UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended May 31,November 30, 2012

or

For the transition period from ___________ to ______________

Commission File Number: 000-54321

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

 

(Address of principal executive offices) (Zip Code)

 

 

 

 

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

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

As of July 16, 2012,January 14, 2013, the issuer had 30,069,629 outstanding shares of Common Stock.

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

China Bilingual Technology & Education Group Inc. and Subsidiaries

 

 

 

(Unaudited)

 

 

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

 

 

 

NOTE 1 -NATURE OF BUSINESS

 

Description of Business

 

China Bilingual Technology & Education Group Inc. (the “Company”), is an education company that owns and operates high-quality K-12 private boarding schools in the People’s Republic of China (the “PRC”). The Company established school operations in 1998 and currently operates three schools encompassing kindergarten, elementary, middle and high school levels. The Company’s schools are located in Shanxi and Sichuan Provinces and focus on fluency and cultural skills in both Chinese and English, as well as the PRC core curriculum.  The Company’s sector in education is not subject to corporate income tax.

 

Control by Principal Shareholders

 

The Company’s directors, executive officers and their affiliates or related parties, own beneficially and in the aggregate, the majority of the voting power of the outstanding shares of the common stock of the Company. Accordingly, the directors, executive officers and their affiliates, if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including increasing the authorized capital stock of the Company and the dissolution, merger or sale of the Company's assets or business.

 

Financial Statements Presented

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

 

The Company was incorporated in the State of Nevada on March 31, 2009 under the name Designer Export, Inc.  On June 30, 2010, the Company changed its name to China Bilingual Technology & Education Group Inc.

On June 30, 2010, the Company entered into a Share Exchange Agreement (the “Agreement”) with Kahibah Limited (“KL”), a British Virgin Islands (“BVI”) corporation and its shareholders. According to this Agreement, the Company acquired all the issued and outstanding shares of KL. The Company issued 26,100,076 shares of its common stock, after giving effect to the cancellation of 7,748,343 shares on June 30, 2010, to KL’s shareholders in exchange for 100% of the shares of KL. After the closing of the transaction, the Company had a total of 30,000,005 shares of common stock issued and outstanding, with KL’s shareholders owning 87% of the total issued and outstanding shares of the Company’s common stock, and the balance held by those who held shares of the Company’s common stock prior to the closing of the exchange. This transaction resulted in KL’s shareholders obtaining a majority voting interest in the Company. All shares are shown effective of a 2.582781 forward stock split as of July 14, 2010.

The acquisition of KL and the operations of its subsidiaries were accounted for as a reverse merger, whereby KL is the continuing entity for financial reporting purposes and is deemed, for accounting purposes, to be the acquirer of the Company.  In accordance with the applicable accounting guidance for accounting for the business combination as a reverse merger, KL is deemed to have undergone a recapitalization, whereby KL is deemed to have issued common stock to the Company’s common equity holders.  Accordingly, although the Company, as KL’s parent company, was deemed to have legally acquired KL, in accordance with the applicable accounting guidance for accounting for the transaction as a reverse merger and re-capitalization, KL is the surviving entity for accounting purposes and its assets and liabilities are recorded at their historical carrying amounts with no goodwill or other intangible assets recorded as a result of the accounting merger with the Company.

As part of the acquisition, the Company changed its name to China Bilingual Technology & Education Group Inc.  Share and per share amounts stated have been retroactively adjusted to reflect the acquisition. The accompanying financial statements present the historical financial condition, results of operations and cash flows of KL and its operating subsidiaries prior to the recapitalization.

The historical consolidated financial statements of the Company are those of KL, and of the consolidated entities.  The consolidated financial statements of the Company presented for the nine-month and three-month periodsthree months ended May 31,November 30, 2012 and May 31, 2011 included the financial statements of China Bilingual, KL, KL’s subsidiary Taiyuan Taiji Industry Development co., Ltd. (“Taiyuan Taiji”), a wholly-foreign owned enterprise (“WFOE”) under the laws of the Peoples Republic of China (“PRC”), which owns 95% of the registered capital of Shanxi Taiji Industry Development Co., Ltd. (“Shanxi Taiji”), an equity joint venture company organized under the laws of the PRC. Shanxi Taiji owns all of the registered capital of Shanxi Modern Bilingual School (“Shanxi North Campus”) and Sichuan Guang’an Experimental High School (“Sichuan Guang’an School”), both private non-enterprise entities incorporated under the laws of the PRC, collectively the “Subsidiaries.”

 

 

 

Since the ownership of KL and its Subsidiaries was substantially the same, the merger with each was accounted for as a transfer of equity interests between entities under common control, whereby the acquirer recognized the assets and liabilities of each Subsidiary transferred at their carrying amounts.  The reorganization was treated similar to the pooling of interest method with carry over basis.  Accordingly, the financial statements for KL and its Subsidiaries have been combined for all periods presented, similar to a pooling of interest.  The reorganization of entities under common control was retrospectively applied to the financial statements of all prior periods when the financial statements are issued for a period that includes the date the transaction occurred.  Intercompany transactions and balances are eliminated in consolidations.

On August 31, 2011, the CompanyCompany’s entered into an Equity Transfer Agreement and purchased all of the outstanding equity of Shanxi Rising Education Investment Company Limited (the “Investment Company”) from the equity holders (the “Sellers”) for a total purchase consideration of RMB 690,000,000 (approximately $108,226,806).  The net present value of the total fair value consideration transferred equals RMB 616,023,000650,000,000 (approximately $96,623,480)$102,565,721), of which RMB 336,563,000370,217,933 (approximately $52,790,055)$55,444,697) has been paid. Under the terms of the Equity Transfer Agreement the balance of the purchase price is to be paid over three years in three scheduled payments as follows: (See Note 18 – Business Combination for additional details on the Equity Transfer Agreement.)

 

The Investment Company, a limited liability company established under the laws of the PRC, is an education company that owns and operates a K-12 private boarding school in Jinzhong City, Shanxi Province of the PRC, encompassing kindergarten, primary and secondary education. The Investment Company was established in 2001 and it has share capital of RMB 70,000,000. It is the parent company of Shanxi Rising School (the "Rising School"), founded in 2002, which currently serves approximately 5,869over 5,400 students from its location in Shanxi Province, PRC. The Rising School is now known by the Company as the “Shanxi South School.”

 

Prior to closing the Equity Transfer Agreement, the Company became involved in the operations of the Shanxi South SchoolCampus in the spring of 2011. With the consent of the Investment Company, the Company assisted in the operations, accounting and promotion of the school to attract more and better students for the 2011-2012 school year. Some of these responsibilities included collecting prepaid tuition,deferred school fees, room & board and other school fees (“School Fees”) in advance of the school year, which combined with better operations, higher tuition rates and an increase in enrollment led to an increase in deferred revenue at the start of the 2011 – 2012 school year, which corresponds to the fiscal year from September 1, 2011 to August 31, 2012. The Company’s involvement at the Shanxi South SchoolCampus was under the direction of Investment Company management until it assumed control of the Investment Company on August 31, 2011, in accordance with the Equity Transfer Agreement.

 

The condensed consolidated financial statements include the accounts of China Bilingual Technology & Education Group Inc. and the following subsidiaries:

(i) Shanxi Taiji Industrial Development Co., Ltd. was incorporated as a limited liability company on July 25, 1997 under PRC law. It is currently 95% owned by Taiyuan Taiji and 5% owned by Ms. Ren Baiv.  On November 25, 2009, KL entered into a share exchange agreement to sell the remaining 5% ownership to Ms. Ren Baiv. Ms. Ren Baiv is the sister of Mr. Ren Zhiqing, the Company’s Chief Executive Officer.  At December 31, 2010, Ms. Ren Baiv paid 1 million Renminbi (“RMB”) as part of the capital contribution. The 5% ownership is held by Ms. Ren Baiv on behalf of the Taiyuan Taiji in accordance with local Chinese regulations, therefore no non-controlling interest is recognized.  Shanxi Taiji is an equity joint venture under the laws of the PRC. The Shanxi North Campus, Modern Bilingual School and Sichuan Guang’an Experimental High School (the “Schools”) hold the requisite governmental licenses to provide private educational services within their province in China.  Each province sets its own licensing criteria and duration following the general guidelines established by the national government for education standards.

(ii) Shanxi Modern Bilingual School (the “Shanxi North School”) was established in 1998 by Shanxi Taiji.  It operates as a private K-12 boarding school on a 38 acre campus in Taiyuan City, Shanxi Province.  The Shanxi School holds a three year provincial license to be renewed May, 2013.

(iii)  Sichuan Guang’an Experimental High School (the “Sichuan Guang’an School”) was established in 2002 by Shanxi Taiji.  It operates as a private K-12 boarding school on a 23 acre campus in Guang’an, Sichuan Province.  The Sichuan Guang'an School holds a four year provincial license to be renewed MayMarch, 2015.

 

(iv) Shanxi Rising Education Investment Company Ltd. (the “Investment Company”) was established in 2001 to own and operate private boarding schools in the PRC.  The Investment Company has share capital of RMB 70,000,000.  It is the parent company of one school, the Shanxi Rising School, which was acquired by the Company on August 31, 2011.  The Investment Company has no operations other than its ownership of the Shanxi Rising School.

(v) Shanxi Rising School (the “Shanxi South School”) was established in 2002 by the Investment Company as a private boarding school encompassing kindergarten, primary and secondary education located in the Shanxi Province of the PRC.  The school has been assimilated in the operation of the Company and re-branded as the Shanxi South School operating as a private K-12 boarding school on an 82 acre campus comprised of over 2.3 million square feet of facilities, including 18 dormitories with capacity for 10,000 students, academic classrooms, gymnasium, theatre, natatorium, cafeteria and other administrative and academic buildings. The Shanxi South School holds a four year provincial license to be renewed April 2015.

All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Management’s Representation of Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited financial statements at August 31, 20112012 as filed in the Company Form 10-K filed with the SEC on November 29, 2011.2012.

 

 

NOTE 2 – USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Measurement, estimates and assumptions are used for, but not limited to, the selection of the useful lives of property and equipment, impairment of long-lived assets, fair values and revenue recognition. Management makes these estimates using the best information available at the time the estimates are made; however, actual results, when ultimately realized, could differ from those estimates. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s consolidated financial statements.  The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity.  These accounting policies conform to US GAAP and have been consistently applied in the preparation of the consolidated financial statements. 

 

 

 

The Company applies the provisions of accounting guidance, FASB ASC Topic 820 that requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.  As of May 31,November 30, 2012, the fair value of cash and cash equivalents, other receivables, accounts payable, short term bank loans, and other payables approximated carrying value due to the short maturity of the instruments, quoted market prices or interest rates which fluctuate with market rates except for related party debt or receivables for which it is not practicable to estimate fair value.

 

 

 

 

Various inputs are considered when determining the fair value of the Company’s financial instruments. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities.  These inputs are summarized in the three broad levels listed below:

The Company’s adoption of FASB ASC Topic 820 did not have a material impact on the Company’s consolidated financial statements.

The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a nonrecurringnon-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. The Company had no financial assets and/or liabilities carried at fair value on a recurring basis at May 31,November 30, 2012.

 

 

 

The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.

 (b)  Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. There are no restrictions to cash at May 31,November 30, 2012. A substantial amount of the Company’s cash is held in bank accounts in the PRC and is not protected by the Federal Deposit Insurance Corporation (“FDIC”) insurance or any other similar insurance. Given the current economic environment and the financial conditions of the banking industry there is a risk that deposits may not be readily available. Cash held in the PRC amounted to $9,010,350$9,032,544 and $15,088,156$30,410,983 at May 31,November 30, 2012 and August 31, 2011,2012, respectively.  The PRC places limitations on expatriating cash out of the country, which may limit the Company’s ability to pay dividends. As of May 31, 2012 and August 31, 2011, the Company had $2,207 and $2,365, respectively, in deposits in a federally insured United States (“US”) bank.  The Company has not experienced any losses with regard to its bank accounts and believes it is not exposed to any risk of loss on its cash in bank accounts.

 

 

On March 16, 2007, the PRC National People’s Congress passed the PRC Enterprise Income Tax Law (“New EIT Law”) which became effective on January 1, 2008.  Pursuant to the New EIT Law, a unified enterprise income tax rate of 25% and unified tax deduction standards will be applied consistently to both domestic-invested enterprises and foreign-invested enterprises.

Shanxi Taiji, Taiyuan Taiji and the Investment Company are taxed pursuant to the New EIT Law with a unified enterprise income tax rate of 25%. Shanxi Taiji, Taiyuan Taiji and the Investment Company did not pay any income taxes during the three months ended May 31,November 30, 2012 due to net losses experienced in the past reporting periods. The three entities may apply the past periods’ net operating losses to futures years’ profits in order to reduce tax liability. Since Shanxi Taiji, Taiyuan Taiji and Investment Company have minimal business operations, the three entities are unlikely to have profits in future periods. As a result, all deferred tax assets and liabilities are deminimus, and management would have a 100% valuation allowance for all deferred tax assets.

 

The Company has three subsidiaries registered as private schools (the “school-subsidiaries”), which are not subject to income taxes determined in accordance with the Law for Promoting Private Education (2003) and school-subsidiaries registered as private schools not requiring reasonable returns (similar to a not-for-profit entity) are treated as public schools and are generally not subject to enterprise income taxes. Therefore, the school-subsidiaries are tax exempt, including Shanxi North Campus, Shanxi South Campus and Sichuan Guangan School.

Kahibah Limited is exempt from income tax on all sources of income pursuant to the tax law in the British Virgin Islands. However, pursuant and subsequent to the reverse merger, the parent company in the U.S. may be subject to income tax in future years.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Deferred tax assets 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 taxes of a change in tax rates is recognized in income in the period that includes the enactment date.  Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities.  The components of the deferred tax assets and liabilities are individually classified as current or non-current based on their characteristics. Deferred tax assets and liabilities are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  A provision has not been made at May 31,November 30, 2012, and 2011 for U.S. or additional foreign withholding taxes of undistributed earnings of foreign subsidiaries because it is the present intention of management to reinvest the undistributed earnings indefinitely in foreign operations.  Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances.  It is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.

 

 

 

The Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the government.  However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current government officials.

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of May 31,November 30, 2012 and August 31, 20112012 are not material to its results of operations, financial condition or cash flows.  The Company also believes that the total amount of unrecognized tax benefits as of May 31,November 30, 2012 and August 31, 2011,2012, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on the current PRC tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next twelve months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows as of May 31,November 30, 2012 and August 31, 2011.2012, but the 2012 and 2013 tax years are still open for examination.

Revenues consist primarily of tuition, room & board and other fees (the "School Fees") derived from providing meals and housing for students living on campus. Revenues from School Fees are recognized pro-rata (on a straight-line basis) over the relevant period attended by the student of the applicable grade or program. The school year typically runs September 1 through August 31 and prepaiddeferred School Fees are recognized over the twelve-month period. If a student withdraws from a course or program within three months after the school year starts, the paid but unearned portion of the student’s School Fees is 67% refunded. If a student withdraws after the first three months in a school year, no School Fees will be refunded. As a result, the Company has recorded prepaiddeferred School Fees as a current liability on the consolidated balance sheet in the event a student withdraws from school and the Company has to return a portion of the prepaiddeferred School Fees. In past years there were minimal students who withdrew from a course or program before the end of a school year.

The Company normally receives prepaid School Feesdeferred school fees from students at their initial admission or before the start of the school year on September 1. As of August 31, 2011,2012, all students are required to fully prepay school fees at the beginning of the school year by September 1, 20112012 for the 2011-20122012-2013 school year. In prior periods this policy was not fully enforced. Some students will benefit from a discount of fees if they prepay School Fees for two to three years of school term. PrepaidDeferred School Fees is the portion of payments received but not earned and is reflected as a current liability under prepaid tuitiondeferred school fee  in the accompanying consolidated balance sheets as such amounts are expected to be earned, but may be refundable within the next year.

 

Below is a schedule of prepaid School Feesdeferred school fees as of May 31,November 30, 2012 expected to be recognized into revenue over twelve-month periodstwelve months for school yearsthe next year ended August 31 (corresponds to the school year – September 1 through August 31) and thereafter as follows:

The Company’s principal country of operations is theThe PRC. The financial position and results of operations of the Company are determined using the local currency (“Renminbi or RMB”) as the functional currency.  The results of operations denominated in foreign currency are translated at the average rate of exchange during the reporting period.

 

 

As of May 31,November 30, 2012 and May 31, 2011, the exchange rate to the U.S. Dollar was RMB 6.34096.2763 and RMB 6.4865, respectively. The average exchange rate for the nine months ended May 31, 2012 and May 31, 2011 was RMB 6.3384 and RMB 6.6096,6.3726, respectively. The average exchange rate for the three months ended May 31,November 30, 2012 and May 31, 2011 was RMB 6.31726.3063 and RMB 6.5303,6.3742, respectively.

Certain reclassifications have been made to the consolidated financial statements as of August 31, 2011November 30, 2012 and for the nine- month and three-month periodsthree months ended May 31, 2011November 30, 2012 in order to conform to the condensed consolidated financial statement presentation as of May 31,November 30, 2012. These reclassifications had no effect on net income as previously reported.

 

Other accounting standards have been issued or proposed by the FASB or other standard-setting bodies that do not require adoption until a future date and are not expected to have a material impact on the Company’s financial statements.

NOTE 5 -4 – PREPAYMENT AND OTHER CURRENT ASSETS

Prepayment and other current assets consisted of the following:

 

Cash – individual bank accounts, is for funds advanced to employees for the purchase of school and boarding related materials for the day-to-day operations of the school.  Advances to suppliers are primarily advances, travel, and the other related expenses. The other prepaid and other receivables are primarily for certain operating requirements of the school.

NOTE 6 – LAND USE RIGHTS, NET

Land use rights, net consisted of the following:

Amortization expense for the nine-month and three-month periodsthree months ended May 31,November 30, 2012 and May 31, 2011 was $767,122$297,620 and $113,512, and $256,566 and $38,297,$254,271, respectively. 

 

Amortization expense for the next five years and thereafter is as follows:follows

  

NOTE 7 - PROPERTY AND EQUIPMENT, NET

 

 

Property and equipment are located at the Company’s three school locations in Shanxi and Sichuan Provinces in the PRC and are recorded at cost less accumulated depreciation. Depreciation and amortization are calculated using the straight-line method over the expected useful life of the asset, after the asset is placed in service. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited.  Maintenance and repairs are generally expensed as incurred.  When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.

 

 

NOTE 98 - OTHER PAYABLE

Other payables included traveling and the related expenses incurred by employees on behalf of the Company. These amounts are unsecured, non-interest bearing and generally are short term in nature.

NOTE 109 – REFUNDABLE DEPOSITSHOME PURCHASE DOWN PAYMENT

Students living on campus are requiredAccording to paythe Company’s Employee Welfare Policy, the Company may sign a deposithome purchase agreement with teachers which would allow teachers to purchase home property at a discounted market rate. Pursuant to the home purchase agreement between the Company and teachers, teachers were given the right to purchase a home property upon their 8th year of approximately RMB 60,000 at their initial admissions or before the startservice. There were two payment options:

(1) one-time full payment of the school year in September. If a student has any damages tohome purchase price based on the school housing, the repair and maintenance expense will be deducted directly from hissigned agreement; or her student deposit. Any(2) RMB 20,000 down payment with remaining balance to be paid in student deposits is fully refunded upon graduation8 equal annual installments until their 8th year of service. Those teachers who selected option (2) would be charged an interest of 7% if they do not make payment on time during the 8 year period. If teachers resign or if students leave the school for any reasons. Forreasons, they will be entitled to a refund based on the nine andterms of the home purchase agreement. There were minimal refunds for the three month periodsmonths ended May 31,November 30, 2012 and May 31, 2011, there were minimal damages2011. For accounting purposes, cash received from teachers through payment options (1) and (2) and late interest payments are recorded as deposits at the time of receipt. The Company recognizes profit when the sale is consummated.

NOTE 1210 – HOME PURCHASE DOWN PAYMENTACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

The Chief Financial Officer is entitled to receive $6,000 per month in cash compensation for his services, as well as a stock award of $6,000 per month in shares of the Company’s Employee Welfare Policy,restricted common stock, which vest on a quarterly basis.  During the Company may sign a home purchase agreement with teachers which would allow teachers to purchase home property at a discounted market rate. Pursuant tothree months ended November 30, 2012, the home purchase agreement between the CompanyChief Financial Officer earned and teachers, teachers were given the right to purchase a home property upon their 8th yearwas vested in 40,000 shares of service. There were two payment options:

 

 

NOTE 14 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

NOTE 15 – EMPLOYEE RETIREMENT BENEFITS AND POST RETIREMENT BENEFITSTAXES

Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is required to make contributions tomore likely than not that the state retirement plantax position will be sustained on examination by the taxing authorities, based on 20%the technical merits of the employees’ monthly basic salaries. Employeesposition. The tax benefits recognized in the PRC are entitled to retirement benefits calculated with reference to their basic salariesfinancial statements from such a position should be measured based on retirementthe largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10 also provides guidance on de-recognition, classification, interest and their lengthpenalties on income taxes, accounting in interim periods and requires increased disclosures. As of service in accordance withNovember 30, 2012 and August 31, 2012, the Company does not have a government managed benefits plan. liability for unrecognized tax benefits.

The PRC government is responsibleCompany’s estimated income tax savings for the benefit liability to these retired employees.

Had the Company’s tax exemption not been in the place for the three months ended November 30, 2012 and 2011, the Company contributed $270,497 and $151,239 in pension contributions, respectively.  estimates the following pro-forma financial statement impact:

NOTE 16 – STOCK BASED COMPENSATION

Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings 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 shares had been issued and if the additional common shares were dilutive. There were no potentially dilutive securities for the three month or nine month periodsmonths ended May 31,November 30, 2012 and May 31, 2011. If the Company had dilutive securities it would have computed dilution by applying the treasury stock method. Under this method, warrants and options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.  

  

The following table sets forth the computation of basic and diluted net income per share:

NOTE 1918 – BUSINESS COMBINATION - EQUITY TRANSFER AGREEMENT

 

Description of AcquisitionAcqusition

On August 31, 2011, the Company’s entered into an Equity Transfer Agreement and purchased all of the outstanding equity of theShanxi Rising Education Investment Company Limited (the “Investment Company”) from the Sellersequity holders (the “Sellers”) for a total purchase consideration of RMB 690,000,000.690,000,000 (approximately $108,226,806).  The net present value of the total fair value consideration transferred equals RMB 616,023,000650,000,000 (approximately $96,623,480)$102,565,721), of which RMB 336,563,000370,217,933 (approximately $52,790,055)$55,444,697) has been paid. Under the terms of the Equity Transfer Agreement the balance of the purchase price is to be paid over three years in three scheduled payments as follows: (See Note 18 – Business Combination for additional details on the Equity Transfer Agreement.)

 

 

The Investment Company is an education company that owns and operates a K-12 private boarding school in the PRC, encompassing kindergarten, primary and secondary education. The Investment Company was established in 2001 and it has share capital of RMB 70,000,000. It is the parent company of Shanxi Rising School (the "Rising School"), founded 2002, which currently serves approximately 5,869 students from its locationlocated in Shanxi Province, PRC. The Rising School is now known by the Company as the “Shanxi South School.”

During the nine-month and three-month periodsthree months ended May 31,November 30, 2012, the Company paid RMB 119,782,067 (approximately $19,017,481) toward the debt to the seller and recorded $4,572,250 and $0, respectively,RMB 3,099,000 (approximately $491,413) toward the accretion of the implied interest in the long-term and short-term portion of the payable - acquisition resulting from the fair value discount recorded as interest expense based on payment planpayments to the seller.  The net present value of the payments is discounted at the Company’s current financing interest rate of 14%6.84%.