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EX-32.1 - EXHIBIT 32.1 - CHINA SUN GROUP HIGH-TECH COv245080_ex32-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended November 30, 2011

OR

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

For the transition period from ______________ to ______________

Commission File Number: 333-118259

CHINA SUN GROUP HIGH-TECH CO.
(Exact name of registrant as specified in its charter)

Delaware
 
54-2142880
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)

1 Hutan Street, Zhongshan District
Dalian, The People’s Republic of China
(Address of principal executive offices) (Zip Code)

011 – 86- (411) 8288 9800/ 8289 2736
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes  ¨ No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x   Yes ¨  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨
 
Accelerated filer   ¨
     
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
  
Smaller reporting company   þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨  Yes  þ No         

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

There are presently 55,962,971 shares of common stock, $0.001 par value, issued and outstanding as of December 28, 2011.

 
 

 

TABLE OF CONTENTS
 
   
Page
 
PART I – FINANCIAL INFORMATION
     
Item 1.
Financial Statements.
F-1
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
2
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
9
Item 4.
Controls and Procedures.
9
     
PART II – OTHER INFORMATION
 
     
Item 1.
Legal Proceedings.
10
Item 1A.
Risk Factors.
10
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
10
Item 3.
Defaults Upon Senior Securities.
10
Item 4.
(Removed and Reserved)
10
Item 5.
Other Information.
10
Item 6.
Exhibits.
10
Signatures
 
11

 
1

 

PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements.

CHINA SUN GROUP HIGH-TECH CO.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 
Page
   
Condensed Consolidated Balance Sheets as of November 30, 2011 and May 31, 2011
F-2
   
Condensed Consolidated Statements of Operations And Comprehensive Income for the Three and Six Months ended November 30, 2011 and 2010
F-3
   
Condensed Consolidated Statements of Cash Flows for the Six Months ended November 30, 2011 and 2010
F-4
   
Condensed Consolidated Statements of Stockholders’ Equity for the Six Months ended November 30, 2011
F-5
   
Notes to Condensed Consolidated Financial Statements
F-6 – F-16

 
F-1

 
 
CHINA SUN GROUP HIGH-TECH CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF NOVEMBER 30, 2011 AND MAY 31, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)

   
November 30, 2011
   
May 31, 2011
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 23,926,083     $ 21,810,394  
Accounts receivable, trade
    4,580,140       2,465,862  
Inventories
    1,018,117       610,025  
Deposits and prepayments
    7,318       1,026  
                 
Total current assets
    29,531,658       24,887,307  
                 
Non-current assets:
               
Technical know-how, net
    2,372,477       2,420,278  
Property, plant and equipment, net
    27,247,063       27,805,208  
Construction in progress
    2,590,438       -  
                 
TOTAL ASSETS
  $ 61,741,636     $ 55,112,793  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable, trade
  $ 536,669     $ -  
Income tax payable
    505,940       536,647  
Other payables and accrued liabilities
    1,428,830       1,163,324  
                 
Total liabilities
    2,471,439       1,699,971  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Preferred stock, $0.001 par value; 2,000,000 shares authorized; none of shares issued and outstanding
    -       -  
Common stock, $0.001 par value; 100,000,000 shares authorized; 55,962,971 shares issued and outstanding, respectively
    55,963       55,963  
Additional paid-in capital
    11,790,789       11,790,789  
Accumulated other comprehensive income
    6,497,710       5,457,233  
Statutory reserve
    3,342,358       3,342,358  
Deferred compensation
    (96,000 )     (96,000 )
Retained earnings
    37,679,377       32,862,479  
                 
Total stockholders’ equity
    59,270,197       53,412,822  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 61,741,636     $ 55,112,793  

See accompanying notes to condensed consolidated financial statements.

 
F-2

 

CHINA SUN GROUP HIGH-TECH CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2011 AND 2010
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

   
Three months ended November 30,
   
Six months ended November 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues, net
  $ 10,712,997       12,639,828     $ 22,202,263     $ 24,393,287  
                                 
Cost of revenue (inclusive of depreciation and amortization)
    7,116,356       8,568,216       14,754,207       16,614,672  
                                 
Gross profit
    3,596,641       4,071,612       7,448,056       7,778,615  
                                 
Operating expenses:
                               
Sales and marketing
    43,840       37,447       81,039       68,773  
Research and development
    33,717       32,514       67,672       53,447  
General and administrative
    406,858       2,195,429       850,464       2,595,814  
                                 
Total operating expenses
    484,415       2,265,390       999,175       2,718,034  
                                 
INCOME FROM OPERATIONS
    3,112,226       1,806,222       6,448,881       5,060,581  
                                 
Other income:
                               
Other income
    -       44,432       -       44,432  
Interest income
    19,988       13,212       33,561       23,851  
                                 
INCOME BEFORE INCOME TAXES
    3,132,214       1,863,866       6,482,442       5,128,864  
                                 
Income tax expense
    (800,424 )     (923,867 )     (1,665,544 )     (1,758,130 )
                                 
NET INCOME
  $ 2,331,790     $ 939,999     $ 4,816,898     $ 3,370,734  
                                 
Other comprehensive income:
                               
- Foreign currency translation gain
    34,688       944,317       1,040,477       1,051,560  
                                 
COMPREHENSIVE INCOME
  $ 2,366,478     $ 1,884,316     $ 5,857,375     $ 4,422,294  
                                 
Net income per share – Basic and diluted
  $ 0.04     $ 0.02     $ 0.09     $ 0.06  
                                 
Weighted average common stock outstanding – Basic and diluted
    55,962,971       55,017,415       55,962,971       54,220,193  
 
See accompanying notes to condensed consolidated financial statements.

 
F-3

 

CHINA SUN GROUP HIGH-TECH CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30 2011 AND 2010
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

   
Six months ended November 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 4,816,898     $ 3,370,734  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation of property, plant and equipment
    1,085,950       810,149  
Amortization of technical know-how
    92,447       87,876  
Shares issued for services, non-cash
    -       1,783,500  
Changes in operating assets and liabilities:
               
Accounts receivable, trade
    (2,055,044 )     (2,537,625 )
Inventories
    (394,169 )     816,781  
Deposits and prepayments
    (6,232 )     (323,736 )
Accounts payable, trade
    533,258       (1,745,030 )
Income tax payable
    (40,479 )     (900,803 )
Other payables and accrued liabilities
    (76,437 )     5,717  
                 
Net cash provided by operating activities
    3,956,192       1,367,563  
                 
Cash flows from investing activities:
               
Purchase of plant and equipment
    (207,988 )     (49,852 )
Payment on construction in progress
    (2,059,180 )     -  
                 
Net cash used in investing activities
    (2,267,168 )     (49,852 )
                 
Effect of exchange rate changes on cash and cash equivalents
    426,665       462,435  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    2,115,689       1,780,146  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    21,810,394       18,017,266  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 23,926,083     $ 19,797,412  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for income taxes
  $ 1,706,022     $ 2,658,933  
Cash paid for interest
  $ -     $ -  
 
See accompanying notes to condensed consolidated financial statements.

 
F-4

 

CHINA SUN GROUP HIGH-TECH CO.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
   
Preferred stock
   
Common stock
     
Additional
     
Accumulated
other
                       
Total
 
   
No. of
share
   
Amount
   
No. of
share
   
Amount
   
paid-in
capital
   
comprehensive
income
   
Statutory
reserve
   
Deferred
compensation
   
Retained
earnings
   
stockholders’
equity
 
                                                             
Balance as of June 1, 2011
    -     $ -       55,962,971     $ 55,963     $ 11,790,789     $ 5,457,233     $ 3,342,358     $ (96,000 )   $ 32,862,479     $ 53,412,822  
                                                                                 
Net income for the period
    -       -       -       -       -       -       -       -       4,816,898       4,816,898  
                                                                                 
Foreign currency translation adjustment
    -       -       -       -       -       1,040,477       -       -       -       1,040,477  
                                                                                 
Balance as of November 30, 2011
    -     $ -       55,962,971     $ 55,963     $ 11,790,789     $ 6,497,710     $ 3,342,358     $ (96,000 )   $ 37,679,377     $ 59,270,197  
 
See accompanying notes to condensed consolidated financial statements.

 
F-5

 

CHINA SUN GROUP HIGH-TECH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

NOTE1
BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with both accounting principles generally accepted in the United States (“GAAP”) and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

In the opinion of management, the consolidated balance sheet as of May 31, 2011 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended November 30, 2011 are not necessarily indicative of the results to be expected for the entire fiscal year ending May 31, 2012 or for any future periods.

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended May 31, 2011.

NOTE2
ORGANIZATION AND BUSINESS BACKGROUND

 
China Sun Group High-Tech Co. (the “Company” or “CSGH”) was organized under the laws of the State of North Carolina on February 2, 2004 as a subchapter S-Corporation. On August 24, 2007, the Company was reincorporated in the State of Delaware and changed its name from “Capital Resource Funding, Inc.” to “China Sun Group High-Tech Co.”

The Company, through its operating subsidiaries in the People Republic of China (the “PRC”), mainly engages in the production and sales of cobaltosic oxide and lithium iron phosphate, both cathode materials used in lithium ion rechargeable batteries in the PRC.

CSGH and its subsidiaries are hereinafter referred to as the “Company”.

NOTE3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying condensed consolidated financial statements and notes.

·
Use of estimates

In preparing these condensed consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the periods reported.  Actual results may differ from these estimates.

·
Basis of consolidation

The condensed consolidated financial statements include the financial statements of CSGH and its subsidiaries. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.

 
F-6

 

CHINA SUN GROUP HIGH-TECH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
·
Cash and cash equivalents

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.

The Company maintains cash balances at one financial institution in the PRC, which are insured by China Citic Bank. The Company has cash concentration risk of $23,925,901 as of November 30, 2011.

·
Accounts receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on management’s assessment of known requirements, aging of receivables, payment history, the customers’ current credit worthiness and the economic environment.

·
Inventories

Inventories include material, labor and manufacturing overhead and are stated at lower of cost or market value, cost being determined on a weighted average method. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of November 30, 2011, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.

·
Technical know-how

Technical know-how represents the developed product technology acquired from a third party and is carried at its purchase cost, net of accumulated amortization. The Company determined that the estimated useful life of the acquired technology is 15 years and subject to amortization using a straight-line basis over the estimated useful life when its developed products are approved by the government agency.

Amortization expense for the three months ended November 30, 2011 and 2010 were $46,451 and $44,275, respectively, which was recorded in cost of revenue.

Amortization expense for the six months ended November 30, 2011 and 2010 were $92,447 and $87,876, respectively, which was recorded in cost of revenue.

·
Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

   
Expected useful lives
 
Residual value
 
Building
 
20-40 years
    5 %
Plant and machinery
 
5-40 years
    5 %
Office equipment
 
5 years
    5 %
Motor vehicle
 
5 years
    5 %
 
 
F-7

 
 
CHINA SUN GROUP HIGH-TECH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
Expenditure for repairs and maintenance is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.

Depreciation expense for the three months ended November 30, 2011 and 2010 were $545,729 and $408,826, which included $483,693 and $408,313 in cost of revenue, respectively.

Depreciation expense for the six months ended November 30, 2011 and 2010 were $1,085,950 and $810,149, which included $962,753 and $743,313 in cost of revenue, respectively.

·
Construction in progress

Construction in progress is stated at cost, which includes cost attributable to the conversion of two production lines to the manufacture of lithium iron phosphate. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No interest was capitalized during the period of construction. The new production lines are expected to be completed and put into operational use in the third quarter of fiscal 2012.

·
Valuation of long-lived assets

Long-lived assets primarily include technical know-how, construction in progress and property, plant and equipment. In accordance with Accounting Standards Codification (“ASC”) Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets,” the Company periodically reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. Determining the fair value of long-lived assets includes significant judgment by management, and different judgments could yield different results. There has been no impairment charge for the periods presented.

·
Revenue recognition

In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectibility is reasonably assured.

Revenue is recognized when products are delivered to customers. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. In instances where products are configured to customer requirements, revenue is recorded upon the successful completion of the Company’s final test procedures and the customer’s acceptance.

Revenue represents the invoiced value of goods, net of value-added tax (“VAT”). All of the Company's products that are sold in the PRC are subject to VAT which is levied at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

·
Comprehensive income

ASC Topic 220, “Comprehensive Income” establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during the period from non-owner sources. Accumulated comprehensive income consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.

 
F-8

 

CHINA SUN GROUP HIGH-TECH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
·
Income taxes

The provision for income taxes is determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in the financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities assuming full knowledge of the position and relevant facts.

For the six months ended November 30, 2011 and 2010, the Company did not have any interest and penalties associated with tax positions. As of November 30, 2011, the Company did not have any significant unrecognized uncertain tax positions.

The Company conducts major businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the foreign tax authorities.

·
Net income per share

The Company calculates net income per share in accordance with ASC Topic 260, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.

·
Foreign currencies translation

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the condensed consolidated statement of operations.

The reporting currency of the Company is United States Dollar ("US$"). The Company's subsidiaries in the PRC, maintain their books and records in their local currency, Renminbi Yuan ("RMB"), which is the functional currency as being the primary currency of the economic environment in which these entities operate.

In general, for consolidation purposes, assets and liabilities of the Company’s subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

Translation of amounts from RMB into US$1 has been made at the following exchange rates for the respective period:
   
November 30, 2011
   
November 30, 2010
 
Period-end RMB:US$1 exchange rate
    6.3773       6.6714  
Average period RMB:US$1 exchange rate
    6.4181       6.7519  

 
F-9

 

CHINA SUN GROUP HIGH-TECH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
·
Related parties

Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.

·
Segment reporting

ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in the financial statements. For the six months ended November 30, 2011, the Company operates one reportable business segment in the PRC.

·
Fair value of financial instruments

Cash and cash equivalents, accounts receivable, deposits and prepayments, accounts payable, income tax payable, other payables and accrued liabilities are carried at cost which approximated fair value. Any changes in fair value of assets or liabilities carried at fair value are recognized in other comprehensive income for each period.

The Company also follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10"), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:

·
Level 1 : Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;

·
Level 2 : Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. Black-Scholes Option-Pricing model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs; and

·
Level 3 : Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.

Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

·
Recent accounting pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

 
F-10

 

CHINA SUN GROUP HIGH-TECH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
NOTE4
ACCOUNTS RECEIVABLE

The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, the Company has determined that no allowance for doubtful accounts is required for the periods ended November 30, 2011 and 2010.

NOTE5
OTHER PAYABLES AND ACCRUED LIABILITIES

Other payables and accrued liabilities consisted of:

   
November 30, 2011
   
May 31, 2011
 
             
VAT payable
  $ 193,197     $ 216,198  
Welfare payable
    446,519       438,326  
Payable to equipment vendors
    551,017       223,043  
Accrued operating expenses
    110,097       157,757  
Other payable
    128,000       128,000  
                 
Other payables and accrued liabilities
  $ 1,428,830     $ 1,163,324  

NOTE6
INCOME TAXES

For the six months ended November 30, 2011 and 2010, the local (“United States of America”) and foreign components of (loss) income before income taxes were comprised of the following:

   
Six months ended November 30,
 
   
2011
   
2010
 
Tax jurisdiction from:
           
– Local
  $ (193,956 )   $ (1,944,811 )
– Foreign
    6,676,398       7,073,675  
                 
Income before income taxes
  $ 6,482,442     $ 5,128,864  

The provision for income taxes consisted of the following:

   
Six months ended November 30,
 
   
2011
   
2010
 
Current tax:
           
– Local
  $ -     $ -  
– Foreign
    1,665,544       1,758,130  
                 
Deferred tax:
               
– Local
    -       -  
– Foreign
    -       -  
                 
Income tax expense
  $ 1,665,544     $ 1,758,130  

 
F-11

 

CHINA SUN GROUP HIGH-TECH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company operates in various countries: United States of America and the PRC that are subject to tax in the jurisdictions in which they operate, as follows:

United States of America

The Company is registered in the State of Delaware and is subject to the tax laws of the United States of America.

As of November 30, 2011, the operation in the United States of America incurred $3,892,532 of cumulative operating losses carryforwards for federal tax purposes, which are available to offset future taxable income. The net operating loss carryforwards begin to expire in 2030, if unutilized. The Company has provided for a full valuation allowance for any future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.

The PRC

The Company’s PRC subsidiaries are subject to the Corporate Income Tax governed by the Income Tax Law of the People’s Republic of China, at a statutory income tax rate of 25%.

The reconciliation of income tax rate to the effective income tax rate based on income before income taxes from the operation in the PRC for the six months ended November 30, 2011 and 2010 are as follows:

   
Six months ended November 30,
 
   
2011
   
2010
 
             
Income before income taxes
  $ 6,676,398     $ 7,073,675  
Income statutory tax rate
    25 %     25 %
Income taxes calculated at statutory income tax rate
    1,669,100       1,768,419  
                 
Tax effect of non-deductible items
    (3,556 )     819  
Tax effect on non-taxable items
    -       (11,108 )
                 
Income tax expense
  $ 1,665,544     $ 1,758,130  

The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of November 30, 2011 and May 31, 2011:

   
November 30, 2011
   
May 31, 2011
 
Deferred tax assets:
           
- Net operating loss carryforwards
  $ 1,323,461     $ 1,257,516  
Less: valuation allowance
    (1,323,461 )     (1,257,516 )
                 
Deferred tax assets
  $ -     $ -  

As of November 30, 2011, the Company has provided for a full valuation allowance against the aggregate deferred tax assets of $1,323,461 on the expected future tax benefits from the net operating losses carryforwards as the management believes it is more likely than not that these assets will not be realized in the future. For the six months ended November 30, 2011, the valuation allowance increased by $65,945, primarily relating to net operating losses carryforwards from the local tax regime.

 
F-12

 

CHINA SUN GROUP HIGH-TECH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
NOTE7
SEGMENT INFORMATION BY PRODUCTS

The Company operates in one reportable operating segment in the production and sales of batteries material in the PRC, as defined by ASC Topic 280. Summarized financial information concerning the Company’s major products is shown in the following table for the three and six months ended November 30, 2011 and 2010:

   
Revenues for the 
three months ended November 30,
 
   
2011
   
2010
 
             
Lithium iron phosphate
  $ 4,079,972     $ 3,336,612  
Cobaltosic oxide
    6,633,025       9,303,216  
                 
    $ 10,712,997     $ 12,639,828  

   
Revenues for the 
six months ended November 30,
 
   
2011
   
2010
 
             
Lithium iron phosphate
  $ 8,195,490     $ 5,936,625  
Cobaltosic oxide
    14,006,773       18,456,662  
                 
    $ 22,202,263     $ 24,393,287  

NOTE8
CONCENTRATIONS OF RISK

The Company is exposed to the following concentrations of risk:

(a)
Major customers

For the three and six months ended November 30, 2011 and 2010, the customer who accounts for 10% or more of revenues of the Company and its outstanding balance at the period-end are presented as follows:

   
Three months ended November 30, 2011
   
November 30, 2011
 
   
Revenues
   
Percentage
of revenues
   
Trade accounts
receivable
 
                   
Customer A
  $ 2,298,784       21 %   $ 898,844  
Customer B
    1,325,075       12 %     504,909  
Customer C
    1,285,599       12 %     448,681  
Customer D
    1,277,415       12 %     460,724  
Customer E
    1,186,978       11 %     785,737  
                         
Total:
  $ 7,373,851       68 %   $ 3,098,895  

 
F-13

 

CHINA SUN GROUP HIGH-TECH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)
 
   
Six months ended November 30, 2011
   
November 30, 2011
 
   
Revenues
   
Percentage
of revenues
   
Trade accounts
receivable
 
                   
Customer A
  $ 4,491,535       20 %   $ 898,844  
Customer B
    2,845,065       13 %     504,909  
Customer E
    2,596,331       12 %     785,737  
Customer C
    2,514,943       11 %     448,681  
Customer D
    2,466,284       11 %     460,724  
Customer F
    2,263,321       10 %     550,390  
                         
Total:
  $ 17,177,479       77 %   $ 3,649,285  

   
Three months ended November 30, 2010
   
November 30, 2010
 
   
Revenues
   
Percentage
of revenues
   
Trade accounts
receivable
 
                   
Customer B
  $ 1,934,364       15 %   $ 447,207  
Customer E
    1,737,489       14 %     764,863  
Customer F
    1,645,173       13 %     799,331  
Customer C
    1,237,998       10 %     724,441  
                         
Total:
  $ 6,555,024       52 %   $ 2,735,842  

   
Six months ended November 30, 2010
   
November 30, 2010
 
   
Revenues
   
Percentage
of revenues
   
Trade accounts
receivable
 
                   
Customer F
  $ 3,786,012       16 %   $ 799,331  
Customer E
    3,671,154       15 %     764,863  
Customer B
    3,538,443       15 %     447,207  
Customer C
    2,659,388       11 %     724,441  
Customer G
    2,375,547       10 %     426,251  
                         
Total:
  $ 16,030,544       67 %   $ 3,162,093  

All of the customers are located in the PRC.

 
F-14

 

CHINA SUN GROUP HIGH-TECH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

(b)         Major vendors

For the three and six months ended November 30, 2011 and 2010, the vendor who accounts for 10% or more of purchases of the Company and its outstanding balance at the period-end are presented as follows:

   
Three months ended November 30, 2011
   
November 30, 2011
 
   
Purchases
   
Percentage
of purchases
   
Accounts
payable
 
                   
Vendor A
  $ 2,493,055       38 %   $ -  
Vendor B
    1,360,136       21 %     -  
Vendor C
    1,203,820       18 %     163,862  
                         
Total:
  $ 5,057,011       77 %   $ 163,862  

   
Six months ended November 30, 2011
   
November 30, 2011
 
   
Purchases
   
Percentage
of purchases
   
Accounts
payable
 
                   
Vendor A
  $ 5,300,523       40 %   $ -  
Vendor B
    2,571,390       19 %     -  
Vendor C
    2,439,193       18 %     163,862  
                         
Total:
  $ 10,311,106       77 %   $ 163,862  

   
Three months ended November 30, 2010
   
November 30, 2010
 
   
Purchases
   
Percentage
of purchases
   
Accounts
payable
 
                   
Vendor A
  $ 3,086,112       40 %   $ -  
Vendor C
    1,727,995       23 %     412,207  
Vendor B
    1,700,828       22 %     -  
Vendor D
    939,791       12 %     -  
                         
Total:
  $ 7,454,726       97 %   $ 412,207  

   
Six months ended November 30, 2010
   
November 30, 2010
 
   
Purchases
   
Percentage
of purchases
   
Accounts
payable
 
                   
Vendor A
  $ 5,581,911       39 %   $ -  
Vendor B
    3,461,269       24 %     -  
Vendor C
    3,117,688       22 %     412,207  
Vendor D
    1,743,626       12 %     -  
                         
Total:
  $ 13,904,494       97 %   $ 412,207  

All of the vendors are located in the PRC.

(c)         Credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.

(d)         Exchange rate risk

The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities is denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates against US$, the value of the RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.

 
F-15

 

CHINA SUN GROUP HIGH-TECH CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

(e)         Economic and political risks

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

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

NOTE9         COMMITMENTS AND CONTINGENCIES

The Company’s subsidiary operating in the PRC was committed under several non-cancelable operating leases for the terms from 5 to 10 years, with monthly rentals, due through July 2020. Costs incurred under these operating leases are recorded as rental expense and totaled approximately $6,232 and $8,516 for the six months ended November 30, 2011 and 2010.

As of November 30, 2011, the Company has future minimum rental payments under the operating lease agreements in the next five years and thereafter, as follow:

Year ending November 30,
 
2012
  $ 17,249  
2013
    17,249  
2014
    17,249  
2015
    16,073  
2016
    12,544  
Thereafter
    44,951  
         
Total:
  $ 125,315  

NOTE10       SUBSEQUENT EVENTS
 
The Company evaluated subsequent events through the date on which the financial statements were issued and filed with this Form 10-Q. There were no subsequent events that required recognition or disclosure.

 
F-16

 

Item 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our products, and other statements of our plans, beliefs, or expectations, including the statements contained under this item as well as items elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.
 
The nature of our business makes predicting the future trends of our revenues, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the factors discussed above in the section entitled “Risk Factors” and the following:
 
·
the effect of political, economic, and market conditions and geopolitical events;
·
legislative and regulatory changes that affect our business;
·
the availability of funds and working capital;
·
the actions and initiatives of current and potential competitors;
·
investor sentiment; and
·
our reputation.

We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere in this Report on Form 10-Q.

Overview

We believe we are one of the leading producers of cathode materials for lithium ion batteries in China. We currently produce cobaltosic oxide and lithium iron phosphate. With the latest technological know-how, innovative manufacturing processes, state-of-the-art  manufacturing equipment and substantial manufacturing capacity, we have evolved into a market leader in China and one of the most innovative and respected manufacturers of cathode materials for lithium ion batteries.

Since 2007, we have engaged in the manufacturing, marketing and distribution of cobaltosic oxide. In 2008 we successfully developed proprietary processes for the manufacture of lithium iron phosphate (“LIP”). We began manufacturing LIP in quantity in the second quarter of fiscal year 2011. Since then, we have focused on expanding sales and increasing production of LIP. Originally, we had seven cobaltosic oxide production lines and five lithium cobalt oxide production lines. By the end of fiscal year 2011, we had converted three of our seven cobaltosic oxide and three of our five lithium cobalt oxide production lines to LIP production lines.

 
2

 

At November 30, 2011 we had four cobaltosic oxide production lines, two lithium cobalt oxide production lines, and six LIP production lines along with the corollary process flow equipment. Currently, our total annual production capacity is 2,500 tons which includes 1,500 tons of cobaltosic oxide, 300 tons of lithium cobalt oxide, and 700 tons of LIP. We are in the process of converting our two remaining lithium cobalt oxide production lines to the production of LIP. This conversion is expected to be completed in the third quarter of fiscal 2012. Once the conversion of these two lines is complete, will have a total of four cobaltosic oxide production lines and eight LIP production lines and our annual production capacity for LIP will increase to 1,000 tons. The increase in sales of LIP is the primary reason for our substantial increase in gross margins in this quarter and we believe that sales of LIP will continue to represent a larger portion of our gross profits and positively impact our gross margins in the future.

We expect that the demand for LIP is will continue to remain strong because: 1) the lithium ion battery industry is an integral part of the new energy sector which has experienced substantial growth, and 2) LIP is becoming the preferred cathode material for lithium ion batteries because of its high level of performance.China has a plan to put one million electric cars on the road by 2015 and lithium-ion (Li) batteries are currently the prevailing battery type for portable electronics and electric cars. In addition, we are seeing most of our existing and potential customers expanding their production of Li batteries. As a result, we will continue our strategy to shift more of our production capacity to the production of LIP. We will also work to stabilize our production levels of cobaltosic oxide. However, if the profit margin for cobaltosic oxide continues to decline, we may decide to shift even more production to LIP.
 
As a result of our efforts to expand our production and sales of LIP, net revenues from the sale of LIP increased by 22% to $4 million for the three months ended November 30, 2011 and production increased by 18% to 213 tons compared to the same period in fiscal 2011, while net revenues from the sale of cobaltosic oxide declined by 29% to $6.6 million and production declined by 22% to 230 tons compared to the same period in fiscal 2011.

In the six months ended November 30, 2011, net revenues from the sale of LIP increased by 38% to $8.2 million and production increased by 37% to 430 tons, while net revenues from the sale of cobaltosic oxide declined 24% to $14 million and production declined by 20% to 470 tons compared to the same period in fiscal 2011.We expect our production of cobaltosic oxide to be stable and our production and sales of LIP to increase.

During the six months ended November 30, 2011, we had six major customers: Henan Huanyu Sai Er New Energy Technology Co., Ltd (“Huanyu”); CITIC Guo’an Mengguli Ltd.; Guangzhou Hongsen Material Co., Ltd.; Tianjin B&M Science and Technology Ltd.; Dalian Dahua International Trade Co., Ltd.; and Beijing Easpring Co., Ltd.   Sales to these customers totaled 77% of our sales volume of 900 tons for the six months ended November 30, 2011. We expect that these customers will continue to represent a substantial portion of our sales in fiscal year 2012. We are working persistently to increase our customer base.
 
The price of raw materials did not have a significant impact on our financial results during the three and six months ended November 30, 2011.  The major raw materials used to produce cobaltosic oxide are cobalt salt, ferric carbonate and cobaltous oxalate. The major raw materials used to produce lithium iron phosphate are ferric phosphate and lithium carbonate.  Our cost of the raw materials to produce cobaltosic oxide did not change substantially, and our cost for LIP raw materials, especially ferric phosphate, declined in part because of the increase in production of one of our suppliers.   We saw a 7.9% and 5.5% decline in the average selling price of cobaltosic oxide and a 3.3% and 0.5% increase in the average selling price of LIP during the three and six months ended November 30, 2011, respectively.
 
Results of Operations

Comparison of Six Months Ended November 30, 2011 to Six Months Ended November 30, 2010

Net Revenue

Net revenue was $22,202,263, compared to $24,393,287 for the prior period, a decrease of $2,191,024 or 9%.  One hundred percent (100%) of the net revenue decrease was attributed to a decrease in sales of our older product cobaltosic oxide. Sales of cobaltosic oxide for the six months ended November 30, 2011 totaled 470 tons and $14,006,773, a decrease of 115 tons and $4,449,889, or 20% in quantity and 24% in dollar value, from 585 tons and $18,456,662 for the comparable period in 2010, while sales of lithium iron phosphate for the six months ended November 30, 2011 totaled 430 tons and $8,195,490, an increase of 117.12 tons and $2,258,865, or 37% in quantity or 38% in dollar value, from 312.88 tons and $5,936,625 for the comparable period in 2010.
 
 
3

 
 
Changes in Sales Amount and Volume
 
   
Sales Amount ($)
   
Change
 
Product
 
Q1 &
Q2 of 2012
   
Q1 &
Q2 of 2011
    $     %  
Cobaltosic oxide
    14,006,773       18,456,662       -4,449,889       -24 %
Lithium iron phosphate
    8,195,490       5,936,625       2,258,865       38 %
Total
    22,202,263       24,393,287       -2,191,024       -9 %
 
   
Sales Volume (Ton)
   
Change
 
Product
 
Q1 & Q2 of 2012
   
Q1 & Q2 of 2011
   
Tons
   
%
 
Cobaltosic oxide
    470       585       -115       -20 %
Lithium iron phosphate
    430       312.88       117.12       37 %
Total
    900       897.88       2.12       0 %

 Cost of Revenue

Cost of revenue was $14,754,207, compared to $16,614,672 for the comparable period, a decrease of $1,860,465 or 11%. Cost of revenue decreased primarily due to the decreased production of cobaltosic oxide and increased production of LIP, which costs less to produce.

Gross Profit

Gross profit was $7,448,056, a decrease of $330,559 or 4% from $7,778,615 for the comparable period.  Overall gross margin was 33.5% compared to 31.9% in the comparable period, an increase of 1.65%. The gross profit margins for cobaltosic oxide and lithium iron phosphate were 23% and 52%, respectively, compared to 27% and 49%, respectively for the comparable period. The decrease in gross profit margins for cobaltosic oxide was primarily attributable to a reduction in the average selling price of cobaltosic oxide from $31,550 per ton for the comparable period to $29,801 per ton in the current period. Gross profit margins for LIP increased approximately 3%, of which approximately 0.5% was due to an increase in the average selling price of lithium iron phosphate from $18,967 per ton for the comparable period to $19,059 per ton in the current period; and approximately 2% was due to a reduction in the cost of raw materials.

Sales and Marketing Expenses

Sales and marketing expenses totaled $81,039, compared to $68,773 for the comparable period, an increase of $12,266 or 18%. The increase was primarily attributable to an increase in salaries paid to our sales personnel.

General and Administrative Expenses

General and administrative expenses were $850,464, compared to $2,595,814 for the comparable period, a decrease of $1,745,350 or 67%. During the six months ended November 30, 2010, the Company recorded a stock-based consultancy fee of $1,783,500. No such expense was incurred during the six months ended November 30, 2011.

Research and Development Expenses

Research and development expenses were $67,672, compared to $53,447 for the comparable period, an increase of $14,225 or 27%. The increase was primarily attributable to an increase in salaries and bonus paid to research and development personnel.

 
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Income from Operations

Income from operations was $6,448,881, an increase of $1,388,300 or 27%, compared to $5,060,581 for the comparable period.  The increase was primarily attributable to the decrease of $1,745,350 in general and administrative expenses.

Other Income

Other income was $33,561, compared to other income of $68,283 for the comparable period, a decrease of $34,722 or 51%. In September 2010, the Company received a grant from the Dalian Municipal Government in the amount of $44,432. No such grants were received during the six months ended November 30, 2011.

Income Taxes

Provisions for income tax expenses were $1,665,544 compared to $1,758,130 for the comparable period, a decrease of $92,586 or 5%.  The decrease resulted primarily from the decrease in gross profit and profit before taxation in the Company’s PRC subsidiaries. The Company was established under the laws of the State of Delaware and is subject to U.S. federal income tax and Delaware annual reporting requirements. No provision for income taxes in the United States has been made as the Company has no income taxable in the United States. The Company’s PRC subsidiaries expect to use their retained earnings to support their PRC operations, and do not expect to declare any dividends within the foreseeable future.

Foreign Currency Translation Gain

The foreign currency translation gain was $1,040,477, a decrease of $11,083 or 1% compared to $1,051,560 for the comparable period. There was no significant fluctuation in foreign currency translation gain.

Net Income

Net income was $4,816,898, an increase of $1,446,164 or 43% compared to the net income of $3,370,734 for the comparable period.  The increase in net income resulted primarily from the decrease in general and administrative expenses.

Comparison of Three Months Ended November 30, 2011 to Three Months Ended November 30, 2010

Net Revenue

Net revenue was $10,712,997, compared to $12,639,828 for the comparable period, a decrease of $1,926,831 or 15%.  One hundred percent (100%) of the net revenue decrease was attributed to a decrease in sales of our older product cobaltosic oxide. Sales of cobaltosic oxide for the three months ended November 30, 2011 totaled 230 tons and $6,633,025, a decrease of 67.12 tons and $2,670,191, or 22% in quantity and 29% in dollar value, from 297.12 tons and $9,303,216 for the comparable period in 2010. Sales of lithium iron phosphate for the three months ended November 30, 2011 totaled 213 tons and $4,079,972, an increase of 33 tons and $743,360, or 18% in quantity or 22% in dollar value, from 180 tons and $3,336,612 for the comparable period in 2010.

Changes in Sales Amount and Volume
 
  
 
Sales Amount ($)
   
Change
 
Product
 
Q2 of 2012
   
Q2 of 2011
    $     %  
Cobaltosic oxide
    6,633,025       9,303,216       -2,670,191       -29 %
Lithium iron phosphate
    4,079,972       3,336,612       743,360       22 %
Total
    10,712,997       12,639,828       -1,926,831       -15 %
 
  
 
Sales Volume (Ton)
   
Change
 
Product
 
Q2 of 2012
   
Q2 of 2011
   
Tons
   
%
 
Cobaltosic oxide
    230       297.12       -67.12       -22 %
Lithium iron phosphate
    213       180       33       18 %
Total
    443       477.12       -34.12       -7 %

 
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Cost of Revenue

Cost of revenue was $7,116,356, compared to $8,568,216 for the comparable period, a decrease of $1,451,860 or 17%. Cost of revenue decreased primarily due to the decreased production of cobaltosic oxide and increased production of LIP, which costs less to produce.
 
Gross Profit

Gross profit was $3,596,641 a decrease of $474,971 or 12% from $4,071,612 for the comparable period.  Overall gross margin was 33.6% compared to 32.2% in the comparable period, an increase of 1.4%. The gross profit margins for cobaltosic oxide and LIP were 22% and 53%, respectively compared to 26% and 50%, respectively for the comparable period. The decrease in gross profit margins for cobaltosic oxide was primarily attributable to a reduction in the average selling price of cobaltosic oxide from $31,323 per ton for the three months ended November 30, 2010 to $28,839 per ton for the three months ended November 30, 2011.  The increase in gross profit margins for LIP was primarily attributable to an increase in the average selling price of LIP from $18,536 per ton for the three months ended November 30, 2010 to $19,155 per ton for the three months ended November 30, 2011.

Sales and Marketing Expenses

Sales and marketing expenses totaled $43,840, compared to $37,447 for the comparable period, an increase of $6,393 or 17%. The increase was primarily attributable to an increase in salaries paid to sales personnel.

General and Administrative Expenses

General and administrative expenses were $406,858, compared to $2,195,429 for the comparable period, a decrease of $1,788,571 or 81%. During the three months ended November 30, 2010, the Company recorded a stock-based consultancy fee of $1,783,500. No such expense was incurred during the three months ended November 30, 2011.

Research and Development Expenses

Research and development expenses were $33,717, compared to $32,514 for the comparable period, an increase of $1,203 or 4%. There was no significant fluctuation in research and development expenses.

Income from Operations

Income from operations was $3,112,226, an increase of $1,306,004 or 72%, compared to $1,806,222 for the comparable period.  The increase was primarily attributable to the decrease of $1,745,350 in general and administrative expenses.

Other Income

Other income was $19,988, compared to $57,644 for the comparable period, a decrease of $37,656 or 65%. In September 2010, the Company received a grant from the Dalian Municipal Government in the amount of $44,432. No such grants were received during the three months ended November 30, 2011.
 
Income Taxes

Provisions for income tax expenses were $800,424 compared to $923,867 for the comparable period, a decrease of $123,443 or 13%.   The decrease resulted primarily from the decrease in gross profit and in profit before taxation in the Company’s PRC subsidiaries.

The Company was established under the laws of the State of Delaware and is subject to U.S. federal income tax and Delaware annual reporting requirements. No provision for income taxes in the United States has been made as the Company has no income taxable in the United States. The Company’s PRC subsidiaries expect to use their retained earnings to support their PRC operations, and do not expect to declare any dividends within the foreseeable future.

 
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Foreign Currency Translation Gain
 
The foreign currency translation gain was $34,688, a decrease of $909,629 or 96% compared to $944,317 for the same period in 2010. The decrease resulted from the slowing down of devaluation of US dollar during the three months ended November 30, 2011. The RMB: US$1 exchange rates as of November 30, 2011 and 2010 were 6.3773 and 6.6714, respectively while the average RMB: US$1 exchange rates for six months ended on November 30, 2011 and 2010 were 6.4181 and 6.7519, respectively.

Net Income

Net income was $2,331,790, an increase of $1,391,791 or 148% compared to $939,999 for the comparable period.  The increase in net income resulted primarily from the decrease in general and administrative expenses.
 
Liquidity and Capital Resources

Cash and Cash Equivalents

Our cash and cash equivalents were $21,810,394 at the beginning of the six months ended November 30, 2011 and increased to $23,926,083 at the end of the six months ended November 30, 2011, an increase of $2,115,689 or 9.7%. This increase represents the combined effects of cash generated from operating activities in the total amount of $3,956,192 plus the effect of exchange rate changes of $426,665 offset by cash used in investing activities in the total amount of $2,267,168.

As of November 30, 2011, the majority of our cash was held in RMB denominated bank deposits in a single PRC financial institution.

Our decision to maintain high cash reserves is mainly based upon (1) the projected need for new manufacturing equipment for lithium iron phosphate production in fiscal 2012 estimated to be approximately $7.44 million, and (2) the projected purchase of new R&D equipment in the amount of approximately $3 million in fiscal year 2012.

Capital expenditures have historically been necessary to expand the production capacity of our manufacturing operations. Our prospective increase in both production lines and R&D is primarily due to the projected increased demand of our principal product lithium iron phosphate. On the basis of our current cash balances and outlook for the upcoming fiscal year, we believe we have sufficient cash resources to fund the expansion of our LIP production lines from 700 tons to 1,000 tons per annum.

Net Cash Provided by Operating Activities

Net cash provided by our operating activities was $3,956,192, an increase of $2,588,629 or 189% compared to $1,367,563 in the comparable period in 2010. The increase was primarily attributable to the increase of about $2.2 million in accounts payable in this period, incurred in the conversion of two production lines to LIP production.

Net Cash Used in Investing Activities

Net cash used in investing activities was $2,267,168 for the six months ended November 30, 2011. The Company purchased additional equipment in the amount of $207,988 and expended $2,059,180 as part of total cost on the conversion of two additional production lines to the production of LIP .

Net cash used in financing activities

There was no net cash generated or used for financing activities for the six months ended November 30, 2011.

Income Taxes

Cash paid for income tax expense was $1,706,022 for the six months ended November 30, 2011, compared to $2658,933 for the six months ended November 30, 2010, a decrease of $952,911 or 36%. The decrease was primarily due to the decrease in gross profit and profit before taxation in the Company’s PRC subsidiaries.

 
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Inflation

We believe that inflation has not had a material or significant impact on our revenue or our results of operations.

General

We believe that we currently have sufficient income generated from our operations to meet our operating and/or capital needs. However, we will continue to evaluate various sources of capital to meet our growth needs. Such sources may include debt financing, issuance of equity securities and entrance into some financing arrangements. There can be no assurance, however, that any of the financing arrangements described herein will be available and, if available, can be obtained on terms favorable to us.

Contractual Obligations and Commitments
 
We are committed under several non-cancelable operating lease agreements, with terms from five to ten years, due through July 25, 2020. Annual lease payments are $17,249 over the next three years, $16,073 for the fourth year, $12,544 for the fifth year and $44,951 for periods thereafter. We have a minimum rental payment obligation totaling $125,315.
 
The agreement dated November 30, 2010 between Dalian Xinyang High-Tech Development Co., Ltd. (“DLXY”), a wholly owned subsidiary of China Sun Group High-Tech Co., and Henan Huanyu Sai Er New Energy Technology Co., Ltd. (“Huanyu”), and the agreement dated April 20, 2011 between DLXY and Advanced Battery Technologies Inc. (“ABAT”) expired at the end of December 2011 and we have no further obligations under these agreements.  DLXY is currently negotiating the renewal of these agreements.
 
Critical Accounting Policies

Revenue recognition

In accordance with the ASC Topic 605, “Revenue Recognition,” we recognize revenue when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.

Revenue is recognized when products are delivered to customers. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. In instances where products are configured to customer requirements, revenue is recorded upon the successful completion of our final test procedures and the customer’s acceptance.

Our subsidiary, DLXY is subject to valued-added tax (“VAT”) which is levied on the majority of the products of DLXY at the rate of 17% on the invoiced value of sales sold in the People’s Republic of China. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by us in addition to the invoiced value of purchases to the extent not refunded for export sales.

Accounts receivables and allowance for doubtful accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. We extend unsecured credit to our customers in the ordinary course of business, but mitigate the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on management’s assessment of known requirements, aging of receivables, payment history, the customers’ current credit worthiness and the economic environment.
 
 
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Foreign currencies translation
 
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the condensed consolidated statement of operations.

The reporting currency of the Company is the United States Dollar ("US$"). The Company's subsidiaries in the PRC maintain their books and records in their local currency, Renminbi Yuan ("RMB"), which is the functional currency, being the primary currency of the economic environment in which these entities operate.

In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$ in accordance with ASC Topic 830-30, “Translation of Financial Statement,” using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

New Financial Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements maybe expected to cause a material impact on its financial condition or the result of its operation.

Item 3.               Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4.               Controls and Procedures.

Evaluation of Our Disclosure Controls

As of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), our principal executive officer and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended

The purpose of this evaluation is to determine if, as of the Evaluation Date, our disclosure controls and procedures are effective such that the information required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended November 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the Effectiveness of Disclosure Controls and Procedures

Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 
9

 
 
PART II – OTHER INFORMATION

Item 1.         Legal Proceedings.

We know of no material legal proceeding pending against us.

Item 1A.      Risk Factors.

Not applicable.

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

None.

Item 3.         Defaults Upon Senior Securities.

None.

Item 4.         (Removed and Reserved.)

Item 5.         Other Information.

None.

Item 6.    Exhibits.
 
EXHIBIT INDEX
 
Exhibit No.
 
Title of Document
     
31.1
 
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
CHINA SUN GROUP HIGH-TECH CO.
     
Date: January 13, 2012
By:
/s/ Guosheng Fu
   
Name: Guosheng Fu
   
Title: Chief Executive Officer
   
(Principle Executive Officer)
 
Date: January 13, 2012
By:
/s/ Ming Fen Liu
   
Name: Ming Fen Liu
   
Title: Chief Financial Officer
   
(Principle Financial and Accounting Officer)
 
 
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