Beijing Tsingda Century Management Consulting Ltd. (Tsingda Management), a wholly foreign owned enterprise incorporated under the laws of the Peoples Republic of China (PRC). On April 26, 2010, Tsingda Management entered into a series of contractual agreements with Beijing Tsingda Century Investment Consultant of Education Co. Ltd (Tsingda Education), a company incorporated under the laws of the PRC, and its shareholders, in which Tsingda Management assumed management of the business activities of Tsingda Education and has the right to appoint all executives and senior management and the members of the board of directors. The contractual arrangements are comprised of a Consulting Services Agreement, Operating Agreement, Equity Pledge Agreement, and Option Agreement, through which Tsingda Management has the right to advise, consult, manage and operate Tsingda Education for a quarterly fee in the amount of 100% of Tsingda Educations quarterly, after tax net profits. Additionally, Tsingda Educations Shareholders have pledged their rights, titles and equity interest in Tsingda Education as security for Tsingda Management to collect consulting and services fees provided to Tsingda Education through an Equity Pledge Agreement. In order to further reinforce Tsingda Managements rights to control and operate Tsingda Education, Tsingda Educations shareholders have granted Tsingda Management the exclusive right and option to acquire all of their equity interests in Tsingda Education through an Option Agreement.
Pursuant to the Tsingda transaction, and as described elsewhere herein, on May 24, 2010, the Company issued 244,022.78 preferred shares of Compass to the Tsingda shareholders in exchange for 100% of the outstanding shares of Tsingda Technology. The Company also issued 2,079,740 Ordinary Shares to Eastbridge Investment Group Corporation in exchange for certain considerations provided by Eastbridge.
Advances were made during 2008 and 2009 to Mr. Zhang Hui, our chief executive officer and to Mr. Liu Juntao, our executive vice president, both of whom are equity shareholders of Tsing Da Century Education Technology Co., Ltd., a Belize corporation, which is the Companys largest shareholder. The outstanding balance of such advances was $1,996,821 and $186,747 respectively at December 31, 2008. Additional advances of $299,734 and $6,584 were made during 2009 and repayments of $1,836,257 and $177,864 were received, leaving balances of $460,716 and $15,468 at December 31, 2009. As of March 31, 2010, all advances were paid back to Tsingda Education.
Other than employment, none of the following persons has any direct or indirect material interest in any transaction to which we are a party since our last fiscal year or in any proposed transaction to which we are proposed to be a party:
|
|
(A) |
Any of our directors or officers; |
(B) |
Any proposed nominee for election as our director; |
(C) |
Any person who beneficially owns, directly or indirectly, shares carrying more than 10% of the voting rights attached to our Ordinary Shares; or |
(D) |
Any relative or spouse of any of the foregoing persons, or any relative of such spouse, who has the same house as such person or who is a director or officer of any parent or subsidiary of our company. |
73
TAXATION
The following summary of the material Cayman Islands, PRC and U.S. tax consequences of an investment in our ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change, possibly with retroactive effect. The discussion is based on information provided to us by our legal counsel, whose legal opinions have been filed as exhibits to the registration statement of which this prospectus forms a part. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any prospective purchaser and is not exhaustive of all possible tax considerations. This summary does not deal with all possible tax consequences relating to an investment in our shares, such as the tax consequences under state, local, non-U.S., non-PRC, and non-Cayman Islands tax laws. You should consult your own tax advisors with respect to the consequences of the acquisition, ownership and disposition of our shares.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to the Company or its shareholders levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by the Company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Peoples Republic of China Taxation
The
following discussion summarizes the material PRC income tax considerations
relating to the ownership of our Ordinary shares following the consummation of
this Offering.
Resident Enterprise Treatment
On March 16, 2007, the Fifth Session of the Tenth National Peoples Congress passed the Enterprise Income Tax Law of the Peoples Republic of China, or the EIT Law, which became effective on January 1, 2008. Under the EIT Law, enterprises are classified as resident enterprises and non-resident enterprises. Pursuant to the EIT Law and its implementing rules, enterprises established outside China whose de facto management bodies are located in China are considered resident enterprises and subject to the uniform 25% enterprise income tax rate on global income. According to the implementing rules of the EIT Law, de facto management body refers to a managing body that in practice exercises overall management control over the production and business, personnel, accounting and assets of an enterprise.
The EIT Law and the interpretation of many of its provisions, including the definition of resident enterprise, are unclear. It is also uncertain how the PRC tax authorities would interpret and implement the EIT Law and its implementing rules. Generally, the PRC tax authorities may determine the resident enterprise status of entities organized under the laws of foreign jurisdictions, which own a 100% equity interest in a PRC operating entity. Our management is substantially based in China and expected to be based in China in the future, although some of our directors are not PRC nationals. It remains uncertain whether the PRC tax authorities would determine that we are a resident enterprise or a non-resident enterprise.
Given
the short history of the EIT law and lack of applicable legal precedent, it
remains unclear how the PRC tax authorities will determine the PRC tax resident
treatment of a non-PRC company such as us. If the PRC tax authorities determine
that we are a resident enterprise for PRC enterprise income tax purposes, a
number of tax consequences could follow. First, we could be subject to the
enterprise income tax at a rate of 25% on our global taxable income. Second,
the EIT Law provides that dividend income between qualified resident
enterprises is exempt from income tax. As a result the dividends we receive
from our subsidiaries would constitute dividend income between qualified
resident enterprises if we are
classified as a resident enterprise by the PRC tax authorities and would therefore likely qualify
for tax exemption. But it
remains unclear how the PRC tax authorities will treat such dividends.
74
As
of the date of this prospectus, there has not been a definitive determination
as to the resident enterprise or non-resident enterprise status of the
Company or any of our subsidiaries and we will consult with the PRC tax
authorities and make any necessary tax payment if we (based on future
clarifying guidance issued by the PRC), or the PRC tax authorities, determine
that we is a resident enterprise under the EIT Law, and if we were to have
taxable income in the future.
Dividends From PRC Operating Companies
If we are not treated as resident enterprises under the EIT Law, then dividends that we receive may be subject to PRC withholding tax. The EIT Law and the implementing rules of the EIT Law provide that (A) an income tax rate of 25% will normally be applicable to investors that are non-resident enterprises, or non-resident investors, which (i) have establishments or premises of business inside China, and (ii) the income in connection with their establishment or premises of business is sourced from China or the income is earned outside China but has actual connection with their establishments or places of business inside China, and (B) an income tax rate of 10% will normally be applicable to dividends payable to investors that are non-resident enterprises, or non-resident investors, which (i) do not have an establishment or place of business in the PRC or (ii) have an establishment or place of business in the PRC, but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC.
As described above, the PRC tax authorities may determine the resident enterprise status of entities organized under the laws of foreign jurisdictions, on a case-by-case basis. We are a holding company and substantially all of our income may be derived from dividends. Thus, if we are considered as a non-resident enterprise under the EIT Law and the dividends paid to us are considered income sourced within China, such dividends received may be subject to the income tax described in the foregoing paragraph.
As of the date of this prospectus, there has not been a definitive determination as to the resident enterprise or non-resident enterprise status of the Company. We will consult with the PRC tax authorities and make any necessary tax withholding if, in the future, our PRC operating subsidiaries were to pay any dividends and we (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that we is a non-resident enterprise under the EIT Law.
Dividends that Non-Resident Investors Receive From Us; Gain on the Sale or Transfer of Our Ordinary Shares
If dividends payable to (or gains recognized by) our non-resident investors are treated as income derived from sources within the PRC, then the dividends that non-resident investors receive from us and any such gain on the sale or transfer of our Ordinary shares, may be subject to taxes under PRC tax laws.
Under
the EIT Law and the implementing rules of the EIT Law, PRC income tax at the
rate of 10% is applicable to dividends payable to investors that are
non-resident enterprises, or non-resident investors, which (i) do not have an
establishment or place of business in the PRC or (ii) have an establishment or
place of business in the PRC but the relevant income is not effectively
connected with the establishment or place of business, to the extent that such
dividends have their sources within the PRC. Similarly, any gain realized on
the transfer of Ordinary shares by such investors is also subject to 10% PRC
income tax if such gain is regarded as income derived from sources within the
PRC.
75
The
dividends paid by us to non-resident investors with respect to our Ordinary
shares, or gain non-resident investors may realize from sale or the transfer of
our Ordinary shares, may be treated as PRC-sourced income and, as a result, may
be subject to PRC tax at a rate of 10%. In such event, we also may be required
to withhold a 10% PRC tax on any dividends paid to non-resident investors. In
addition, non-resident investors in our Ordinary shares may be responsible for
paying PRC tax at a rate of 10% on any gain realized from the sale or transfer
of our Ordinary shares after the consummation of the Offering if such
non-resident investors and the gain satisfy the requirements under the EIT Law
and its implementing rules. However, under the EIT Law and its implementing
rules, we would not have an obligation to withhold income tax in respect of the
gains that non-resident investors (including U.S. investors) may realize from
the sale or transfer of our Ordinary shares from and after the consummation of
this Offering.
If we were to pay any dividends in the future, we would again consult with the PRC tax authorities and if we (based on future clarifying guidance issued by the PRC), or the PRC tax authorities, determine that we must withhold PRC tax on any dividends payable by us under the EIT Law, we will make any necessary tax withholding on dividends payable to our non-resident investors. If non-resident investors as described under the EIT Law (including U.S. investors) realized any gain from the sale or transfer of our Ordinary shares and if such gain were considered as PRC-sourced income, such non-resident investors would be responsible for paying 10% PRC income tax on the gain from the sale or transfer of our Ordinary shares. As indicated above, under the EIT Law and its implementing rules, we would not have an obligation to withhold PRC income tax in respect of the gains that non-resident investors (including U.S. investors) may realize from the sale or transfer of our Ordinary shares from and after the consummation of this Offering.
Penalties for Failure to Pay Applicable PRC Income Tax
Non-resident investors in us may be responsible for paying PRC tax at a rate of 10% on any gain realized from the sale or transfer of our Ordinary shares after the consummation of this Offering if such non-resident investors and the gain satisfies the requirements under the EIT Law and its implementing rules, as described above.
According
to the EIT Law and its implementing rules, the PRC Tax Administration Law (the
Tax Administration Law) and its implementing rules, the Provisional Measures
for the Administration of Withholding of Enterprise Income Tax for Non-resident
Enterprises (the Administration Measures) and other applicable PRC laws or
regulations (collectively the Tax Related Laws), where any gain derived by
non-resident investors from the sale or transfer of our Securities is subject
to any income tax in China, and such non-resident investors fail to file any
tax return or pay tax in this regard pursuant to the Tax Related Laws, they may
be subject to certain fines, penalties or punishments, including without
limitation: (1) if a non-resident investor fails to file a tax return and
present the relevant information in connection with tax payments, the competent
tax authorities shall order it to do so within the prescribed time limit and
may impose a fine up to RMB 2,000, and in egregious cases, may impose a fine
ranging from RMB 2,000 to RMB 10,000; (2) if a non-resident investor fails to
file a tax return or fails to pay all or part of the amount of tax payable, the
non-resident investor shall be required to pay the unpaid tax amount payable, a
surcharge on overdue tax payments (the daily surcharge is 0.05% of the overdue
amount, beginning from the day the deferral begins), and a fine ranging from
50% to 500% of the unpaid amount of the tax payable; (3) if a non-resident
investor fails to file a tax return or pay the tax within the prescribed time
limit according to the order by the PRC tax authorities, the PRC tax
authorities may collect and check information about the income items of the
non-resident investor in China and other payers (the Other Payers) who will
pay amounts to such non-resident investor, and send a Notice of Tax Issues to
the Other Payers to collect and recover the tax payable and impose overdue
fines on such non-resident investor from the amounts otherwise payable to such
non-resident investor by the Other Payers; (4) if a non-resident investor fails
to pay the tax payable within the prescribed time limit as ordered by the PRC
tax authorities, a fine may be imposed on the non-resident investor ranging
from 50% to 500% of the unpaid tax payable; and the PRC tax authorities may,
upon approval by the director of the tax bureau (or sub-bureau) of, or higher
than, the county level, take the following compulsory measures: (i) notify in
writing the non-resident investors bank or other financial institution to
withhold from the account thereof for payment of the amount of tax payable, and
(ii) detain, seal off, or sell by auction or on the market the non-resident
investors commodities, goods or other property in a value equivalent to the
amount of tax payable; or (5) if the non-resident investor fails to pay all or
part of the amount of tax payable or surcharge for overdue tax payment, and can
not provide a guarantee to the tax authorities, the tax authorities may notify
the frontier authorities to prevent the non-resident investor or their legal
representative from leaving China.
76
U.S. Federal Income Taxation
The following is a discussion of the material U.S. federal income tax considerations relevant to an investment decision by a U.S. Holder, as defined below, of our ordinary shares. This discussion does not purport to deal with the tax consequences of owning our ordinary shares to all categories of investors, some of which (such as financial institutions, regulated investment companies, real estate investment trusts, tax-exempt organizations, insurance companies, persons holding our ordinary shares as part of a hedging, integrated, conversion or constructive sale transaction or a straddle, traders in securities that have elected the mark-to-market method of accounting for their securities, persons liable for alternative minimum tax, persons who are investors in partnerships or other pass-through entities, persons who own, actually or under applicable constructive ownership rules, 10% or more of our ordinary shares, U.S. expatriates, dealers in securities or currencies and investors whose functional currency is not the U.S. dollar) may be subject to special rules. This discussion deals only with holders who purchase ordinary shares and hold the ordinary shares as a capital asset. Moreover, this discussion is based on laws, regulations and other authorities in effect as of the date of this prospectus, all of which are subject to change, possibly with retroactive effect. You are encouraged to consult your own tax advisors concerning the overall tax consequences arising in your own particular situation under U.S. federal, state, local or foreign law of the ownership of our ordinary shares.
For purposes of this discussion, the term U.S. Holder means a beneficial owner of our ordinary shares that is, for United States federal income tax purposes, (i) an individual U.S. citizen or resident, (ii) a U.S. corporation or other U.S. entity taxable as a corporation, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if either (x) a court within the United States is able to exercise primary jurisdiction over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (y) the trust has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. If a U.S. partnership, or an entity treated for U.S. federal income tax purposes as a partnership, such as a U.S. limited liability company, holds ordinary shares, the tax treatment of a partner will depend on the status of the partner and upon the activities of the partnership. If you are a partner in such a partnership holding our ordinary shares, you are encouraged to consult your tax advisor.
U.S. Federal Income Taxation of U.S. Holders
Distributions
Subject to the discussion of PFICs below, any distributions (other than certain distributions of our ordinary shares or warrants to purchase our ordinary shares) made by us with respect to our ordinary shares to a U.S. Holder will constitute dividends to the extent of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of those earnings and profits will be treated first as a nontaxable return of capital to the extent of the U.S. Holders tax basis in our ordinary shares, and thereafter as capital gain. Because we are not a U.S. corporation, U.S. Holders that are corporations will not be entitled to claim a dividends-received deduction with respect to any distributions they receive from us. Amounts taxable as dividends will be treated as either foreign source passive income or general category income for U.S. foreign tax credit purposes.
77
Dividends paid on our ordinary shares to a U.S. Holder who is an individual, trust or estate (a U.S. Non-Corporate Holder) will be treated as qualified dividend income that is taxable to such U.S. Non-Corporate Holder at preferential tax for taxable years beginning before January 1, 2013, provided that (1) our ordinary shares are readily tradable on an established securities market in the United States (such as NYSE Amex Stock Exchange, on which we expect our ordinary shares will be traded); (2) we are not a PFIC for the taxable year during which the dividend is paid or the immediately preceding taxable year; (3) the U.S. Non-Corporate Holders holding period of the ordinary shares includes more than 60 days in the 121-day period beginning 60 days before the date on which the ordinary shares becomes ex-dividend; and (4) the U.S. Non-Corporate Holder is not under an obligation to make related payments with respect to positions in substantially similar or related property. There is no assurance that any dividends paid on our ordinary shares will be eligible for these preferential rates in the hands of a U.S. Non-Corporate Holder. Any dividends we pay out of earnings and profits which are not eligible for these preferential rates will be taxed as ordinary income to a U.S. Non-Corporate Holder.
Special rules apply to any extraordinary dividend a dividend in an amount which is equal to or in excess of 10% of a shareholders adjusted basis (or fair market value in certain circumstances) in a share of our ordinary shares paid by us. If we pay an extraordinary dividend on our ordinary shares that is treated as qualified dividend income, then, notwithstanding the period during which the shares were held, any loss derived by a U.S. Non-Corporate Holder from the sale or exchange of such ordinary shares will be treated as long-term capital loss to the extent of such dividend.
Impact of New Legislation on Ownership and Disposition of Ordinary Shares
Newly enacted legislation requires certain U.S. Holders that are individuals, estates or trusts to pay an additional 3.8% tax on, among other things, dividends on and capital gains from the sale or other disposition of stock for taxable years beginning after December 31, 2012. U.S. Holders should consult their tax advisors regarding the effect, if any, of this legislation on their ownership and disposition of our ordinary shares.
Sale, Exchange or Other Disposition of Ordinary Shares
Subject to the discussion of PFICs below, a U.S. Holder will recognize taxable gain or loss upon a sale, exchange or other taxable disposition of our ordinary shares in an amount equal to the difference between the amount realized by the U.S. Holder from such
78
disposition and the U.S. Holders tax basis in such stock. Such gain or loss will be treated as long-term capital gain or loss if the U.S. Holders holding period is greater than one year at the time of the disposition. Such capital gain or loss will generally be treated as U.S. source income or loss, as applicable, for U.S. foreign tax credit purposes. Long-term capital gains of U.S. Non-Corporate Holders are eligible for reduced rates of taxation. A U.S. Holders ability to deduct capital losses is subject to certain limitations.
Passive Foreign Investment Company Status and Significant Tax Consequences
We will be a passive foreign investment company (a PFIC) if either:
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75% or more of our gross income in a taxable year consists of passive income (including dividends, interest, gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business, as defined in applicable Treasury regulations); or |
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at least 50% of our assets in a taxable year (averaged over the year and generally determined based upon value) produce or are held for the production of passive income. |
Although it is not clear how the contractual arrangements with Tsingda Education will be treated for purposes of the PFIC rules, we do not believe that we were a PFIC for the years ended December 31, 2009 or December 31, 2010 nor do we currently anticipate that we will be a PFIC for the current taxable year based upon our estimates of the values of our assets as determined based on the assumed public offering price of our ordinary shares and the anticipated price of our ordinary shares following the offering. However, because PFIC status is based on the composition of our income and assets for the entire taxable year, it is not possible to determine whether we will become a PFIC for the current year until after the close of the year. Therefore, we may become a PFIC for the year ending December 31, 2011 or in any future taxable year.
If we were to be treated as a PFIC for any taxable year (and regardless of whether we remain a PFIC for subsequent taxable years), each U.S. Holder who is treated as owning ordinary shares during any period we are determined to be a PFIC would be liable to pay U.S. federal income tax at the highest applicable income tax rates on ordinary income upon the receipt of excess distributions (i.e., the portion of any distributions received by the U.S. Holder on our ordinary shares in a taxable year in excess of 125 percent of the average annual distributions received by the U.S. Holder in the three preceding taxable years, or, if shorter, the U.S. Holders holding period for the ordinary shares) and on any gain from the disposition of our ordinary shares, plus interest on such amounts, as if such excess distributions or gain had been recognized ratably over the U.S. Holders holding period of our ordinary shares.
The above rules relating to the taxation of excess distributions and dispositions will not apply to a U.S. Holder who has made a timely qualified electing fund (QEF) election for all taxable years that the holder has held our ordinary shares and we were a PFIC. Instead, each U.S. Holder who has made a timely QEF election is required for each taxable year to include in income a pro rata share of our ordinary earnings as ordinary income and a pro rata share of our net capital gain as long term capital gain, regardless of whether we have made any distributions of the earnings or gain. The U.S. Holders basis in our ordinary shares will be increased to reflect taxed but undistributed income. Distributions of income that had been previously taxed will result in a corresponding reduction in the basis of the ordinary shares and will not be taxed again once distributed. A U.S. Holder making a QEF election would recognize capital gain or loss on the sale, exchange or other disposition of our ordinary shares. A QEF election is only valid if the PFIC provides certain necessary information to the U. S. Holder. If we determine that we are a PFIC for any taxable year, we may provide each U.S. Holder with all necessary information in order to make the QEF election described above, but there can be no assurance that we will be able to provide this information.
Alternatively, if we were to be treated as a PFIC for any taxable year and provided that our ordinary shares are treated as regularly traded on a qualified exchange, a U.S. Holder may make a mark-to-market election. Our ordinary shares will be treated as regularly traded in any calendar year in which more than a de minimis quantity of our ordinary shares were traded on a qualified exchange on at least 15 days during each calendar quarter. There can be no assurance that the mark-to-market election for PFIC purposes will be available in any particular calendar year with respect to our ordinary shares. Under a mark-to-market election, any excess of the fair market value of the ordinary shares at the close of any taxable year over the U.S. Holders adjusted tax basis in the ordinary shares is included in the U.S. Holders income as ordinary income. In addition, the excess, if any, of the U.S. Holders adjusted tax basis at the close of any taxable year over the fair market value of the ordinary shares is deductible in an amount equal to the lesser of the amount of the excess or the amount of the net mark-to-market gains that the U.S. Holder included in income in prior years. A U.S. Holders tax basis in its ordinary shares would be adjusted to reflect any such income or loss. Gain realized on the sale, exchange or other disposition of our ordinary shares would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition of the ordinary shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously included by the U.S. Holder.
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A U.S. Holder who holds our ordinary shares during a period when we are a PFIC will be subject to the foregoing rules for that taxable year and all subsequent taxable years with respect to that U.S. Holders holding of our ordinary shares, even if we cease to be a PFIC, subject to certain exceptions for U.S. Holders who made a mark-to-market or QEF election. U.S. Holders are urged to consult their tax advisors regarding the PFIC rules, including as to the advisability of choosing to make a QEF or mark-to-market election.
Backup Withholding and Information Reporting
Payments of distributions on, and the proceeds of a disposition of, our ordinary shares will be subject to U.S. federal income tax information reporting requirements if you are a U.S. Holder other than a corporation. In addition, pursuant to recently enacted legislation, certain information concerning a U.S. holder’s adjusted tax basis in our ordinary shares and adjustments to that tax basis and whether any gain or loss with respect to such ordinary shares is long-term or short-term also may be required to be reported to the IRS. Moreover U.S. federal backup withholding tax generally will apply to dividends paid on our ordinary shares and the proceeds from sales and other dispositions of our ordinary shares if you are a U.S. Holder other than a corporation and you:
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fail to provide us with an accurate taxpayer identification number; |
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are notified by the IRS that you have failed to report all interest or dividends required to be shown on your federal income tax returns; or |
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fail to comply with applicable certification requirements. |
Backup withholding tax is not an additional tax. Rather, you may obtain a refund of any amounts withheld under backup withholding rules that exceed your income tax liability by timely filing a refund claim with the IRS in accordance with applicable requirements.
Stamp Taxes
If you purchase our ordinary shares offered in this prospectus, you may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover page of this prospectus.
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UNDERWRITING
Subject
to the terms and conditions in the underwriting agreement, dated
[ ],
2011, by and between us and Maxim Group LLC has agreed to purchase from us, on
a firm commitment basis, the number of Ordinary Shares set forth
opposite its name below, at the public offering price, less the underwriting
discount set forth on the cover page of this prospectus.
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Underwriter |
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Number of Shares |
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Maxim Group LLC |
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Total |
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Maxim Group LLC has agreed to purchase all of the shares offered by this prospectus (other than those covered by the over-allotment option described below) if any are purchased. The underwriting agreement provides that the obligations of Maxim Group LLC to pay for and accept delivery of the shares is subject to the passing upon certain legal matters by counsel and certain conditions such as confirmation of the accuracy of representations and warranties by us about our financial condition and operations.
The shares should be ready for delivery on or about [ ], 2011 against payment in immediately available funds. The underwriter may reject all or part of any order.
We
intend to apply to have our Ordinary Shares listed on the NYSE Amex Stock
Exchange under the symbol CFG, which listing is expected to be effective
concurrent with the closing of this offering.
Commissions and Discounts
The following table provides information regarding the amount of the discount to be paid to Maxim Group LLC by us:
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Total |
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Per Share |
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Without |
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With |
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Public offering price |
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$ |
[ ] |
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$ |
[ ] |
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$ |
[ ] |
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Underwriting discount |
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$ |
[ ] |
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$ |
[ ] |
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$ |
[ ] |
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Non-accountable expense allowance (1) |
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$ |
[ ] |
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$ |
[ ] |
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$ |
[ ] |
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Proceeds, before expenses, to us (2) |
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$ |
[ ] |
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$ |
[ ] |
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$ |
[ ] |
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(1) |
The non-accountable expense allowance of 1.0% of the gross proceeds of the offering is not payable with respect to the Ordinary Shares sold upon exercise of the underwriters over-allotment option. |
(2) |
We estimate that the total expense of this offering excluding the underwriters discount and the non-accountable expense allowance, will be approximately $[ ]. |
We
have agreed to sell the Ordinary Shares to Maxim Group LLC at the initial
public offering price less the underwriting discount set forth on the cover
page of this prospectus. The underwriting agreement also provides that Maxim
Group LLC will be paid a non-accountable expense allowance equal to 1.0% of the
gross proceeds from the sale of the Ordinary Shares offered by this
prospectus ($[ ] of
which has been previously advanced to Maxim Group LLC), exclusive of any Ordinary
Shares purchased on exercise of the underwriters over-allotment option.
Pricing of Securities
Maxim Group LLC has advised us that it proposes to offer the shares directly to the public at the public offering price that appears on the cover page of this prospectus. In addition, Maxim Group LLC may offer some of the shares to other securities dealers at such price less a concession of $[ ] per share. Maxim Group LLC may also allow, and such dealers may reallow, a concession not in excess of $[ ] per share to other dealers. After the shares are released for sale to the public, the representatives may change the offering price and other selling terms at various times.
Prior
to this offering, there was no public market for our securities. The public
offering price of our Ordinary Shares was determined by negotiation between us
and Maxim Group LLC. The principal factors considered in determining the
public offering price of the shares included:
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the information in this prospectus and otherwise available to Maxim Group LLC ; |
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the history and the prospects for the industry in which we compete; |
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the ability of our management; |
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the prospects for our future earnings; |
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the present state of our development and our current financial condition; |
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the general condition of the economy and the securities markets in the United States at the time of this offering; |
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other factors we deemed relevant. |
We can offer no assurances that the public offering price in this offering will correspond to the price at which our shares will trade in the public market following this offering or that an active trading market for our shares will develop and continue after this offering.
Over-allotment Option
We have granted Maxim Group LLC an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits Maxim Group LLC to purchase a maximum of [_________] additional shares from us to cover over-allotments. If Maxim Group LLC exercises all or part of this option, it will purchase shares covered by the option at the public offering price that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total price to the public will be $[ ] million and the total proceeds to us will be $[ ] million.
Underwriters Warrant
We have
also agreed to issue to Maxim Group LLC, for $100, an ordinary share purchase
warrant to purchase a number of ordinary shares equal to
an aggregate of five percent (5%) of the shares sold in the offering. The warrant
will have an exercise price equal to 130% the offering price of the shares sold
in this offering. The warrants are exercisable commencing six (6) months after
the effective date of the registration statement related to this offering, and
will be exercisable for five (5) years thereafter. The warrant is not redeemable
by us, and allows for cashless exercise. The warrant also provides
for one demand registration right at our expense, one demand registration right
at the warrant holders expense and for unlimited piggyback registration
rights at our expense with respect to the underlying Ordinary Shares during
the five (5) year period commencing six (6) months after the effective date.
Pursuant to the rules of the Financial Industry Regulatory Authority, Inc., or
FINRA, and in particular FINRA Rule 5110, the warrants (and underlying shares)
issued to Maxim Group LLC may not be sold, transferred, assigned, pledged, or
hypothecated, or the subject of any hedging, short sale, derivative, put or
call transaction that would result in the effective disposition of the
securities by any person for a period of 180 days immediately following the
date of delivery and payment for the shares offered provided, however, the
warrant (and underlying shares) may be transferred to officers or directors of
Maxim Group LLC and members of the underwriting syndicate and their affiliates
as long as the warrants (and underlying shares) remain subject to the lockup.
Right of First Refusal
We have granted Maxim Group LLC a right of first refusal to act as our lead underwriter or placement agent in any and all of our future public and private equity offerings for a period of 12 months from the closing of this offering.
Other Matters
The underwriting agreement provides for indemnification between us and Maxim Group LLC against specified liabilities, including liabilities under the Securities Act, and for contribution by us and Maxim Group LLC to payments that may be required to be made with respect to those liabilities. We have been advised that, in the opinion of the Securities and Exchange Commission, indemnification liabilities under the Securities Act is against public policy as expressed in the Securities Act, and is therefore, unenforceable.
A prospectus in electronic format may be made available on a website maintained by the Maxim Group LLC. Maxim Group LLC may agree to allocate a number of shares to itself for sale to their online brokerage account holders. In connection with the offering, Maxim Group LLC or syndicate members may distribute prospectuses electronically. No forms of electronic prospectus other than prospectuses that are printable as Adobe® PDF will be used in connection with this offering.
82
Maxim Group LLC has informed us that it does not expect to confirm sales of shares of common stock offered by this prospectus to accounts over which they exercise discretionary authority.
Stabilization
Until
the distribution of the Ordinary Shares offered by this prospectus is
completed, rules of the SEC may limit the ability of Maxim Group LLC to bid for
and to purchase our Ordinary Shares. As an exception to these rules,
Maxim Group LLC may engage in transactions effected in accordance with
Regulation M under the Securities Exchange Act of 1934 that are intended to
stabilize, maintain or otherwise affect the price of our Ordinary Shares. Maxim
Group LLC may engage in over-allotment sales, syndicate covering transactions,
stabilizing transactions and penalty bids in accordance with Regulation M.
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Stabilizing transactions permit bids or purchases for the purpose of pegging, fixing or maintaining the price of the Ordinary Shares, so long as stabilizing bids do not exceed a specified maximum. |
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Over-allotment involves sales by Maxim Group LLC of Ordinary Shares in excess of the number of Ordinary Shares Maxim Group LLC is obligated to purchase, which creates a short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of Ordinary Shares over-allotted by Maxim Group LLC is not greater than the number of Ordinary Shares that they may purchase in the over-allotment option. In a naked short position, the number of Ordinary Shares involved is greater than the number of shares in the over-allotment option. Maxim Group LLC may close out any covered short position by either exercising the over-allotment option or purchasing Ordinary Shares in the open market. |
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Covering transactions involve the purchase of securities in the open market after the distribution has been completed in order to cover short positions. In determining the source of securities to close out the short position, Maxim Group LLC will consider, among other things, the price of securities available for purchase in the open market as compared to the price at which they may purchase securities through the over-allotment option. If Maxim Group LLC sells more Ordinary Shares than could be covered by the over-allotment option, creating a naked short position, the position can only be closed out by buying securities in the open market. A naked short position is more likely to be created if Maxim Group LLC is concerned that there could be downward pressure on the price of the securities in the open market after pricing that could adversely affect investors who purchase in this offering. |
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Penalty bids permit Maxim Group LLC to reclaim a selling concession from a selected dealer when the Ordinary Shares originally sold by the selected dealer are purchased in a stabilizing or syndicate covering transaction. |
These stabilizing transactions, covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our Ordinary Shares. As a result, the price of our Ordinary Shares may be higher than the price that might otherwise exist in the open market.
Neither
we nor Maxim Group LLC makes any representation or prediction as to the effect
that the transactions described above may have on the prices of our Ordinary
Shares. These transactions may occur on the NYSE AMEX Stock Exchange or on
any other trading market. If any of these transactions are commenced, they
may be discontinued without notice at any time.
Foreign Regulatory Restrictions on Purchase of Shares
We have not taken any action to permit a public offering of the shares outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to this offering of ordinary shares and the distribution of the prospectus outside the United States.
83
LEGAL MATTERS
The validity of the Ordinary Shares offered by this prospectus will be passed upon for us by Stuarts Walker Hersant, Attorneys at Law, Grand Cayman, Cayman Islands.
EXPERTS
The consolidated financial statements of our company included in this prospectus and in the registration statement have been audited by MaloneBailey LLP and Jeffrey & Company, each an independent registered public accounting firm, to the extent and for the periods set forth in their report appearing elsewhere herein and in the registration statement, and are included in reliance on such report, given the authority of said firm as an expert in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or SEC, a registration statement on Form S-1 under the Securities Act with respect to the Ordinary Shares to be sold by the Company. This prospectus does not contain all of the information set forth in the registration statement. For further information with respect to us and the Ordinary Shares offered in this offering, we refer you to the registration statement and to the attached exhibits. With respect to each such document filed as an exhibit to the registration statement, we refer you to the exhibit for a more complete description of the matters involved.
You may inspect our registration statement and the attached exhibits and schedules without charge at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain copies of all or any part of our registration statement from the SEC upon payment of prescribed fees. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.
Our SEC filings, including the registration statement and the exhibits filed with the registration statement, are also available from the SECs website at www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
84
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Tsingda eEDU Corporation (Formerly Compass Acquisition Corporation)
Cayman Islands
We have audited the accompanying consolidated balance sheet of Tsingda eEDU Corporation and its Subsidiaries (the Company) as of December 31, 2010, and the related consolidated statements of operations and comprehensive income, shareholders equity, and cash flows for the year then ended. In connection with our audit for the consolidated financial statements, we have also audited the condensed parent company financial statements for the year ended December 31, 2010. These consolidated financial statements and condensed parent company financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010, and the results of its operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related condensed parent company financial statements, when considered in relation to the consolidated financial statements taken a whole, presents fairly, in all material aspects, the information set forth therein.
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
March 11, 2011
F-2
JEFFREY &
COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
61 BERDAN AVENUE
WAYNE, NEW JERSEY 07470
Report of Independent Registered Public Accounting Firm
Board of Directors
Tsingda eEDU Corporation (formerly Compass Acquisition Corporation)
We have audited the accompanying consolidated balance sheet of Tsingda eEDU Corporation (formerly Compass Acquisition Corporation) as of December 31, 2009, and the related consolidated statement of income, changes in stockholders equity, and cash flows, for the year ended December 31, 2009. These financial statements are the responsibility of the Company management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted the audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate under the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tsingda eEDU Corporation as of December 31, 2009, and the consolidated results of its operations and its cash flows for the year ended December 31, 2009 in conformity with U. S. generally accepted accounting principles.
/s/ Jeffrey & Company
January 11, 2011
JEFFREY & COMPANY
Wayne, New Jersey
F-3
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Consolidated Balance Sheets
(Stated in US dollars)
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December 31, |
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December 31, |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
4,086,214 |
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$ |
458,645 |
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Short-term investment |
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2,018,370 |
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Accounts receivable, net |
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6,555,936 |
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4,228,510 |
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Advances to suppliers |
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8,488,751 |
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3,880,307 |
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Other receivables |
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1,103,083 |
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374,243 |
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Receivable from escrow account |
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520,000 |
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Shareholder advances |
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37,749 |
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476,220 |
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Inventory |
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40,558 |
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Deferred tax assets |
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382,758 |
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155,690 |
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Total Current Assets |
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21,174,491 |
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11,632,543 |
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Advances for leasehold improvements |
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6,604,628 |
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Property and equipment, net |
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10,652,830 |
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2,757,387 |
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Intangible assets, net |
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5,021,983 |
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2,853,766 |
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TOTAL ASSETS |
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$ |
43,453,932 |
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$ |
17,243,696 |
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LIABILITIES & SHAREHOLDERS EQUITY |
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Current Liabilities |
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Accounts payable |
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305,165 |
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36,910 |
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Customer deposit |
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1,642,642 |
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270,229 |
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Taxes payable |
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5,070,919 |
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1,946,542 |
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Accrued and other liabilities |
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222,512 |
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440,631 |
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Deferred revenue |
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2,551,722 |
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1,037,932 |
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Total Current Liabilities |
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9,792,960 |
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3,732,244 |
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Commitment and Contingencies |
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SHAREHOLDERS EQUITY |
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Preferred stock: 781,250 shares of $.000128 par value authorized; None shares issued and outstanding |
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$ |
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$ |
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Common stock (par value $0.000384 per share; 100,000,000 shares authorized; 33,729,862 and 24,402,278 shares issued and outstanding as of December 31, 2010 and 2009, respectively) |
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12,952 |
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9,370 |
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Additional paid in capital |
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13,523,180 |
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4,400,435 |
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Statutory reserves |
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2,398,464 |
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1,329,032 |
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Retained earnings |
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16,762,941 |
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7,531,177 |
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Accumulated other comprehensive income |
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963,435 |
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241,438 |
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TOTAL SHAREHOLDERS EQUITY |
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33,660,972 |
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13,511,452 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
43,453,932 |
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$ |
17,243,696 |
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|
|
|
The accompanying notes are an integral part of these financial statements.
F-4
|
TSINGDA EEDU CORPORATION |
|
(FORMERLY COMPASS ACQUISITOIN CORPORATION) |
|
Consolidated Statements of Operations and Comprehensive Income |
|
(Stated in US dollars) |
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
||||
|
|
|
|
||||
|
|
2010 |
|
2009 |
|
||
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
Revenue |
|
$ |
27,447,545 |
|
$ |
14,650,863 |
|
Cost of revenue |
|
|
6,011,094 |
|
|
2,231,202 |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
21,436,451 |
|
|
12,419,661 |
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
Selling expenses |
|
|
6,199,618 |
|
|
3,460,803 |
|
General and administrative expenses |
|
|
3,205,802 |
|
|
1,900,063 |
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9,405,420 |
|
|
5,360,866 |
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
12,031,031 |
|
|
7,058,795 |
|
Interest income |
|
|
31,102 |
|
|
80,973 |
|
Realized gain from short-term investment |
|
|
73,861 |
|
|
|
|
Other expense |
|
|
(257 |
) |
|
(19,638 |
) |
|
|
|
|
|
|
|
|
Income before income tax |
|
|
12,135,737 |
|
|
7,120,130 |
|
Income tax expenses |
|
|
1,834,541 |
|
|
1,068,020 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,301,196 |
|
$ |
6,052,110 |
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss) |
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
721,997 |
|
|
(40,113 |
) |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
11,023,193 |
|
$ |
6,011,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basic and diluted |
|
$ |
0.36 |
|
$ |
0.25 |
|
|
|||||||
Weighted average number of shares, basic and diluted |
|
|
28,242,518 |
|
|
24,402,278 |
|
The accompanying notes are an integral part of these financial statements.
F-5
|
TSINGDA EEDU CORPORATION |
|
(FORMERLY COMPASS ACQUISITION CORPORATION) |
|
Consolidated Statement of Shareholders Equity |
|
(Stated in US dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
Accumulated |
|
|
|
Total |
|
|||||||
|
|
Common Stock |
|
|
|
|
|
|
|
|
||||||||||||
|
|
Shares |
|
Amount |
|
|
Statutory |
|
|
Retained |
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
|
24,402,278 |
|
$ |
9,370 |
|
$ |
4,400,435 |
|
$ |
421,215 |
|
$ |
281,551 |
|
$ |
2,386,884 |
|
$ |
7,499,455 |
|
Net income for the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,052,110 |
|
|
6,052,110 |
|
Allocation of retained earnings to statutory reserve |
|
|
|
|
|
|
|
|
|
|
|
907,817 |
|
|
|
|
|
(907,817 |
) |
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,113 |
) |
|
|
|
|
(40,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009 |
|
|
24,402,278 |
|
$ |
9,370 |
|
$ |
4,400,435 |
|
$ |
1,329,032 |
|
$ |
241,438 |
|
$ |
7,531,177 |
|
$ |
13,511,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 332,759 shares in connection with the share exchange transaction on May 24, 2010 |
|
|
332,759 |
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128 |
|
Issuance of 915,085 shares to Maxim Group on May 17, 2010 |
|
|
915,085 |
|
|
351 |
|
|
29,649 |
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
Issuance of 2,079,740 shares to Eastbridge Investment Corporation on May 17, 2010 |
|
|
2,079,740 |
|
|
799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
799 |
|
Issuance of 6,000,000 shares on September 16, 2010 |
|
|
6,000,000 |
|
|
2,304 |
|
|
9,597,696 |
|
|
|
|
|
|
|
|
|
|
|
9,600,000 |
|
Stock issuance cost related to the private placement on September 16, 2010 |
|
|
|
|
|
|
|
|
(504,600 |
) |
|
|
|
|
|
|
|
|
|
|
(504,600 |
) |
Net income for the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,301,196 |
|
|
10,301,196 |
|
Allocation of retained earnings to statutory reserve |
|
|
|
|
|
|
|
|
|
|
|
1,069,432 |
|
|
|
|
|
(1,069,432 |
) |
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
721,997 |
|
|
|
|
|
721,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010 |
|
|
33,729,862 |
|
$ |
12,952 |
|
$ |
13,523,180 |
|
$ |
2,398,464 |
|
$ |
963,435 |
|
$ |
16,762,941 |
|
$ |
33,660,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-6
|
TSINGDA EEDU CORPORATION |
|
(FORMERLY COMPASS ACQUISITION CORPORATION) |
|
Consolidated Statements of Cash Flows |
|
(Stated in US dollars) |
|
|
|
|
|
|
|
|
|
|
For the years ended December 31 |
|
||||
|
|
|
|
||||
|
|
2010 |
|
2009 |
|
||
|
|
|
|
|
|
||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
Net income |
|
$ |
10,301,196 |
|
$ |
6,052,110 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,356,930 |
|
|
1,075,980 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
|
(2,196,217 |
) |
|
(1,979,699 |
) |
Advances to suppliers |
|
|
(4,488,039 |
) |
|
(3,407,580 |
) |
Prepaid expenses |
|
|
|
|
|
75,078 |
|
Other receivables |
|
|
(689,354 |
) |
|
(76,540 |
) |
Inventories |
|
|
41,817 |
|
|
(14 |
) |
Deferred tax assets |
|
|
(222,237 |
) |
|
78,094 |
|
Accounts payable |
|
|
267,110 |
|
|
16,234 |
|
Customer deposit |
|
|
1,364,028 |
|
|
195,708 |
|
Accrued and other liabilities |
|
|
(276,039 |
) |
|
311,892 |
|
Deferred revenue |
|
|
1,449,454 |
|
|
(520,630 |
) |
Taxes payable |
|
|
3,063,977 |
|
|
1,339,219 |
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
10,972,626 |
|
|
3,159,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(8,673,220 |
) |
|
(1,501,212 |
) |
Addition of intangible assets |
|
|
(4,006,992 |
) |
|
(2,529,710 |
) |
Payments for leasehold improvements not completed |
|
|
(6,461,403 |
) |
|
|
|
Cash used in short-term investments |
|
|
|
|
|
(2,845,939 |
) |
Cash received from short-term investment matured |
|
|
2,068,100 |
|
|
|
|
Collection of advances/loan to related parties |
|
|
443,419 |
|
|
1,822,543 |
|
Long-term prepaid expenses |
|
|
|
|
|
166,389 |
|
|
|
|
|
|
|
|
|
CASH USED IN INVESTING ACTIVITIES |
|
|
(16,630,096 |
) |
|
(4,887,929 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Proceeds from stock issuance |
|
|
9,630,927 |
|
|
|
|
Payment for stock issuance cost |
|
|
(504,600 |
) |
|
|
|
Payment in the escrow account |
|
|
(520,000 |
) |
|
|
|
Repayment of bank loans |
|
|
|
|
|
(131,562 |
) |
|
|
|
|
|
|
|
|
CASH PROVIDED BY/ (USED IN) FINANCING ACTIVITIES |
|
|
8,606,327 |
|
|
(131,562 |
) |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
678,712 |
|
|
4,022 |
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH |
|
|
3,627,569 |
|
|
(1,855,617 |
) |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
|
$ |
458,645 |
|
$ |
2,314,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR |
|
$ |
4,086,214 |
|
$ |
458,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary Disclosures for Cash Flow Information: |
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
$ |
2,956 |
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
138,709 |
|
$ |
806,391 |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-7
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements
For the years ended December 31, 2009 and 2010
NOTE 1- ORGANIZATION AND BUSINESS OPERATIONS
Tsingda Century Investment Consultant of Education Co., Ltd. (Tsingda Century) was incorporated on October 23, 2003, in Beijing, the Peoples Republic of China (the PRC). Beijing Tsingda Century Network Technology Co., Ltd. (Tsingda Network), the wholly owned subsidiary of Tsingda Century was incorporated in the PRC on February 14, 2004. Tsingda Century and its subsidiary provide high quality offline and online educational services for students ranging from six to eighteen years of age in the PRC. Tsingda eEDU Corporation (Tsingda eEDU or the Company, formerly Compass Acquisition Corporation) was incorporated in the Cayman Islands on September 27, 2006. The Company was originally organized as a blank check company to investigate and acquire a target company or business seeking the advantages of being a publicly held corporation.
Tsing Da Century Education Technology Co., Ltd. (Tsingda Technology) was incorporated on December 11, 2009, in the British Virgin Islands, to serve as the intermediate holding company.
Tsingda Century Beijing Management Consulting Co., Ltd. (Tsingda Management) was incorporated on November 26, 2007 and was serving as the wholly owned foreign enterprise (WOFE) of Tsingda Technology.
On April 22, 2010, Tsingda Century Training School (Tsingda School) was incorporated in Beijing, the PRC, and it is a wholly owned subsidiary of Tsingda Century.
As part of the restructuring, on April 26, 2010, Tsingda Management entered into a series of agreements with Tsingda Century and its shareholders, including an Operating Agreement, Proxy Agreement, Consulting Services Agreement, Equity Pledge Agreement and Option Agreement, which entitled Tsingda Management to receive substantially all of the economic benefits of Tsingda Century in consideration for consulting services provided by Tsingda Management to Tsingda Century. An Option Agreement allows Tsingda Management to acquire the shares of Tsingda Century when permitted by the PRC laws. The Proxy Agreement provides Tsingda Management with the voting rights of Tsingda Centurys shareholder and Equity Pledge Agreement pledges the shares in Tsingda Century to Tsingda Management without transferring legal ownership in Tsingda Century to Tsingda Management. Under the Consulting Services Agreement, Tsingda Management is the exclusive service provider, to Tsingda Century, for services, including general business operation, human resources, business development and Tsingda Century is obligated to make regular payments for such services provided. Under the Operating Agreement, Tsingda Century shall not conduct any transactions which may materially affect the assets, obligations, rights or the operations, without the written consent of Tsingda Management and Tsingda Century accepted Tsingda Managements corporate policy provide by Tsingda Management in connection with Tsingda Centurys daily operations, financial management and the employment and dismissal of Tsingda Centurys employees. Through those agreements, Tsingda Management has the power to direct the activities that most significantly impact the economic performance of Tsingda Century and Tsingda Century became a variable interest entity (VIE) and is included in the consolidated group.
As all of the companies are under common control, this structure has been accounted for as a reorganization of entities under common control and the financial statements have been prepared as if the reorganization had occurred retroactively.
On May 24, 2010, the Company and its controlling shareholders entered into a share exchange agreement (the Agreement) with Tsingda Technology and all of the shareholders of Tsingda Technology. Under the Agreement, the Company acquired 100% of the outstanding equity interests of Tsingda Technology in exchange for 244,022.78 preferred shares of the Company. Each such share of preferred stock was convertible into 100 ordinary shares of the Company at such time as the number of authorized ordinary shares is increased. The transaction was closed in May 2010 and was accounted for as a reverse merger with a shell company and a recapitalization of Tsingda Technology. Tsingda eEDU Corporation is the accounting acquiree. Tsingda Tecknology is the accounting acquirer and the surviving entity
On November 15, 2010, the Companys shareholders approved the change of the Companys name from Compass Acquisition Corporation to Tsingda eEDU Corporation and the name change is effective immediately following the shareholders approval.
The corporate structure of the Company is as follows:
F-8
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in accordance with U.S, Generally Accepted Accounting Principles (US GAAP).The Companys functional currency is the Chinese Renminbi (RMB); however the accompanying financial statements have been translated and presented in United States Dollars ($).
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, (Tsingda Technology, and Tsingda Management), and Tsingda Century and its subsidiaries, Tsingda Network and Tsingda Century Training School. All intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the allowance for doubtful accounts; the fair value determination of financial and equity instruments, the reliability of deferred tax assets; the recoverability of, intangible asset and property, plant and equipment; and accruals for income tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
RECLASSIFICATION
Certain amounts in the consolidated financial statements for the prior year have been reclassified to conform to the presentation of the current year for the comparative purposes.
RISKS AND UNCERTAINTIES
Tsingda Century and Tsingda Network operate under the authority of business licenses which were granted in 2003, and expire in 2023. Renewal of these licenses will depend on the result of government inspections which are made to ensure environmental laws are not breached.
The officers of the Company control through direct ownership of most of the equity interests of the Company. As a result, insiders will be able to control the outcome of all matters requiring approval of equity owners and will be able to elect all of the Company directors.
F-9
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
CASH AND CASH EQUIVALENTS
The Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with original maturity of three months or less, when purchased, to be cash and cash equivalents. The Company maintains cash with various banks and trust companies located in China. Cash accounts are not insured or otherwise protected. Should any bank or trust company holding cash deposits become insolvent, or if the Company is otherwise unable to withdraw funds, the Company would lose the cash on deposit with that particular bank or trust company.
SHORT-TERM INVESTMENTS
The Company invested in a financial product, which is similar to notes receivable, with maturity of four months, provided by a small investment company in China in the year ended December 31, 2009. The short-term investment is recorded at cost which approximates the fair market value. As of December 31, 2010, the short-term investment has been matured and fully collected with a gain of $73,861.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are recognized and carried at the invoiced amount less an allowance for uncollectible accounts, as needed. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and the customers financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for doubtful accounts monthly. Past due balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
ADVANCE TO SUPPLIERS
Advance to suppliers represents the payments made and recorded in advance for goods and services to be received. The Company makes advances to suppliers for advertising, printing and other services and products.
FAIRE VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Companys financial instruments, which include cash, short term investments, accounts receivable and other receivables, advances to suppliers, accounts payable, accrued liabilities, and other liabilities, approximate their fair values at December 31, 2010 and 2009.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation. Depreciation on property and equipment other than leasehold improvements is calculated on the straight-line method over the estimated useful lives of the assets as set out below:
|
|
|
|
|
|
||
|
|
Residual Value |
|
Estimated Useful Life |
|
||
|
|
|
|
|
|
||
Office furniture and equipment |
|
|
5 |
% |
|
5 years |
|
Vehicles |
|
|
5 |
% |
|
5 years |
|
F-10
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
INTANGIBLE ASSETS
Intangibles are the cost of computerized video lessons delivered both online and offline developed by the Company and the acquired intangible assets with finite lives consist of courseware. All costs incurred to establish the technological feasibility of a computer software product to be sold, leased, or otherwise marketed are charged to expenses as incurred. Development costs incurred after technological feasibility of a product has been established and before product sales begin are capitalized and amortized over the estimated life of the product, which thus far has been three years, starting when product sales begin. Technological feasibility is deemed to have been achieved when all the planning, designing, coding, and testing activities necessary to establish that the product can be produced to meet its design specifications have been completed, including functions, features, and technical performance requirements. Acquired coursewares with finite lives are carried at cost, less accumulated amortization and impairment. Amortization of acquired coursewares is calculated on a straight-line basis over three years.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment - Overall, long-lived assets, such as property, plant and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
CUSTOMER DEPOSITS
The Company required certain amount of deposits from its customers and franchised locations. The customer deposits are recorded as a liability when the Company receives it and will be recognized as revenue after the service is rendered.
REVENUE RECOGNITION
Online Courses
The Company provides online education programs to its franchisees, agents and individual customers. Revenue is realized through sales to franchisees and other agents of rights to conduct education services. The Company authorized the franchised locations to use its logo, all education programs and products and the Company receives a onetime licensing fee, annual management fee, and 20% of student generated revenue from the franchised location by providing them prepaid e-cards of 5 times the cash amount. All the mentioned fees are revenues or unearned revenues from the sale of e-cards. Revenue is recognized until the services are consummated upon the e-cards are opened and used by the students to purchase online education courses and is reported net of business tax. The opening of cards is tracked by our IT system automatically and the revenue is proportionally recognized based on the progress of the e-cards usage.
Virtual Internet Classroom
The Company sold prepaid e-cards to the customers. Revenue is recognized until the services are consummated upon the e-cards are opened and used by the students to purchase online education courses and is reported net of business tax. The opening of cards is tracked by our IT system automatically and the revenue is proportionally recognized based on the progress of the e-cards usage.
Sales of Materials and Publications
The Company started the sales of self-branded reference books and materials from August 2010. The revenue is recognized upon the products are delivered to the customers. During the year ended December 31, 2010, the revenue generated from sales of materials and publications is less than 10% of the total revenue.
Offline courses
Offline tutorial courses are provided by the Company owned learning centers and the sales was started from November 2010. The revenue is recognized based on the progress of courses the students completed during the period. During the year ended December 31, 2010, the revenue generated from providing offline courses is far below 10% of the total revenue.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising is included in selling expenses for financial reporting. The Company incurred advertising costs of $3,150,215 and $2,086,405 for the years ended December 31, 2010 and 2009, respectively.
F-11
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
INCOME TAXES
Income taxes are accounted for under the asset and liability method pursuant to ASC 740 Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of income in the period that includes the enactment date. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.
ASC 740-10-25 clarifies the accounting for uncertain tax positions and requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as a component of income tax expense in the consolidated statements of income.
OTHER TAXES
The Company generates its income in China where Business Tax, Income Tax, City Construction and Development Tax, and Education Surcharge taxes are applicable.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. At December 31, 2010 and 2009, the Company had no common stock equivalents that could potentially dilute future earnings per share.
The Companys board of directors approved a three-for-one reverse stock split (the Reverse Stock Split) of the Companys outstanding common stock on October 19, 2010. References to shares in the consolidated financial statements and the accompanying notes, including, but not limited to, the number of shares and per share amounts, have been adjusted to reflect the Reverse Stock Split on a retroactive basis.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial position and results of operations of the Companys subsidiaries in the PRC are measured using the Chinese currency Renminbi as the functional currency, while the Companys reporting currency is the US dollar. Balance sheet accounts with exception of equity of the subsidiaries are translated at the prevailing exchange rate in effect at each period end, income statement accounts are translated at the average rate of exchange during the period, and equity accounts were stated at their historical exchange rate. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the respective periods. Translation adjustments are included in the accumulated other comprehensive income in the consolidated statements of shareholders equity and comprehensive income.
COMPREHENSIVE INCOME
The Company has adopted ASC220, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income, its components, and accumulated balances in a full-set of general-purpose financial statements. The Companys accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments.
F-12
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC 820 Fair Value Measurements and Disclosures, adopted January 1, 2008, defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for current receivables and payables qualify as financial instruments. Management concluded the carrying values are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and if applicable, their stated interest rate approximates current rates available. The three levels are defined as follows:
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Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
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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 assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
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Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value. |
It is managements opinion that as of December 31, 2010 and 2009, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet dates. The carrying amounts of short-term loans approximate their fair values because the applicable interest rates approximate current market rates.
RELATED PARTIES
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
PRODUCTS WARRANTIES
Refunds to students who withdraw from offline tutorial courses are rarely made and are made only at the discretion of the Company. For this reason and, since revenue is recognized only as services are provided, no provision is needed for possible withdrawals.
SEGMENT REPORTING
The Company uses the management approach in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Companys chief operating decision maker for making operating decisions and assessing performance as the source for determining the Companys reportable segments. The Companys chief operating decision maker has been identified as the chief executive officer of the Company who reviews financial information of separate operating segments based on US GAAP. The chief operating decision maker now reviews results analyzed by service line. This analysis is only presented at the revenue level with no allocation of direct or indirect costs. Consequently, the Company has determined that it has only one operating segment.
F-13
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Management believes that none of the recently adopted accounting pronouncements will have a material effect on the Company financial position, results of operations, or cash flows.
Effective July 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (Now ASC 820), which provides guidance on how to measure assets and liabilities that use fair value. ASC 820 applies whenever another U.S. GAAP standard requires (or permits) measurement of assets or liabilities at fair value, but does not expand the use of fair value to any new circumstances. The Company also adopted FASB Staff Position (FSP) No.FAS 157-2, which allows the Company to partially defer the adoption of ASC820. This FSP defers the effective date of ASC 820 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15,2008, and interim periods within those fiscal years. Nonfinancial assets and nonfinancial liabilities include all assets and liabilities other than those meeting the definition of a financial asset or financial liability as defined in paragraph 6 of Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The adoption of ASC 820 did not have an impact on our financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (Now ASC 855), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. ASC 855 is effective for interim and annual periods ending after June 15, 2009. The adoption of ASC 855 did not have a material impact on the Companys financial position, results of operations or cash flows.
In June 2009, the FASB issued Update No. 2009-01, Generally Accepted Accounting Principles (ASU 2009-01). ASU 2009-01 establishes The FASB Accounting Standards Codification, or Codification, which became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non grandfathered non-SEC accounting literature not included in the Codification will become non authoritative. ASU 2009-01 is effective for interim and annual periods ending after September 15, 2009. The adoption did not have any impact on the Companys operating results, financial position or cash flows.
In December 2009, the FASB codified Consolidations Improvements to Financial Reporting by Enterprises Involved with VIEs (ASU 2009-17), guidance which was issued by the FASB in June 2009. The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance and has (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The adoption of this standard will have no material impact on the Companys consolidated financial statements.
NOTE 3 ACCOUNTS RECEIVABLE
As of December 31, 2010 and 2009, accounts receivable consisted of the following:
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December 31, |
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December 31, |
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Accounts receivable |
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$ |
6,555,936 |
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$ |
4,529,511 |
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Allowance for doubtful accounts |
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(301,001 |
) |
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Accounts receivable, net |
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$ |
6,555,936 |
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$ |
4,228,510 |
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F-14
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
The change in the allowance for doubtful accounts is as follows:
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December 31, |
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December 31, |
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Beginning balance |
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$ |
301,001 |
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$ |
256,486 |
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Provision during the period |
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44,515 |
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Collection during the period |
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(301,001 |
) |
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Ending balance |
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$ |
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$ |
301,001 |
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NOTE 4 - ADVANCES TO SUPPLIERS
Advances to suppliers represent amounts prepaid for advertising, network, rent, store construction and decoration:
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December 31, |
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December 31, |
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Advance for lease-hold improvement |
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$ |
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$ |
3,071,433 |
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Advance for advertising and printing |
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3,466,970 |
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11,993 |
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Advance for network service |
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2,304,492 |
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292,517 |
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Others |
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2,717,289 |
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504,364 |
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Total |
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$ |
8,488,751 |
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$ |
3,880,307 |
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NOTE 5 - OTHER ACCOUNTS RECEIVABLE
Other accounts receivable represent the advances to employees and deposits paid to property management companies.
NOTE 6 SHAREHOLDER ADVANCES
Shareholder advances represent the loans provided to one shareholder and executive with no interest and the repayment is due upon request.
NOTE 7- PROPERTYAND EQUIPMENT, NET
Property and equipment at December 31, 2010 and 2009 consisted of the following:
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December 31, |
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December 31, |
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Office furniture |
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$ |
7,595 |
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$ |
5,107 |
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Office equipment |
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3,710,405 |
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3,044,064 |
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Vehicles |
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143,017 |
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34,976 |
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Leasehold improvement |
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1,152,683 |
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101,450 |
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Construction in progress |
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6,844,359 |
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Total property and equipment |
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11,858,059 |
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3,185,597 |
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Accumulated depreciation |
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(1,205,229 |
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(428,210 |
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Total property and equipment, net |
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$ |
10,652,830 |
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$ |
2,757,387 |
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F-15
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
Depreciation expense for the years ended December 31, 2010 and 2009 were allocated to the following expense items respectively:
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December 31, |
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December 31, |
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COGS |
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$ |
101,880 |
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$ |
33,798 |
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Selling expense |
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1,399 |
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General and administrative |
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643,321 |
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314,482 |
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Total |
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$ |
746,600 |
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$ |
348,280 |
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NOTE 8 INTANGIBLE ASSETS, NET
Intangible assets at December 31, 2010 and 2009 consisted of the following:
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December 31, |
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December 31, |
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Self-developed courseware |
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$ |
379,435 |
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$ |
267,937 |
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Purchased courseware |
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6,507,896 |
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2,964,901 |
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Management software |
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874,610 |
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680,542 |
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Purchased technology |
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150,996 |
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146,259 |
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Intangible assets, total |
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7,912,937 |
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4,059,639 |
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Accumulated amortization |
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(2,890,954 |
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(1,205,873 |
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Intangible assets, net |
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$ |
5,021,983 |
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$ |
2,853,766 |
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The amortization expenses for the years ended December 31, 2010 and 2009 are $1,610,330 and $727,700, respectively.
NOTE 9 PRIVATE PLACEMENT
On September 16, 2010, the Company entered into a Securities Purchase Agreement (Securities Purchase Agreement) with certain investors (Investors) pursuant to which the Company completed an offering (Offering) of units (Units) for total gross proceeds of $9,600,000. Each Unit is priced at $1.60 and consists of one (1) ordinary share, par value $0.000384 per share (Ordinary Shares), and a Series A Stock Purchase Warrant (Warrants) to purchase 0.35 of one Ordinary Share. The initial Warrant exercise price is $2.08 per share on a post split basis. An aggregate of 6,000,000 units were sold, resulted in the sale of 6,000,000 Ordinary Shares and Warrants to purchase 2,100,000 Ordinary Shares at $2.08.
In connection with the private placement, the Company held back and placed in an escrow account an aggregate amount of $520,000, pursuant to the agreement entered with the Lead Purchaser of the Offering. The escrowed amount will be proportionally released upon the Company satisfying one or all conditions as set forth below prior to June 30, 2011.
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(a) |
At such time as the Company engages an investor relations firm reasonably acceptable to the Lead Purchaser; |
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(b) |
At such time as the Company provides the Lead Purchaser with evidence that is reasonably satisfactory to the Lead Purchaser indicating that Circular 75 filings have been approved by the PRC government; |
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(c) |
At such time as the Company provides the Lead Purchaser with documentation demonstrating that the business license of the Beijing Tsingda Century Investment Consultant of Education Co., Ltd. has amended to clarify to the Lead Purchasers reasonable satisfaction that the VIE subsidiaries are properly authorized to engage in its current business; |
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(d) |
At such time as the Company provides the Lead Purchaser with written confirmation that (i) an independent auditing firm reasonably satisfactory to the Lead Purchaser has been engaged; and (ii) a law firm reasonably satisfactory to the Lead Purchaser has been engaged in connection with the Companys initial public offering. |
F-16
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
NOTE 10 SHAREHOLDERS EQUITY
On May 17, 2010, the Company issued 915,085 ordinary shares (adjusted to reflect the 3 for 1 reverse split) for $30,000 in cash to a group associated with the firm that is the placement agent of a private placement offering of Company equity securities, which offering is described in the following paragraphs. Also on May 17, 2010, the Company issued 2,079,740 ordinary shares (adjusted to reflect the 3 for 1 reverse split) to Eastbridge Investment Group Corporation, in return for services. The value of these shares, $1,477,000, was charged to expense prior to the reverse merger.
On May 24, 2010, the Company and its controlling shareholders entered into a share exchange agreement (the Agreement) with Tsingda Technology and all of the shareholders of Tsingda Technology. Under the Agreement, the Company acquired 100% of the outstanding equity interests of Tsingda Technology in exchange for 244,022.78 preferred shares of the Company. Each such share of preferred stock was convertible into 100 ordinary shares of the Company at such time as the number of authorized ordinary shares is increased. The transaction was closed in May 2010 and was accounted for as a reverse merger with a shell company and a recapitalization of Tsingda Technology. Tsingda eEDU Corporation is the accounting acquiree. Tsingda Technology is the accounting acquirer and the surviving entity.
On November 15, 2010, the Companys shareholders approved a three-for-one reverse split of the Companys issued and outstanding Ordinary Shares (and to increase the amount of the Companys authorized Ordinary Shares from thirty-nine million sixty-two thousand five hundred shares (39,062,500); to one hundred million (100,000,000) shares.
As result of the reverse split and increase in share capital, the par value of the Companys Ordinary Shares change from US$0.000128 per share to US$0.000384 per share and the Companys total number of authorized Ordinary Shares authorized increased to 100,000,000 Ordinary Shares. At the same time, all the preferred stock automatically converted to ordinary shares at the ratio of one share of preferred stock to 100 ordinary shares.
All ordinary share data has been retroactively restated for the periods presented to reflect the Reverse Stock Split.
NOTE 11 - STATUTORY RESERVE
In accordance with the relevant laws and regulations of the PRC, the Companys PRC subsidiaries are required to transfer 10% of their respective after tax profit, as determined in accordance with PRC accounting standards and regulations, to a general reserve fund until the balance of the fund reaches 50% of the registered capital of the respective subsidiary. The transfer to this general reserve fund must be made before distribution of dividends can be made. As of December 31, 2010, the registered capitals of Tsingda Century and Tsingda Network are $4,421,156 and $588,235, respectively, and both companies have made the required allocations to the general reserves. As of December 31, 2010 and 2009, the PRC subsidiaries had appropriated $1,955,454 and $886,021, respectively to the general reserve funds, which are restricted from being distributed to the Company. General reserve funds are restricted for set off against losses, expansion of production and operation or increase in registered capital of the respective company. These reserves are therefore not available for distribution except in liquidation.
Further, the PRC subsidiaries may, at the discretion of the enterprise, make appropriations to a staff welfare and bonus reserve in accordance with the relevant laws and regulations in the PRC. The appropriation to staff welfare and bonus reserve is recognized as an expense as it is a current liability to the employees. For the years ended December 31, 2010 and 2009, the PRC subsidiaries made appropriations to the staff welfare and bonus reserve of $0 and $443,010, respectively.
NOTE 12 - RELATED PARTY TRANSACTIONS
As of December 31, 2010 and 2009, the advances to shareholders and executives are $37,749 and $476,220, respectively. During the year ended December 31, 2010 and 2009, the additional advances were paid the shareholders executives at amount of $234,315 and $302,426, respectively; and the repayments to the Company were amounted to $688,209 and $2,015,205, respectively.
Management subsequently evaluated this transaction and determined that the transfers violated Section 402 of the Sarbanes-Oxley Act of 2002. Management is taking actions to reduce and eliminate such transactions.
F-17
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
NOTE 13 - INCOME TAXES
The Company is incorporated in the Cayman Islands, and is not subject to tax on income or capital gain under the current laws of the Cayman Islands. In addition, upon payment of dividends by the Company to its shareholders, no Cayman Islands withholding tax is imposed. The Companys other subsidiaries are subject to income tax as described below.
British Virgin Islands (BVI)
Under the current laws of BVI, our BVI subsidiaries are not subject to tax on income or capital gain. In addition, payments of dividends by our BVI subsidiaries to their shareholders are not subject to withholding tax in the BVI.
PRC
Prior to January 1, 2008, the Company was governed by the previous Income Tax Law (the Previous Tax Law) of China. Under the Previous Tax Law, the Companys PRC subsidiaries, Tsingda Management, Tsingda Century and Tsingda network, were entitled various preferential tax treatments.
On March 16, 2007, the National Peoples Congress passed the new Enterprise Income Tax law (the new EIT law) which imposes a single income tax rate of 25% for most domestic enterprises and foreign investment enterprises. The new EIT law was effective as of January 1, 2008. The new EIT law provides a five-year transition period from its effective date for those enterprises which were established before March 16, 2007 and which were entitled to a preferential lower tax rate under the then effective tax laws or regulations, as well as grandfathering tax holidays. Further, according to the new EIT law, entities that qualify as High and New Technology Enterprises are entitled to the preferential EIT rate of 15%. Tsingda Century has received approval for the status as a High and New Technology Enterprises. The status is valid for three years starting from June 2009 and will be renewed after evaluation by relevant government authorities every three years. Further, on December 26, 2007, the PRC government passed the detailed implementing rules which allow enterprises to continue to enjoy their unexpired tax holiday under the previous income tax laws and rules. As a result, under the new EIT law, Tsingda Centurys tax rate are 15% for the calendar years from 2010 to 2012 and subject to renewal of the status of High and New Technology Enterprises after calendar year 2012; and Tsingda Network and Tsingda Schools tax rates are 25%. Tsingda Managements tax rates are 22% and 24% for 2010 and 2011 and 25% thereafter. For the year ended December 31, 2010 and 2009, Tsingda Management, Tsingda Network and Tsingda School did not generate any taxable income.
The new EIT Law also provides that an enterprise established under the laws of foreign countries or regions but whose de facto management body is located in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for its worldwide income. The Implementing Rules of the new EIT Law merely defines the location of the de facto management body as the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located. On April 22, 2009, the PRC State Administration of Taxation further issued a notice entitled Notice Regarding Recognizing Offshore-Established Enterprises Controlled by PRC Shareholders as Resident Enterprises Based on Their Place of Effective Management. Under this notice, a foreign company controlled by a PRC company or a group of PRC companies shall be deemed as a PRC resident enterprise, if (i) the senior management and the core management departments in charge of its daily operations mainly function in the PRC; (ii) its financial decisions and human resource decisions are subject to decisions or approvals of persons or institutions in the PRC; (iii) its major assets, accounting books, company seals, minutes and files of board meetings and shareholders meetings are located or kept in the PRC; and (iv) more than half of the directors or senior management personnel with voting rights reside in the PRC. Based on a review of surrounding facts and circumstances, the Company does not believe that it is likely that its operations outside of the PRC should be considered a resident enterprise for PRC tax purposes. However, due to limited guidance and implementation history of the new EIT Law, should the Company be treated as a resident enterprise for PRC tax purposes, the Company will be subject to PRC tax on worldwide income at a uniform tax rate of 25% retroactive to January 1, 2008.
The new EIT Law also imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding companys jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Such withholding income tax was exempted under the previous income tax regulations. The Cayman Islands, where the Company is incorporated, does not have such tax treaty with China.
F-18
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
The provision for taxes on earnings consisted of:
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
||
|
|
|
|
|
|
||
PRC Enterprise Income Tax |
|
$ |
1,834,541 |
|
$ |
1,068,020 |
|
United States Federal Income Tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax, net |
|
$ |
1,834,541 |
|
$ |
1,068,020 |
|
|
|
|
|
|
|
|
|
Income tax expense, which is all incurred in the PRC, consists of:
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
||
|
|
|
|
|
|
||
Current income tax expense |
|
$ |
2,061,609 |
|
$ |
989,925 |
|
Deferred income tax expense(benefit) |
|
|
(227,068 |
) |
|
78,095 |
|
|
|
|
|
|
|
|
|
Income tax, net |
|
$ |
1,834,541 |
|
$ |
1,068,020 |
|
|
|
|
|
|
|
|
|
A reconciliation between the income tax computed at the U.S. statutory rate and the Companys provision for income tax is as follows:
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
||
|
|
|
|
|
|
||
U.S. Federal income tax statutory rate |
|
|
35 |
% |
|
35 |
% |
PRC Statutory rate (25%) difference |
|
|
-10 |
% |
|
-10 |
% |
Preferential tax rate |
|
|
-10 |
% |
|
-10 |
% |
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
15 |
% |
|
15 |
% |
|
|
|
|
|
|
|
|
The tax effect of temporary differences that gives rise to significant portions of the deferred income tax assets are presented below:
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
||
|
|
|
|
|
|
||
Deferred tax assets: |
|
|
|
|
|
|
|
Deferred revenue |
|
$ |
382,758 |
|
$ |
155,690 |
|
|
|
|
|
|
|
|
|
Deferred tax assets, total |
|
$ |
382,758 |
|
$ |
155,690 |
|
|
|
|
|
|
|
|
|
Accounting for Uncertainty in Income Taxes
The Company adopted the provisions of Accounting for Uncertainty in Income Taxes on January 1, 2007. The provisions clarify the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with the standard Accounting for Income Taxes, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of Accounting for Uncertainty in Income Taxes also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
F-19
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
Based on the Companys evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.
The Company may from time to time be assessed interest or penalties by major tax jurisdictions. In the event it receives an assessment for interest and/or penalties, it will be classified in the financial statements as tax expense.
NOTE 14 - COMMITMENTS AND CONTINGECIES
Lease Obligations
The Company has entered into multiple lease agreements for the lease of premises for company directly owned learning centers. As of December 31, 2010, the Companys commitments for minimum lease payments under these un-revocable operating leases for the next five years are as follows:
|
|
|
|
|
Year ending December 31, |
|
Payments Due |
|
|
|
|
|
|
|
2011 |
|
$ |
4,583,755 |
|
2012 |
|
|
5,165,630 |
|
2013 to 2015 |
|
|
12,241,591 |
|
|
|
|
|
|
Total |
|
$ |
21,990,976 |
|
|
|
|
|
|
Tax issues
The tax authority of the PRC Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises had completed their relevant tax filings, hence the Companys tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Companys tax filings which may lead to additional tax liabilities.
NOTE 15 - CONCENTRATIONS
Major Customers and Vendors
For the year ended December 31, 2010 and 2009, no individual customers contributed more than 10% of the Companys revenue.
For the year ended December 31, 2010, purchase (net of VAT) from 2 vendors accounted for 27.3% of the total net purchase of the Company. For the year ended December 31, 2009, purchase (net of VAT) from 3 vendors accounted for 71.24% of the total net purchase of the Company.
NOTE 16 OPERATING RISKS
Lack of Insurance
The Company could be exposed to liabilities or other claims for which the Company would have no insurance protection. The Company does not currently maintain any business interruption insurance, products liability insurance, or any other comprehensive insurance policy except for property insurance policies with limited coverage. As a result, the Company may incur uninsured liabilities and losses as a result of the conduct of its business. There can be no guarantee that the Company will be able to obtain additional insurance coverage in the future, and even if it can obtain additional coverage, the Company may not carry sufficient insurance coverage to satisfy potential claims. Should uninsured losses occur, any purchasers of the Companys common stock could lose their entire investment.
Country Risk
The Company has significant operating risk in the PRC. The operating results of the Company may be adversely affected by changes in the political and social conditions in the PRC and by changes in Chinese government 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 can give no assurance that those changes in political and other conditions will not result in have a material adverse effect upon the Companys business and financial condition.
F-20
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
Exchange Risk
The Company cannot guarantee the Renminbi and US dollar exchange rate will remain steady, therefore the Company could post the same profit for two comparable periods and post higher or lower profit depending on exchange rate of Renminbi and US dollar. The exchange rate could fluctuate depending on changes in the political and economic environments without notice.
Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash, short term investments, accounts receivable and advances to suppliers. However, all of the assets of Tsingda Century, Tsingda Network and Tsingda Century Training School, are located in the PRC and cash balances are on deposit at financial institutions in the PRC, the currency of which is not free trading. Foreign exchange transactions are required to be conducted through institutions authorized by the Chinese government and there is no guarantee that Chinese currency can be converted to U.S. or other currencies.
NOTE 17 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Basis of Presentation
The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X, as the restricted net assets of the subsidiaries of Tsingda eEDU Corporation exceed 25% of the consolidated net assets of Tsingda eEDU Corporation. The ability of the Companys Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances of the Chinese operating subsidiaries. Because substantially all of the Companys operations are conducted in China and a substantial majority of its revenues are generated in China, a majority of the Companys revenue being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict its ability to convert RMB into US Dollars.
The condensed parent company financial statements have been prepared using the same accounting principles and policies described in the notes to the consolidated financial statements, with the only exception being that the parent company accounts for its subsidiaries using the equity method. Refer to the consolidated financial statements and notes presented above for additional information and disclosures with respect to these financial statements.
F-21
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
|
TSINGDA EEDU CORPORATION |
(FOERMERLY COMPASS ACQUISITION CORPORATION) |
Condensed Parent Company Balance Sheets |
(Stated in US dollars) |
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
||
|
|
|
|
|
|
||
ASSETS |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from escrow account |
|
$ |
520,479 |
|
$ |
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries |
|
|
33,140,493 |
|
|
13,511,452 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
|
33,660,972 |
|
|
13,511,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock: 781,250 shares of $.000128 par value authorized; None shares issued and outstanding |
|
$ |
|
|
$ |
|
|
Common Stock (par value $0.000384 per share; 100,000,000 shares authorized; 33,729,862 and 24,402,278 shares issued and outstanding as of December 31, 2010 and 2009, respectively) |
|
|
12,952 |
|
|
9,370 |
|
|
|
|
|
|
|
|
|
Additional paid in capital |
|
|
13,523,180 |
|
|
4,400,435 |
|
|
|
|
|
|
|
|
|
Statutory reserve |
|
|
2,398,464 |
|
|
1,329,032 |
|
Accumulated other comprehensive income |
|
|
963,435 |
|
|
241,438 |
|
|
|
|
|
|
|
|
|
Retained deficits |
|
|
16,762,941 |
|
|
7,531,177 |
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY |
|
|
33,660,972 |
|
|
13,511,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
|
$ |
33,660,972 |
|
$ |
13,511,452 |
|
|
|
|
|
|
|
|
|
F-22
TSINGDA EEDU CORPORATION
(FORMERLY COMPASS ACQUISITION CORPORATION)
Notes to the Consolidated Financial Statements (Continued)
For the years ended December 31, 2009 and 2010
|
TSINGDA EEDU CORPORATION |
(FOERMERLY COMPASS ACQUISITON CORPORATIOIN) |
Condensed Parent Company Statements of Operations |
(Stated in US dollars) |
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
||||
|
|
|
|
||||
|
|
2010 |
|
2009 |
|
||
|
|
|
|
|
|
||
Operating Expenses |
|
|
|
|
|
|
|
General and administrative expenses |
|
|
10,475 |
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
10,475 |
|
|
|
|
Other income |
|
|
62 |
|
|
|
|
Equity in undistributed income of subsidiaries |
|
|
10,301,196 |
|
|
6,052,110 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,290,783 |
|
$ |
6,052,110 |
|
|
|
|
|
|
|
|
|
|
Condensed Parent Company Statements of Cash Flows |
(Stated in US Dollars) |
|
|
|
|
|
|
|
|
|
|
For the years ended December 31 |
|
||||
|
|
|
|
||||
|
|
2010 |
|
2009 |
|
||
|
|
|
|
|
|
||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
Net income |
|
$ |
10,290,783 |
|
$ |
6,052,110 |
|
Other income |
|
|
(479 |
) |
|
|
|
Equity in undistributed income of subsidiaries |
|
|
(10,301,196 |
) |
|
(6,052,110 |
) |
|
|
|
|
|
|
|
|
CASH USED IN OPERATING ACTIVITIES |
|
|
(10,892 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Investment in subsidiaries |
|
|
(8,595,435 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH USED IN INVESTING ACTIVITIES |
|
|
(8,595,435 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Proceeds from issuance of shares |
|
|
9,630,927 |
|
|
|
|
Payment for stock issuance cost |
|
|
(504,600 |
) |
|
|
|
Payment in escrow accounts |
|
|
(520,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH USED IN FINANCING ACTIVITIES |
|
|
8,606,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
F-23
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Beijing, China, on the 16th day of March 2011.
|
|
|
|
TSINGDA EEDU CORPORATION |
|
|
|
|
|
By: |
/s/ Zhang Hui |
|
|
|
|
|
Zhang Hui President, Chief Executive Officer, |
|
|
(principal executive officer) |
|
|
and Chairman of the Board of Directors |
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
|
|
|
|
|
|
Name |
|
Title |
|
Date |
|
|
|
|
|
|
|
|
|
|
|
||
|
|
President, Chief Executive Officer |
|
|
|
/s/ Zhang Hui |
|
(principal executive officer) and |
|
March 16, 2011 |
|
|
|
Chairman of the Board of Directors |
|
|
|
Zhang Hui |
|
|
|
|
|
|
|
|
|
|
|
/s/ * |
|
Executive Vice President and Director |
|
March 16, 2011 |
|
|
|
|
|
|
|
Liu Juntao |
|
|
|
|
|
|
|
|
|
|
|
/s/ * |
|
|
|
March 16, 2011 |
|
|
|
|
|
|
|
Kang Chungmai |
|
Secretary and Chief Financial Officer |
|
|
|
|
|
(principal accounting officer) |
|
March 16, 2011 |
|
|
|
|
|
|
|
/s/ * |
|
|
|
|
|
|
|
|
|
|
|
Norm Klein |
|
Director |
|
March 16, 2011 |
|
|
|
|
|
|
|
/s/ * |
|
|
|
|
|
|
|
|
|
|
|
David Bolocan |
|
Director |
|
March 16, 2011 |
|
|
|
|
|
|
|
/s/ * |
|
|
|
|
|
|
|
|
|
|
|
Bi Cheng |
|
Director |
|
March 16, 2011 |
|
* By: | /s/ Zhang Hui |
||||
Zhang Hui, attorney in fact | |||||
II-2
EXHIBIT INDEX
|
|
|
Exhibit |
|
Description |
|
|
|
3.1 |
|
Memorandum and Articles of Association of the Company.(1) |
3.2 |
|
Amended Memorandum of Association of the Company.(2) |
3.3 |
|
Memorandum of and Articles of Association of Tsing Da Century Education Technology Co. Ltd.(3) |
4.1 |
|
Form of Warrant.(5) |
4.2 |
|
Form of Placement Agent Warrant.(5) |
5.1 |
|
Opinion of Stuarts Walker Hersant, Attorneys at Law, regarding legality of shares (11). |
5.2 |
|
Opinion of Shu Jin Law Firm (9) |
10.1 |
|
Consulting Services Agreement dated April 26, 2010(3) |
10.2 |
|
Operating Agreement dated April 26, 2010(3) |
10.3 |
|
Option Agreement dated April 26, 2010(3) |
10.4 |
|
Voting Rights Proxy Agreement dated April 26, 2010(3) |
10.5 |
|
Equity Pledge Agreement dated April 26, 2010(3) |
10.6 |
|
Share Exchange Agreement dated May 24, 2010 by and among Compass Acquisition Corporation and its controlling shareholders, and Tsing Da Century Education Technology Co. Ltd. and its shareholders (4) |
10.7 |
|
Securities Purchase Agreement dated September 16, 2010 by and among the Company and certain investors.(5) |
10.8 |
|
Registration Rights Agreement dated September 16, 2010 by and among the Company and certain investors.(5) |
10.10 |
|
Holdback Escrow Agreement dated September 16, 2010, by and among the Company, Zhong Hui Rong (Fujian) Fund, Ltd. and Collateral Agents, LLC.(5) |
10.11 |
|
Six Month Lock-Up Agreement dated September 16, 2010 by and among the Company and certain shareholders.(5) |
10.12 |
|
Initial Shareholder Lock-Up Agreement dated September 16, 2010 by and among the Company and certain shareholders.(5) |
10.13 |
|
Initial Shareholder Lock-Up Agreement dated September 16, 2010 by and among the Company and Eastbridge Investment Group Corp.(5) |
10.14 |
|
Founding Shareholder Lock-Up Agreement dated September 16, 2010 by and between the Company and Tsingda Century Education Technology Co. Ltd.(5) |
10.15 |
|
Securities Escrow Agreement dated September 16,, 2010 by and among the Company, Maxim Group, LLC, Tsing Da Century Technology Co. Ltd., and Collateral Agents, LLC.(5) |
10.16 |
|
Agreement dated March 12, 2010 by and between Maxim Group, LLC and Beijing Tsingda Century Investment Consultant of Education Co., Ltd.(5) |
10.17 |
|
Translation of Form of Franchise Agreement.(6) |
10.18 |
|
Translation of Employment Agreement with Mr. Zhang.(6) |
10.19 |
|
Services Agreement by and between the Company and Eastbridge Investment Group Corporation dated May 17, 2010. (10) |
21.1 |
|
List of Subsidiaries.(12) |
23.1 |
|
Consent of Jeffrey & Company.(12) |
23.2 |
|
Consent of Stuarts Walker Hersant, Attorneys at Law, included in Exhibit 5.1.(11) |
23.3 |
|
Consent of Malon & Bailey LLP.(12) |
24.1 |
|
Power of Attorney (included in the signature page of the Registration Statement on Form S-1 (Registration No. 333-169877) filed on October 12, 2010.) |
99.1 |
|
Index of Tsingda Courses (8) |
99.2 |
|
Addresses of Company-owned learning centers (9) |
(1)
Incorporated herein by reference to the Form 10 Registration Statement filed on
December 4, 2006.
(2) Incorporated herein by reference to the Form 10-Q Quarterly Report filed on
May 15, 2008.
(3) Incorporated herein by reference to the Form 8-K Current Report filed on
May 28, 2010.
(4) Incorporated by reference to the Form 8-K/A Current Report filed on June 3,
2010.
(5) Incorporated by reference to the Form 8-K Current Report filed on September
23 2010.
(6) Incorporated herein by reference to the Registration Statement on Form S-1
filed on October 12, 2010.
(7) Incorporated by reference to the Registration Statement on Form S-1 filed
on January 20, 2011.
(8) Incorporated herein by reference to the Registration Statement on Form
S-1/A filed on December 3, 2010.
(9) Incorporated herein by reference to the Registration Statement on Form
S-1/A) filed on December 28, 2010.
(10) Incorporated herein by reference to the Registration Statement on Form
S-1/A filed on January 4, 2011.
(11) To be filed with Amendment.
(12) Filed herewith.
II-3