UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended May 31, 2010
[ ] 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: 333-150385
HQ GLOBAL EDUCATION INC.
(Exact name of registrant as specified in its charter)
Delaware 26-1806348
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
No.27, Jinsha Road, Jinnan Village, Lijingpu Township,
Shahe Section, Ningxiang County, Hunan Province, China 410600
Peoples Republic of China
(Address of principal executive offices)
Tel: (86 731) 87828601
(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. Yes [X] 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 (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition 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 [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of July 16, 2010, 33,000,000 shares of the Company's common stock, $0.0001
par value, were issued and outstanding.
HQ GLOBAL EDUCATION INC.
FORM 10-Q
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of May 31, 2010 (unaudited)
and August 31, 2009 3
Condensed Consolidated Statements of Income for the three months
ended May 31, 2010 and 2009 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended May 31, 2010 and 2009 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 1A. Risk Factors 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 3. Defaults Upon Senior Securities 35
Item 4. (Removed and Reserved) 36
Item 5. Other Information 36
Item 6. Exhibits 36
SIGNATURES 37
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
CONDENSED CONSOLIDATED BALANCE SHEETS
May 31, August 31,
2010 2009
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $13,385,942 $ 3,848,040
Accounts receivable, net of allowance of $55,836 as of
May 31, 2010 and August 31, 2009 11,028,527 5,713,491
Other receivables 374,296 2,203
Due from related party -- 2,447,482
Inventory 332,189 1,504,764
Advances to vendors 4,041,259 2,375,364
----------- -----------
Total current assets 29,162,213 15,891,344
PROPERTY AND EQUIPMENT, NET 18,185,908 14,862,590
INTANGIBLE ASSETS, NET 1,020,777 477,339
----------- -----------
TOTAL ASSETS $48,368,898 $31,231,273
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans $ 1,310,798 $ 732,002
Long term loans - current portion 73,229 629,522
Accounts payable 1,642,563 1,327,622
Due to shareholder 310,000 --
Taxes payable 51,771 20,580
Payroll payable 755,361 241,477
Unearned revenues 3,237,823 8,275
Other payables and accrued liabilities 1,653,388 902,725
----------- -----------
Total current liabilities 9,034,933 3,862,203
LONG TERM LOANS 637,092 402,601
----------- -----------
TOTAL LIABILITIES 9,672,025 4,264,804
----------- -----------
COMMITMENT AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $0.0001 par value 100,000,000 shares authorized,
33,000,000 and 2,050,000 shares issued and outstanding
at May 31, 2010 and August 31, 2009, respectively 3,300 2,050
Additional paid-in capital 1,226,674 1,227,924
Accumulated other comprehensive income 1,681,883 1,672,524
Statutory reserve 9,877,685 6,946,771
Retained earnings 25,907,331 17,117,200
----------- -----------
Total shareholders' equity 38,696,873 26,966,469
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $48,368,898 $31,231,273
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended May 31, For the nine months ended May 31,
---------------------------------- ---------------------------------
2010 2009 2010 2009
------------ ------------ ------------ ------------
Revenues $ 17,235,916 $ 9,536,983 $ 37,110,090 $ 31,179,916
Cost of revenue (10,802,813) (6,447,337) (22,317,831) (19,515,016)
------------ ------------ ------------ ------------
Gross profit 6,433,103 3,089,646 14,792,259 11,664,900
Selling expenses (268,893) (156,857) (512,651) (503,089)
General and administrative expenses (567,662) (470,846) (1,495,898) (1,360,377)
------------ ------------ ------------ ------------
Income from operations 5,596,548 2,461,943 12,783,710 9,801,434
Other expenses
Interest expenses (38,711) (25,367) (83,838) (64,795)
Other expenses (8,877) (856) (978,827) (15,629)
------------ ------------ ------------ ------------
Total other expenses (47,588) (26,223) (1,062,665) (80,424)
------------ ------------ ------------ ------------
Income before income taxes 5,548,960 2,435,720 11,721,045 9,721,010
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net income $ 5,548,960 $ 2,435,720 $ 11,721,045 $ 9,721,010
============ ============ ============ ============
Other comprehensive item
Foreign currency translation gain (loss) $ (10,268) $ 43,478 $ 9,359 $ 41,549
------------ ------------ ------------ ------------
Comprehensive Income $ 5,538,692 $ 2,479,198 $ 11,730,404 $ 9,762,559
============ ============ ============ ============
Basic and diluted income per common share $ 0.17 $ 0.12 $ 0.46 $ 0.47
============ ============ ============ ============
Basic and diluted weighted average common
shares outstanding 33,000,000 20,500,000 25,673,993 20,500,000
============ ============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
4
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Nine months ended May 31,
-----------------------------------
2010 2009
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,721,045 $ 9,721,010
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,409,368 1,183,143
Loss on disposal of property & equipment 969,369 --
Changes in assets and liabilities
(Increase) decrease in -
Accounts receivable (5,313,198) (3,890,410)
Other receivables (372,119) (13,021)
Inventories 1,173,255 927,082
Increase (decrease) in -
Accounts payables 314,443 34,157
Payroll Payable 513,828 282,206
Taxes payable 31,185 14,545
Unearned revenues 3,229,791 2,483,429
Other payables and accrued liabilities 750,937 304,689
------------ ------------
Net cash provided by operating activities 14,427,904 11,046,830
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of intangible assets (265,109) --
Acquisition of property & equipment (7,639,799) (2,952,644)
------------ ------------
Net cash used in investing activities (7,904,908) (2,952,644)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions -- 877,963
Proceeds from short term loan 578,508 --
Proceeds from long term loan 234,333 --
Repayments on long term loan (556,540) --
Proceeds from shareholders' loan 310,000 --
Loan to shareholder -- (1,198,942)
Loan to related party -- (1,890,298)
Collection of loans to related party 2,448,629 --
------------ ------------
Net cash provided by (used in) financing activities 3,014,930 (2,211,277)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS (24) 11,746
NET INCREASE IN CASH & CASH EQUIVALENTS 9,537,902 5,894,653
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 3,848,040 3,328,231
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 13,385,942 $ 9,222,884
============ ============
Supplemental disclosures of cash flow information:
Income tax paid $ -- $ --
============ ============
Interest paid $ 93,735 $ 106,254
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
5
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. ORGANIZATION AND BASIS OF PRESENTATION
HQ Global Education Inc. ("the Company"), formerly known as Green Star Mining
Corp., was incorporated under the laws of the State of Delaware on January 22,
2008. On February 8, 2010, the Company acquired all of the outstanding capital
stock of Risetime Group Limited ("Risetime"), a BVI business company
incorporated in British Virgin Islands on December 17, 2007. Risetime owns 100%
of the equity of Xiangtan Nicestar Business Administration Co., Ltd. ("Xiangtan
Nicestar") through its 100% subsidiary, Global Education International Ltd.
("GEI"), an investment holding company incorporated in Hong Kong on November 15,
2007. Xiangtan Nicestar is a wholly foreign owned enterprise incorporated in
Xiangtan City, Hunan Province, People's Republic of China on September 30, 2009
and is primarily engaged in providing business administration, planning and
consulting services. Substantially all Risetime and GEI's operations are
conducted in China through Xiangtan Nicestar, and through contractual
arrangements with Xiangtan Nicestar's consolidated affiliated entities in China,
including Hunan Oya Education Technology Co., Ltd. ("Oya") and Oya's
subsidiaries and variable interest entities ("VIEs"). Oya is a company
incorporated in Changsha City, Hunan Province, People's Republic of China
("PRC") on November 20, 2008 is primarily engaged in providing vocational
education service and vocational skills training service.
In connection with the acquisition, the Company issued 20,500,000 shares of
common stock to the shareholder of Risetime in exchange for all of the capital
stock of Risetime (the "Share Exchange" or "Merger"). Upon the completion of the
Merger, the shareholders of Risetime own approximately 62.12% of the issued and
outstanding capital stock of the Company and consequently control the business
and operation of the Company.
The acquisition was accounted for as a reverse merger under the purchase method
of accounting since there was a change of control. Accordingly, Risetime and its
subsidiaries will be treated as the continuing entity for accounting purposes.
In March 2010, subsequent to the end of the second quarter of fiscal year 2010,
Green Star Mining Corp. changed its name to HQ Global Education Inc. to more
effectively reflect the Company's business and communicate the Company's brand
identity to customers.
6
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)
On July 28, 2009, Oya entered into certain exclusive agreements with Changsha
Huanqiu Vocational Secondary School ("Changsha Huanqiu") and Shaoshan Huanqiu
Vocational Technical Secondary School ("Shaoshan Huanqiu") and their
shareholders. Pursuant to these agreements, Oya provides exclusive consulting
and other general business operation services to Changsha Huanqiu and Shaoshan
Huanqiu in exchange for substantially all net income of Changsha Huanqiu and
Shaoshan Huanqiu. Oya has the right to appoint all senior management personnel
of Changsha Huanqiu and Shaoshan Huanqiu.
On November 28, 2009, Xiangtan Nicestar entered into certain exclusive
agreements with Oya and its shareholders. Pursuant to these agreements, Xiangtan
Nicestar provides exclusive consulting and other general business operation
services to Oya in exchange for all net income of Oya. All voting rights of Oya
are assigned to Xiangtan Nicestar and Xiangtan Nicestar has the right to appoint
all directors and senior management personnel of Oya. In addition, Oya's
shareholders have pledged their equity interest in Oya to Xiangtan Nicestar as
collateral for the fees for consulting and other services due to Xiangtan
Nicestar.
As a result of these contractual arrangements, which obligates Oya to absorb a
majority of the risk of loss from Changsha Huanqiu and Shaoshan Huanqiu's
activities and enable Oya to receive a majority of its expected residual
returns, Oya accounts for Changsha Huanqiu and Shaoshan Huanqiu as variable
interest entities under ASC 810-10, "Consolidation". Accordingly, Oya has
included the accounts of Changsha Huanqiu and Shaoshan Huanqiu in its condensed
consolidated financial statements. For the same reason, Xiangtan Nicestar
accounts for Oya as a VIE and includes Oya's accounts in its condensed
consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. These condensed consolidated financial
statements and notes should be read in conjunction with the consolidated
financial statements and notes thereto included in our Current Report on Form
8-K filed with the Securities and Exchange Commission on February 12, 2010.
Operating results for the nine and three months ended May 31, 2010 and 2009 are
not necessarily indicative of the results that may be expected for the full
years.
7
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the financial statements
of the Company, Risetime, GEI, Xiangtan Nicestar, Oya, as well as Oya's
subsidiaries and VIEs. All significant inter-company balances and transactions
are eliminated in consolidation.
USE OF ESTIMATES
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
("U.S. GAAP") requires management to make estimates and assumptions that affect
the amounts reported in the condensed consolidated financial statements and
accompanying notes, and disclosure of contingent liabilities at the date of the
condensed consolidated financial statements. Estimates are used for, but not
limited to, the selection of the useful lives and residual values of property
and equipment and intangible assets, provision necessary for contingent
liabilities, fair values, revenue recognition, budgeted costs and other similar
charges. Management believes that the estimates utilized in preparing its
condensed consolidated financial statements are reasonable and prudent. Actual
results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents. The Company
maintains uninsured cash and cash equivalents with various banks in the PRC.
8
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company has not experienced any losses in such accounts and management
believes it is not exposed to any risks on its cash in bank accounts.
ACCOUNTS RECEIVABLE
Accounts receivable consists of balances due from the enterprises for the
education services provided and due from China Overseas-Educated Scholars
Development Foundation and Poverty Alleviation and Development Offices of
related provinces for tuition revenues. Accounts receivable are recorded at net
realizable value consisting of the carrying amount less an allowance for
uncollectible amounts.
The Company does periodical reviews as to whether the carrying values of
accounts have become impaired. The assets are considered to be impaired if the
collectability of the balances become doubtful, accordingly, the management
estimates the valuation allowance for anticipated uncollectible receivable
balances. When facts subsequently become available to indicate that the
allowance provided requires an adjustment, then the adjustment will be
classified as a change in estimate. As of May 31, 2010 and August 31, 2009, the
allowance for doubtful accounts was $55,836.
ADVANCES TO VENDORS
Advances to vendors consist of balances paid for materials for construction of
classrooms and related teaching facilities that have not been provided to or
received by the Company. Advances to vendors are reviewed periodically to
determine whether their carrying value has become impaired. The Company
considers the assets to be impaired if the collectability of the services and
materials become doubtful. Advances to vendors as of May 31, 2010 and August 31,
2009 amounted to $4,041,259 and $2,375,364, respectively. The Company has
determined that no reserve is necessary for the nine months ended May 31, 2010
and 2009.
9
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation and
any impairment losses. The cost of an asset comprises of its purchase price and
any directly attributable costs of bringing the asset to its working condition
and location for its intended use. Expenditures incurred after the fixed assets
have been put into operation, such as repairs and maintenance and overhaul
costs, is normally charged to the profit and loss account in the year in which
it is incurred.
In situations where it can be clearly demonstrated that the expenditure has
resulted in an increase in the future economic benefit expected to be obtained
from the use of the asset beyond its originally assessed standard of
performances, the expenditure is capitalized as an additional cost of the asset.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, less any estimated residual value. Estimated useful
lives of the assets are as follows:
Teaching and dormitory facilities 10 - 30 years
Educational equipments and books 5 years
Office equipments and other equipments 5 years
Automobiles 5 years
Any gain or loss on disposal or retirement of a fixed asset is recognized in the
profit and loss account and is the difference between the net sales proceeds and
the carrying amount of the relevant asset. When property and equipment are
retired or otherwise disposed of, the assets and accumulated depreciation are
removed from the accounts and the resulting profit or loss is reflected in
income.
10
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CONSTRUCTION-IN-PROGRESS
The Company constructs certain of its property and equipment. In addition to
cost under the construction contracts, external costs directly related to the
construction of such facilities, including equipment installation and shipping
costs, are capitalized. Depreciation is recorded at the time assets are placed
in service.
INTANGIBLE ASSETS
Intangible assets are accounted for in accordance with the provisions of ASC
350, "Goodwill and Other Intangible Assets". Under ASC 350, intangible asset
included in the carrying value of investments accounted for using the equity
method of accounting, and certain other intangible assets deemed to have
indefinite useful lives are not amortized. Indefinite-lived intangible assets
are assessed for impairment at least annually based on comparisons of their
respective fair values to their carrying values. Intangible assets with a
defined useful life are amortized over their useful lives.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with ASC 360, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company is required to review its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through the estimated
undiscounted cash flows expected to result from the use and eventual disposition
of the assets. Whenever any such impairment exists, an impairment loss will be
recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including property, plant and equipment and
other assets, for recoverability at least annually or more frequently upon the
occurrence of an event or when circumstances indicate that the net carrying
amount is greater than its fair value. Assets are grouped and evaluated at the
lowest level for their identifiable cash flows that are largely independent of
the cash flows of other groups of assets. The Company considers historical
performance and future estimated results in its evaluation of potential
impairment and then compares the carrying amount of the asset to the future
estimated cash flows expected to result
11
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
from the use of the asset. If the carrying amount of the asset exceeds estimated
expected undiscounted future cash flows, the Company measures the amount of
impairment by comparing the carrying amount of the asset to its fair value. The
estimation of fair value is generally determined by using the asset's expected
future discounted cash flows or market value. The Company estimates fair value
based on the information available in making whatever estimates, judgments and
projections are considered necessary. There was no impairment of long-lived
assets during the nine months ended May 31, 2010 and 2009.
UNEARNED REVENUES
Unearned revenues represent amounts received from students for tuition and
service fee relating to the outside-school practice service. The Company
recognizes these funds as a current liability until the revenue can be
recognized. The balance of unearned revenues is not refundable.
REVENUE RECOGNITION
The Company's revenue policies are in compliance with the provision of ASC 605
"Revenue Recognition". The Company recognizes revenue when the following
criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the
services have been rendered, (iii) the fees are fixed or determinable and (iv)
collection of the resulting receivable is reasonably assured.
Details are as follows:
(a) Tuition revenue received for educational programs and services is
recognized proportionately according to the progress the students
complete regarding educational programs in the school. Tuition paid in
advance is recorded as unearned revenues.
(b) The Company provides off-campus internship arrangement for students
and collects service charges at fixed amount from both recruiters and
students. Revenue is recognized upon completion of the internship
program.
(c) The Company provides other services mainly logistic services for
students and the revenue from such services is recognized upon
completion of the service.
12
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
which allows for the recognition and measurement of deferred tax assets based
upon the likelihood of realization of tax benefits in future years. Under the
asset and liability approach, deferred taxes are provided for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not these items will either expire before the Company is able
to realize their benefits, or that future deductibility is uncertain.
The Company records a valuation allowance for deferred tax assets, if any, based
on its estimates of its future taxable income as well as its tax planning
strategies when it is more likely than not that a portion or all of its deferred
tax assets will not be realized. If the Company is able to utilize more of its
deferred tax assets than the net amount previously recorded when unanticipated
events occur, an adjustment to deferred tax assets would increase the Company's
net income when those events occur. The Company had no deferred tax items as of
May 31, 2010 and August 31, 2009.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs consist primarily of salaries and
commissions for sales representatives, salaries for administrative staffs, rent
expenses, depreciation expense and employee benefits for administrative staffs.
COMPREHENSIVE INCOME
ASC 220, "Comprehensive Income" requires disclosure of all components of
comprehensive income and loss on an annual and interim basis. Comprehensive
income and loss is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Accumulated other comprehensive income arose from the changes
in foreign currency exchange rates.
13
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STATEMENT OF CASH FLOWS
In accordance with ASC 230, "Statement of Cash Flows," cash flows from the
Company's operations is calculated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statements of cash
flows will not necessarily agree with changes in the corresponding balances on
the balance sheets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, taxes payable, notes payable and other loans payable. Management has
estimated that the fair value of these financial instruments approximate their
carrying amounts due to the short-term nature. The fair value of long-term loans
also approximate their recorded value because the interest rates charged under
the loan terms are not substantially different than current interest rates..
EARNINGS PER SHARE
The Company computes earnings per share ("EPS') in accordance with ASC 260,
"Earnings Per Share", which requires companies with complex capital structures
to present basic and diluted EPS. Basic EPS is measured as net income divided by
the weighted average common shares outstanding for the period. Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., convertible securities, options and warrants) as
if they had been converted at the beginning of the periods presented, or
issuance date, if later. Potential common shares that have an anti-dilutive
effect (i.e., those that increase income per share or decrease loss per share)
are excluded from the calculation of diluted EPS.
14
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FOREIGN CURRENCY TRANSLATION
The Company's condensed consolidated financial information is presented in US
dollars. In accordance with ASC 830, "Foreign Currency Matters", an entity's
functional currency is the currency of the primary economic environment in which
the entity operates; normally, that is the currency of the environment in which
an entity primarily generates and expends cash. Since substantially all
operations of the Company are conducted in the PRC, the functional currency of
the Company is Renminbi ("RMB"), the currency of the PRC. Transactions at the
Company which are denominated in currencies other than RMB are translated into
RMB at the exchange rate quoted by the People's Bank of China prevailing at the
dates of the transactions. Exchange gains and losses resulting from transactions
denominated in a currency other than that RMB are included in statements of
operations as exchange gains. The condensed consolidated financial statements of
the Company have been translated into U.S. dollars in accordance with ASC 830,
"Foreign Currency Matters". The financial information is first prepared in RMB
and then is translated into U.S. dollars at period-end exchange rates as to
assets and liabilities and average exchange rates as to revenue and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred. The effects of foreign currency translation
adjustments are included as a component of accumulated other comprehensive
income in shareholders' equity.
May 31, 2010 August 31, 2009 May 31, 2009
------------ --------------- ------------
Period end RMB: US$ exchange rate 6.8279 6.8306 6.8281
Average RMB: US$ exchange rate 6.8266 6.8343 6.8309
The RMB is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US
dollars at the rates used in translation.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of accounts receivable and other receivables. The
Company does not require collateral or other security to support these
receivables. The Company conducts periodic reviews of its clients' financial
condition and customer payment practices to minimize collection risk on accounts
receivable.
15
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ADVERTISING
Advertising is expensed as incurred. Advertising expenses which were included in
selling expenses amounted to $11,743, $7,168, $19,274 and $78,460 for the three
months ended May 31, 2010 and 2009, and for the nine months ended May 31, 2010
and 2009, respectively.
OPERATING LEASES
Leases where substantially all the rewards and risks of ownership of assets
remain with the lesser are accounted for as operating leases. Rental payables
under operating lease are recognized as expense on a straight-line basis over
the lease term.
RISKS AND UNCERTAINTIES
The operations of the Company are located in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
general state of the PRC economy.
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, among other
things.
16
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, FASB amended ASC 820 Disclosures about Fair Value Measurements.
This update provides amendments to Subtopic 820-10 that requires new disclosure
as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should
disclose separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and describe the reasons for the transfers.
2) Activity in Level 3 fair value measurements. In the reconciliation for fair
value measurements using significant unobservable inputs (Level 3), a reporting
entity should present separately information about purchases, sales, issuances,
and settlements (that is, on a gross basis rather than as one net number). The
new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company has determined the
adoption of this rule does not have a material impact on its condensed
consolidated financial statements.
17
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In January 2010, FASB amended Accounting for Distributions to Shareholders with
Components of Stock and Cash. The amendments in this Update clarify that the
stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a
share issuance that is reflected in EPS prospectively and is not a stock
dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this rule to
have a material impact on its condensed consolidated financial statements.
Note 3. INVENTORY
Inventory consists of the following:
As of As of
May 31, August 31,
2010 2009
---------- ----------
(Unaudited)
Course materials $ 11,336 $ 45,525
Logistic supplies 90,046 364,122
Office supplies 44,193 202,362
Other materials and supplies 118,003 176,316
Textbooks 68,611 716,439
---------- ----------
Total $ 332,189 $1,504,764
========== ==========
Note 4. RELATED PARTY TRANSACTIONS
As of August 31, 2009, the balance of due from related party represents loans to
Shenzhen Linghai International Cargo Agent Co., Ltd ("Shenzhen Linghai").
Shenzhen Linghai is owned by Ms. Zhong Juanjuan, sister of Ms. Zhong Yabin, 10%
shareholder of Oya. The loan is unsecured, interest free and repayable on
demand. The loan was fully repaid as of May 31, 2010.
18
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. RELATED PARTY TRANSACTIONS (Continued)
As of May 31, 2010, the balance due to shareholder represents a loan from Mr. He
Guangwen, majority shareholder of the Company. The loan is unsecured, bears no
interest, with term of two years and is repayable on February 28, 2012.
Note 5. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
As of As of
May 31, August 31,
2010 2009
------------ ------------
(Unaudited)
Teaching and dormitory facilities $ 12,247,648 $ 10,288,401
Educational equipments and books 3,682,117 4,068,173
Office equipments and other equipments 3,876,948 2,235,171
Automobiles 286,009 269,211
------------ ------------
Sub-total 20,092,722 16,860,956
Less: accumulated depreciation (5,479,061) (5,165,936)
Add: Construction in progress 3,572,247 3,167,570
------------ ------------
$ 18,185,908 $ 14,862,590
============ ============
For the nine months ended May 31, 2010, a total amount of $1,894,664 was
completed and transferred from construction in progress to teaching and
dormitory facilities.
Depreciation expense for the nine months ended May 31, 2010 and 2009 was
$1,392,342 and $1,174,573, respectively and for the three months ended May 31,
2010 and 2009 was $503,047 and $430,413, respectively.
Note 6. INTANGIBLE ASSETS, NET
As of May 31, 2010 and August 31, 2009, intangible assets are land use rights,
which are recorded at cost less accumulated amortization. Amortization is
provided on a straight-line basis over the estimated useful lives, which is
generally 50 years and represents the shorter of the estimated usage periods or
the terms of the agreements. The details of land use rights are as follows:
19
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6. INTANGIBLE ASSETS, NET (Continued)
As of As of
May 31, August 31,
2010 2009
---------- ----------
(Unaudited)
Land use rights $1,122,423 $ 561,926
Less: accumulated amortization (101,645) (84,587)
---------- ----------
Land use rights, net $1,020,777 $ 477,339
========== ==========
Amortization expenses for the land use rights totaled $5,676, $2,858, $17,026
and $8,570 for the three months ended May 31, 2010 and 2009, and for the nine
months ended May 31, 2010 and 2009, respectively.
Note 7. SHORT-TERM LOANS
As at August 31, 2009, the short-term borrowings consisted of two loans of
$292,916 (RMB 2,000,000) and $439, 374 (RMB 3,000,000) from Changsha Foundation
for Education. The two loans were unsecured and bore an interest at 5% per annum
and are repayable on March 17, 2010 and July 31, 2010, respectively. The
$292,916 loan was extended with the new maturity date on March 17, 2011.
As of May 31, 2010, in addition to the loans mentioned above, the Company
entered into two new short-term loans agreements. One loan in the aggregate of
approximately $285,592 (RMB1,950,000) was borrowed from Ningxiang Rural Credit
Cooperative Union. The loan bears an interest rate of 8.50% per annum and is due
on December 13, 2010. It was secured by a land use right of the Company with the
cost of $432,073. Another loan amounted to approximately $292,916 (RMB2,000,000)
was borrowed from China Construction Bank Shaoshan Branch, at an interest of
5.841% per annum and is due on March 23, 2011. It was secured by a land use
right of the Company with the cost of $560,276.
20
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8. LONG-TERM LOANS
The details of long-term loans outstanding as at May 31, 2010 are as follows:
Interest
Lender Term rate Principal
------------------------------------------- ---------------------------- ------- ------------------------
From To RMB US$
------------ ------------ --------- ---------
LONG-TERM LOAN - CURRENT PORTION
Changsha Foundation for Education Jul 31, 2008 Jul 18, 2010 0.00% 500,000 73,249
--------- ---------
500,000 73,249
LONG-TERM LOAN - NON-CURRENT PORTION
Ningxiang Rural Credit Cooperative Union Sep 1, 2009 Aug 21, 2011 8.64% 1,600,000 234,333
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 13, 2011 10.80% 1,350,000 197,718
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 23, 2011 10.80% 1,400,000 205,041
--------- ---------
4,350,000 637,092
The details of long-term loans outstanding as at August 31, 2009 are as follows:
Interest
Lender Term rate Principal
------------------------------------------- ---------------------------- ------- ------------------------
From To RMB US$
------------ ------------ --------- ---------
LONG-TERM LOAN - CURRENT PORTION
Ningxiang Rural Credit Cooperative Union May 30, 2009 May 30, 2010 10.80% 2,000,000 292,801
Ningxiang Rural Credit Cooperative Union Dec 28, 2007 Dec 28, 2009 12.10% 1,800,000 263,521
Changsha Foundation for Education July 31, 2008 July 18, 2010 0.00% 500,000 73,200
--------- ---------
4,300,000 629,522
LONG-TERM LOAN - NON-CURRENT PORTION
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 13, 2011 10.80% 1,350,000 197,641
Ningxiang Rural Credit Cooperative Union Nov 25, 2008 Nov 23, 2011 10.80% 1,400,000 204,960
--------- ---------
2,750,000 402,601
The loans borrowed from Ningxiang rural Credit Cooperative Union were
collateralized by the buildings with an aggregate cost of $743,249 and land use
rights with an aggregate cost of $46,640. The $73,200 loan borrowed from
Changsha Foundation for Education was unsecured and bore no interest. The
$292,801 and 263,521 loans were repaid in September 2009 and December 2009,
respectively. For the three months ended May 31, 2010 and 2009, the Company
incurred $38,171 and $32,134 interest for the above loans respectively, and for
the nine months ended May 31, 2010 and 2009, the Company incurred $91,724 and
$96,237 interest for the above loans, respectively.
21
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 9. OTHER PAYABLES AND ACCRUED LIABILITIES
As of May 31, 2010 and August 31, 2009, other payables and accrued liabilities
are as follow:
As of As of
May 31, August 31,
2010 2009
---------- ----------
Staff welfare payable $1,139,940 $ 836,434
Others 513,448 66,291
---------- ----------
Total $1,653,388 $ 902,725
========== ==========
Note 10. TAXES
(A) CORPORATION INCOME TAX ("CIT") AND BUSINESS TAX
The Company is governed by the Income Tax Law of the People's Republic of China
concerning the private-run enterprises, which are generally subject to tax at a
statutory rate of 25% on income reported in the statutory financial statements
after appropriate tax adjustments. The applicable business tax rate for
educational service is currently 5%.
The PRC government also provides various incentives to companies that engage in
the development of vocational education. Such incentives include reduced tax
rates, tax exemptions and other measures. According to Law of the People's
Republic of China on Promotion of Privately-run Schools, implemented from
September 1, 2003, and the Notice of Tax Policy for Education Activities
(Caishui [2004] No.39), issued and became effective on February 5, 2004, some
specific enterprises, organizations and schools could enjoy the same tax
incentives as the schools run by the government, and could be exempt from
business tax and income tax accordingly. As long as the operation of the Company
meets the requirements of the regulations aforementioned, the Company is
therefore exempt from business tax and income tax.
No income tax and business tax were provided for the reporting period in
accordance with the regulations of the relevant taxing authorities.
22
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 10. TAXES (Continued)
(B) TAX PAYABLE
The Company's tax payable represents the unremitted individual income tax
withheld on behalf of the employees. As of May 31, 2010 and August 31, 2009, the
tax payable amounted to $51,771 and $20,580, respectively.
Note 11. SHAREHOLDERS' EQUITY
(A) COMMON STOCK
HQ Global Education Inc. ("the Company"), formerly Green Star Mining Corp., was
incorporated under the laws of the State of Delaware on January 22, 2008, with
100,000,000 shares of common stock authorized at par value of US$0.0001.
On January 25, 2008, the Company issued a total of 1,500,000 shares of common
stock to Nan E. Weaver for cash in the amount of $0.01 per share for a total of
$15,000.
On July 22, 2008 the Company issued a total of 1,000,000 shares of common stock
to individuals for cash in the amount of $0.025 per share for a total of $
25,000.
On November 23, 2009, the Company approved a 5-for-1 forward stock split of all
issued and outstanding shares of common stock of the Company. On November 25,
2009, the Financial Industry Regulatory Authority ("FINRA") approved the
Company's application for forward stock split applicant. As a result, effective
on December 7, 2009 and prior to the Share Exchange consummated on February 8,
2010, the Company had a total of 12,500,000 shares of common stock issued and
outstanding.
23
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 11. SHAREHOLDERS' EQUITY (Continued)
On February 8, 2010, the Company entered into a share exchange agreement with
Risetime and its sole shareholder, Nicestar International Ltd. ("Nicestar"), a
British Virgin Islands company. Pursuant to the Share Exchange Agreement, the
Company issued 20,500,000 shares of its common stock, par value $0.0001 per
share, to Nicestar, representing 62.12% of the Company's issued and outstanding
common stock, in exchange for all of the outstanding shares of Risetime held by
Nicestar. Immediately after this share exchange, the Company had 33,000,000
shares of common stock issued and outstanding.
As of May 31, 2010 and August 31, 2009, there was 33,000,000 and 20,500,000
share of common stock issued and outstanding, respectively.
(B) PREFERRED STOCK
On December 31, 2009, the Board of Directors of the Company authorized
40,000,000 shares of preferred stock at par value of $0.001. As of May 31, 2010
and August 31, 2009, there was zero share of preferred stock issued and
outstanding.
(C) STATUTORY RESERVE
According to Law of the People's Republic of China on Promotion of Privately-run
Schools, implemented from September 1, 2003, the Company and the related
subsidiaries are required to set aside at least 25% of their after-tax net
profits each year, if any, to fund the statutory reserves for the future
development of educational activities. The statutory reserves are not
distributable in the form of cash dividends to the shareholders.
For the nine months ended May 31, 2010 and 2009, the Company has made
appropriations in the amount of $2,930,914 and $2,430,253 to this statutory
reserve, respectively. As of May 31, 2010 and August 31, 2009, the balances of
the statutory reserve were $9,877,685 and $6,946,771, respectively.
24
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. WEIGHTED AVERAGE NUMBER OF SHARES
In February 2010, the Company entered into a share exchange transaction which
has been accounted for as a reverse merger under the purchase method of
accounting since there has been a change of control. The Company computes the
weighted-average number of common shares outstanding in accordance with ASC 805,
Business Combinations, which states that in calculating the weighted average
shares when a reverse merger takes place in the middle of the year, the number
of common shares outstanding from the beginning of that period to the
acquisition date shall be computed on the basis of the weighted-average number
of common shares of the legal acquiree (the accounting acquirer) outstanding
during the period multiplied by the exchange ratio established in the merger
agreement. The number of common shares outstanding from the acquisition date to
the end of that period shall be the actual number of common shares of the legal
acquirer (the accounting acquiree) outstanding during that period.
Note 13. COMMITMENTS
(A) OPERATING LEASES
The commitments are primarily the rental for the campus of Shaoshan Huanqiu
Vocational Technical Secondary School, a VIE of Oya, and for the Company's
office space and warehouse. Lease periods varied from 14 months to 10 years with
earliest expiration date of December 31, 2010 and latest expiration date of
September 18, 2019. As of May 31, 2010, the commitments related to the above
rental are as follows:
For years end August 31, RMB US$
------------------------ ---------- ----------
2010 $ 251,290 $ 36,803
2011 967,682 141,764
2012 944,687 138,395
2013 1,008,109 147,686
2014 1,075,844 157,609
Thereafter 898,895 131,687
---------- ----------
Total $5,146,507 $ 753,944
========== ==========
25
HQ GLOBAL EDUCATION INC.
(FORMERLY GREEN STAR MINING CORP.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 13. COMMITMENTS (Continued)
(b) Capital commitments
In exchange for obtaining the approval to provide educational services in the
schools of Hunan Province and Sichuan Province in the PRC, the Company have
commitments with the local governments to spend a total amount of Rmb122,800,000
($17,987,060) for the expansion of those schools during the company's operating
periods within them. The operating periods varied from 15 years to 20 years for
different schools and with the earliest expiration date of July 15, 2021 and the
latest expiration date of June 30, 2029. As of May 31, 2010, Rmb30,792,311
($4,510,260) was incurred regarding these commitments. The outstanding
Rmb92,007,690 ($13,476,800) is for the remaining contract periods should be
incurred according to the following schedule:
By December 31, RMB US$
--------------- ----------- -----------
2010 $15,400,000 $ 2,255,732
2011 21,104,990 3,091,341
2012 800,000 117,180
2013 800,000 117,180
2014 800,000 117,180
Thereafter 53,102,700 7,778,187
----------- -----------
Total $92,007,690 $13,476,800
=========== ===========
Note 14. OTHER EVENTS
On May 10, 2010, Oya entered into an exclusive business cooperation agreement
with Tianzhen No.2 Secondary School in Shanxi Province ("Tianzhen School").
Pursuant to the agreement, Oya provides exclusive consulting and other general
business operation services to Tianzhen School during the 20-year operation
period in exchange for all net income of Tianzhen School. Oya has the right to
appoint all senior management personnel of Tianzhen School.
On May 27, 2010, Oya entered into an exclusive business cooperation agreement
with Dongying Shengli Maritime School in Shandong Province ("Dongying Maritime
School"). The agreement became effective on June 12, 2010 and will be valid for
ten years. Pursuant to the agreement, Oya provides exclusive consulting and
other general business operation services to Dongying Maritime School in
exchange for 80% of net income of Dongying Maritime School.
The Company has not started any activity of operation in Tianzhen School and
Dongying Maritime School, and there is no revenue and expenses incurred up to
May 31, 2010, therefore the events have no effect on the financial information
disclosed.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in Management's Discussion and Analysis ("MD&A"), other
than purely historical information, including estimates, projections, statements
relating to our business plans, objectives, and expected operating results, and
the assumptions upon which those statements are based, are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements generally are
identified by the words "believe," "project," "expect," "anticipate,""estimate,"
"intend," "strategy," "plan," "may," "should," "will," "would,""will be," "will
continue," "will likely result," and similar expressions. Forward-looking
statements are based on current expectations and assumptions that are subject to
risks and uncertainties, which may cause actual results to differ materially
from the forward-looking statements. A detailed discussion of risks and
uncertainties that could cause actual results and events to differ materially
from such forward-looking statements is included in this report or other reports
or documents we file with the Securities and Exchange Commission from time to
time. We undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events, or otherwise. The condensed consolidated financial statements and notes
should be read in conjunction with the consolidated financial statements and
notes thereto included in our Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 12, 2010.
OVERVIEW
HQ Global Education Inc. (the "Company", "we", or "us"), formerly known as
Green Star Mining Corp., was incorporated under the laws of the State of
Delaware on January 22, 2008. Currently, the Company's common stock is trading
on the OTC ("Over-the Counter") Bulletin Board under the ticker HQGE.OB.
We provide vocational education and vocational training services to a
varied student population throughout China. As further described below, we
generate revenue from tuition, school logistics services, and off-campus
internship management fees.
OUR HISTORY AND CORPORATE STRUCTURE
On February 11, 2010, we completed a reverse merger ("Reverse Acquisition")
by acquiring all of the outstanding capital stock of Risetime Group Limited
("Risetime"), a company incorporated in the British Virgin Islands on December
17, 2007. In connection with the Reverse Acquisition, we issued 20,500,000
shares of common stock to the sole shareholder of Risetime in exchange for all
of the capital stock of Risetime. Upon the completion of Reverse Acquisition,
the shareholders of Risetime own approximately 62.12% of the issued and
outstanding capital stock of the Company and consequently control the business
and operations of the Company. The Reverse Acquisition was accounted for as a
reverse merger under the purchase method of accounting since there was a change
of control. Accordingly, Risetime and its subsidiaries will be treated as the
continuing entity for accounting purposes.
Risetime, through its wholly owned subsidiary, Global Education
International Ltd. ("GEI"), a holding company incorporated in Hong Kong, owns
100% of the equity of Xiangtan Nicestar Business Administration Co, Ltd.
("Xiangtan Nicestar"). Xiangtan Nicestar is a wholly foreign owned enterprise
(WFOE) formed in Xiangtan City, Hunan Province, People's Republic of China
("PRC") on September 30, 2009.
Due to restrictions on the foreign ownership of certain education
businesses, we conduct our business through arrangements with our Chinese
subsidiaries, as well as our variable interest entities ("VIEs"). Xiangtan
Nicestar has a series of contractual arrangements with Hunan Oya Education
Technology Co., Ltd. ("Oya") and Oya has similar contractual arrangements with
its VIEs. We direct these VIEs business affairs and receive substantially all of
their net income through our contractual arrangements. We believe these
contractual arrangements give us effective control over the business of Oya and
its VIE entities.
Our current Chinese VIEs are:
Hunan Oya Education Technology Co., Ltd.("Oya") Pursuant to the agreements
between Xiangtan Nicestar and Oya and its shareholders, we exercise effective
control over Oya, and receive all the revenue from Oya in exchange for the
consulting and management services provided by Xiangtan Nicestar. Xiangtan
Nicestar also has an exclusive option to purchase all or part of the equity
interests in Oya to the extent permitted by PRC laws.
27
Changsha Huanqiu Vocational Secondary School ("Changsha Huanqiu"). Pursuant
to the agreements between Oya and Changsha Huanqiu and its shareholders, we
provide consulting and other general business operation services to Changsha
Huanqiu on an exclusive basis in exchange for substantially all net income of
Changsha Huanqiu. We also have the right to appoint all senior management of
Changsha Huanqiu.
Shaoshan Huanqiu Vocational Technical Secondary School ("Shaoshan Huanqiu")
Pursuant to the agreements between Oya and Shaoshan Huanqiu and its
shareholders, we provides consulting and other general business operation
services to Shaoshan Huanqiu on an exclusive basis in exchange for substantially
all net income of Shaoshan Huanqiu. We also have the right to appoint all senior
management of Shaoshan Huanqiu.
OUR BUSINESS
As of May 31, 2010, we operate nine (9) schools and have an aggregate of
2,864 faculty members and 34,477 students. The nine schools we operate are
Changsha Huanqiu in Hunan Province, Shaoshan Huanqiu in Hunan Province, Shaoshan
Vocational Secondary School in Hunan Province, Yingjing Vocational School in
Sichuan Province, Tianquan Vocational School in Sichuan Province, Shimian
Vocational School in Sichuan Province, Lushan Vocational School in Sichuan
Province and Shaoyang Industrial Vocational Technical School in Hunan Province
and Tianzhen No.2 Secondary School in Shanxi Province. We own Changsha Huanqiu
and Shaoshan Huanqiu. We operate the remaining seven schools via exclusive
business cooperation agreements, pursuant to which we operate the schools by
utilizing the schools' facilities and fixed assets, manage the teachers and
place the graduates to enterprise clients and in return we are entitled to 100%
of the net income from these schools. We established cooperation relationships
with approximately 120 enterprise clients to which we place students for the
off-campus internship program and provide training to the clients' employees.
For the nine months ended May 31, 2010, the employment rate remained 100% for
the students who graduated from our vocational programs.
On May 27, 2010, we entered into an exclusive business cooperation
agreement with Dongying Shengli Maritime School in Shandong Province ("Dongying
Maritime School") to launch full-scale maritime training services. The agreement
became effective on June 12, 2010 and will be valid for ten (10) years. Under
the agreement, we shall operate the school by utilizing the teaching facilities
and equipment and in return we are entitled to receive 80% of its net income.
ORDER-ORIENTED EDUCATION
"Order-oriented Education", or customized education, was created by Mr.
Guangwen He, our Chief Executive Officer, and currently is our main business
model. Under Order-oriented Education, we enter into cooperative agreements with
enterprise clients who place orders for qualified employees with us. We then
recruit students and provide them with a customized curriculum based on the
enterprise client's needs and place qualified students in compliance with the
clients' specific requirements. We provide the "order-oriented education" or
"customized education" to students through our own private schools or
cooperating with selected public or private schools in China.
We divide our teaching calendar into two semesters per year. Our most
recent teaching semester lasted from March 1, 2010 to August 31, 2010. During
this semester, we offered a total of around 60 programs under 17 categories to
34,477 students. Revenue generated from the students' tuition is recognized
proportionately within each semester.
During winter and summer break, off-campus internships are provided to
students. Our teachers work as the team leaders for these students who are sent
to different enterprises in groups. Such on-site practice help students
understand the business, the production process, management model and position
requirements. As a result, students are prepared for their positions without
further training once they are placed with the enterprise clients.
We receive commissions from the enterprise clients for placing intern
students with them. The amount of commission is based on the number of students
an enterprise client receives. We also receive management fees from the intern
students at a monthly fixed rate based on the duration of their internship. Such
revenue is recognized upon the completion of the internship arrangement.
Upon graduation, students are usually hired by the same enterprise client
with which they interned. In such instances, we will receive placement fees from
the students. We also receive fees from enterprise clients at a fixed amount for
each student the clients hire.
28
SOURCE OF STUDENTS
As of May 31, 2010, we have approximately 34,477 students from more than 22
provinces and 26 nationalities. The enrolled students include graduates from
junior high schools, senior high schools and junior colleges, unemployed young
people and rural labor force. There are two main source of recruitment, public
schools and government subsidized students.
We recruit students from public schools where the students can choose to
enroll into our schools when they graduate from junior high school or senior
high school. We select students who wish to enroll into our schools based on
certain criteria, including their scores in the provincial exams and their
performance in the interview.
We also have government-subsidized students enrolled in our schools under
the central government's "Rain-dew Plan o Tengfei Project". On December 28,
2007, the State Council Leading Group's Office of Poverty Alleviation and
Development of PRC ("Poverty Alleviation Office") launched "Rain-dew Plan o
Take-off Project" (the "Project"). The Poverty Alleviation Office works with the
China Overseas Scholarship Development Foundation in Hunan Province and several
other provinces to enable the financially burdened junior school graduates to
receive continuing education. Our school in Changsha has been one of the
educational program providers under the Project since the second semester of
2008. The Project provides an important source of our students. During the first
year of the Project, 5,310 students were enrolled from 18 cities or areas. The
number of students from the Project increased to 11,673 in the second semester
of 2010 and is expected to increase further in the coming years. Students under
the Project are placed at enterprise clients located in the Yangtze River Delta
and Pearl River Delta after they finish the one-to-three year vocational or
technical training programs in our schools. Poverty Alleviation Office's
provincial counterparts provide full subsidies for the students' tuition and
miscellaneous fees. Students are responsible for their own living and travel
expenses.
ENTERPRISE CLIENTS
As of May 31, 2010, we have established cooperative relationships with
approximately 120 enterprises to place our students and/or make various training
courses available to their employees. These employers are mainly located in the
economic centers of China, namely, Yangtze River Delta (ranging from Shanghai to
Nanjing, Hangzhou, Wuxi, Ningbo and other coastal areas), the Pearl River Delta
(ranging from Shenzhen to Dongguan, Guangzhou, Huizhou, Panyu, Qingyuan,
Shaoguan and other coastal areas) . Our top enterprise clients include Fuji
Xerox Technology (Shenzhen) Co., Ltd., Flextronics (Zhuhai) Co., Ltd., Dongguan
Master Electronics Co., Ltd., Huizhou Manley Toys Limited, and Shanghai Inventec
Co., Ltd.
BUSINESS STRATEGY
Under economic globalization, enterprises in China are expanding faster
than ever and this has resulted in a serious shortage of skilled personnel.
According to the National Guideline on Medium and Long-Term Program for
Education Reform and Development 2010-2020 issued by the Central Government, the
number of secondary vocational students is expected to reach 22.5 million by the
end of 2015 and 23.5 million by the end of 2020. Management believes this
provides favorable opportunities for the development of our business.
For the following twelve months, HQ Global will continue to grow its
business to provide vocational training and desirable job opportunities for more
students. Our business development plan is as follows
* Under the Order-oriented Education mode, we expect to build new
teaching facilities in our existing schools so as to expand the
capacity of student enrollment. Meanwhile, we are expecting to
cooperate with 2-4 vocational or technical schools in the financial
year 2011, and with 10-12 vocational or technical schools in the
coming five years in the inland provinces, such as Yunnan Province,
Liaoning Province, Guangxi Province, Guizhou Province, Anhui Province,
Hunan Province and so on, in addition to the ten schools (including
Dongying Shengli Maritime School in Shandong Province which we started
in this June) we operate currently.
* We plan to cooperate with more maritime schools in Fujian Province and
Qingdao City in Shandong Province to reinforce the training of
maritime talents.
* We plan to establish cooperative relationships with more enterprises
and actively promote the Order-oriented Education mode.
* We will further develop our program and curriculum to be offered to
different types of students including high school graduates,
unemployed young people, enterprise employees and rural labor force.
* We will launch the "Online Education" where we provide remote
education program via dedicated Internet platform and "Continuing
Education" where we provide continuing education to employed people.
29
CRITICAL ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect our reported assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We evaluate our estimates on an on-going basis and use them on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances as the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates because of
different assumptions or conditions.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2010 AND 2009
The following table summarizes our operating results for the three months
and nine months ended May 31, 2010 and 2009, respectively:
For the three months ended For the nine months ended
May 31, Comparison May 31, Comparison
------------------- -------------------- ------------------- --------------------
2010 2009 Amount Percent 2010 2009 Amount Percent
---- ---- ------ ------- ---- ---- ------ -------
US$ US$ US$ % US$ US$ US$ %
Revenues 17,235,916 9,536,983 7,698,933 80.73 37,110,090 31,179,916 5,930,174 19.02
Cost of revenue (10,802,813) (6,447,337) (4,355,476) 67.55 (22,317,831) (19,515,016) (2,802,815) 14.36
----------- ----------- ----------- ------ ----------- ----------- ----------- --------
Gross profit 6,433,103 3,089,646 3,343,457 108.21 14,792,259 11,664,900 3,127,359 26.81
Selling expenses (268,893) (156,857) (112,036) 71.43 (512,651) (503,089) (9,562) 1.90
G&A expenses (567,662) (470,846) (96,816) 20.56 (1,495,898) (1,360,377) (135,521) 9.96
----------- ----------- ----------- ------ ----------- ----------- ----------- --------
Income from operations 5,596,548 2,461,943 3,134,605 127.32 12,783,710 9,801,434 2,982,276 30.43
Other expenses (47,588) (26,223) (21,365) 81.47 (1,062,665) (80,424) (982,241) 1,221.33
Income taxes -- -- -- -- -- -- -- --
----------- ----------- ----------- ------ ----------- ----------- ----------- --------
Net income 5,548,960 2,435,720 3,113,240 127.82 11,721,045 9,721,010 2,000,035 20.57
=========== =========== =========== ====== =========== =========== =========== ========
In line with our business expansion, both revenue and profit have
demonstrated successive growth in each semester of these years. During the third
quarter ended May 31, 2010, we achieved total revenue of $17,235,916,
representing an increase of 80.73% when compared to $9,536,983 for the same
period of fiscal year 2009. The third quarter's net income was $5,548,960,
representing an increase of 127.82% when compared to $2,435,720 for the same
period of 2009. The significant increase in net income was mainly attributable
to the timing difference between the fiscal year 2010 and 2009. In 2009,
students returned to schools in early February. According to the principle of
revenue recognition, the tuition fees were recognized in the second quarter.
However in 2010, students returned to schools after March 1, 2010 and certain
portion of tuition revenue was recognized in third quarter of 2010. This has
resulted in the significant increase in the recognized revenue of the third
quarter of 2010 compared to the same period in 2009.
This chart below shows the time difference between our 2009 and 2010
teaching calendars:
2009 2010
------------------------------------ ------------------------------------
Period of first semester September 1, 2008 - January 15, 2009 September 1, 2009 - January 31, 2010
Chinese New Year January 26, 2009 February 14, 2010
Start of second semester February 12, 2009 March 1, 2010
Our net profit increased from $9,721,010 for the nine months ended May 31,
2009 to $11,721,045 for the nine months ended May 31, 2010, demonstrating a
growth rate of 20.57%. The stable growth in operating results and profits in
each semester was the combined effect of the following factors, in addition to
the school timing differences:
For the nine months ended May 31, 2010, the Company achieved total revenue
of $37,110,090, representing an increase of $25,930,134 or 19.02% when compared
to $31,179,916 for the nine months ended May 31, 2009. The significant increase
in revenue was mainly attributable to the expansion of our operation as
reflected in the following:
(1) Student enrollment in the second semester of 2009 which started from
February 2009 totaled 29,883 and the number increased to 34,477 in the
second semester of 2010 which started from March 1, 2010, representing
an increase of 15.4%. The increase in the number of students led to
the increase of revenue.
30
(2) We had cooperation agreement with Dongying Maritime School which was
effective from in September 1, 2009 to June 2010, where we provide the
student recruiting services to the Dongying Maritime School in
exchange for a fixed percentage of tuition. We sent 1,072 students to
the Dongying Maritime School during the third quarter of 2010, whereas
there was no such business in the same period of 2009.
(3) On April 30, 2009, Oya entered into an exclusive business cooperation
agreement with Shaoshan Vocational Secondary School ("Shaoshan
Vocational School"). From then on the operating results of Shaoshan
Vocational School were consolidated into our financial statements. On
September 1, 2009, Shaoshan Vocational School commenced operation and
contributed more than $1 million to the total revenue for the quarter
ended May 31, 2010.
The cost of revenue incurred was $22,317,831 in the nine months ended May
31, 2010, representing an increase of 14.36% when compared to $19,515,016 for
the same period of 2009. With the increase in student enrollment, variable cost
increased while the fixed cost remains stable. In addition, the cost of
recruitment service provided for the Dongying Shengli Maritime School was much
less than that of teaching activities. This has resulted in the increase in the
gross profit rates for the nine months ended May 31, 2010 compared to the same
period in 2009.
Selling expenses increased from $503,089 in the first three quarters of
2009 to $512,651 in the first three quarters of 2010, representing an increase
of 1.90%. This modest increase in operating expenses was mainly attributable to
the increase in the wages resulted from the increase number of employees and in
the expansion of business.
General & Administrative expenses increased from $1,360,377 in the first
three quarters of 2009 to $1,495,898 in the first three quarters of 2010,
representing an increase of 9.96%. The increase in such expenses was mainly
attributable to two factors:
(1) Operations of new schools and increase in the student enrollment.
Shaoshan Vocational School commenced operations in September 2009 and
we employed more management personnel for this new school. Meanwhile
the increased student enrollment in other schools invited additional
management personnel. This led to an increase of $65,634 in employee
salaries and benefits, representing an increase rate of 12%.
(2) The cost related to being a public company. We went public in the
first quarter of 2010. In order to prepare for the public listing, we
hired management staff and this resulted in the increase in salaries
and other related expenses.
REVENUES
The table below illustrates the revenue from different services for the nine
months ended May 31, 2010 and 2009:
For the nine months ended May 31, Comparison
--------------------------------- -----------------------
2010 2009 Amount Percent
---------- ---------- --------- -------
US$ US$ US$ %
Order-oriented education 25,041,246 19,492,256 5,548,990 28.47
Off-campus internship arrangement 1,511,709 2,444,075 (932,366) (38.15)
Other services 10,557,135 9,243,585 1,313,550 14.21
---------- ---------- --------- -----
Total revenue 37,110,090 31,179,916 5,930,174 19.02
========== ========== ========= =====
(1) Tuition is collected from students after we file our fee schedules
with each Ministry of Education's local counterpart. For the nine
months ended May 31, 2010, total revenue from Order-oriented Education
increased 28.74% compared to the same period in 2009. The increase was
due to an increase in the number of enrolled students, the operation
of new campus in Shaoshan, Hunan Province as well as the students
recruitment service provided for the Dongying Maritime School, both of
which were not in existence in the same period of 2009.
(2) Revenue from our off-campus internship service is generated from both
students and employers. We launched such arrangements with more
enterprises in 2010 compared with 2009. As the second semester of 2010
began in March and our off-campus internship arrangement began in
June, we had no revenue from off-campus internship arrangements in the
third quarter of 2010. Because the second semester of 2009 started
earlier than that of 2010 and the off-campus internship arrangement
began in May, the term of the off-campus internship arrangement in the
second semester of 2010 was shorter than that in the second semester
of 2009. The above mentioned factors have led to the decrease in such
revenue.
31
(3) Revenue of "other services" consists of revenue from campus logistics
services and government subsidies under the Rain Dew Plan. Due to the
increase in student enrollment, revenue from campus logistics services
has seen an increase in both the third quarter of 2010 and in the nine
months ended May 31, 2010 compared to those of 2009.
SELLING EXPENSES
The table below sets forth the selling expenses for the three months and
nine months ended May 31, 2010 and May 31, 2009.
For the three months ended For the nine months ended
May 31, Comparison May 31, Comparison
------------------- -------------------- ------------------- --------------------
2010 2009 Amount Percent 2010 2009 Amount Percent
---- ---- ------ ------- ---- ---- ------ -------
US$ US$ US$ % US$ US$ US$ %
Salary and staff welfare 61,230 29,864 31,366 105.03 159,197 134,122 25,075 18.70
Office expenses 61,219 55,657 5,562 9.99 69,001 72,293 (3,292) (4.55)
Advertising 11,743 6,689 5,054 75.56 17,575 72,424 (54,849) (75.73)
Travel expenses 70,007 43,921 26,086 59.39 153,306 143,253 10,053 7.02
Others 64,694 20,726 43,968 212.14 113,572 80,997 32,575 40.22
------- ------- ------- ------ ------- ------- ------- ------
Total 268,893 156,857 112,036 71.43 512,651 503,089 9,562 1.90
======= ======= ======= ====== ======= ======= ======= ======
Our selling expenses increased by 71.43% from $156,857 in the three months
ended May 31, 2009 to $268,893 in the three months ended May 31, 2010, and
increased by 1.9% from $503,089 in the nine months ended May 31, 2009 to
$512,651 in the nine months ended May 31, 2010. The increase was primarily due
to the increase of salaries, welfare, advertising and travel expenses. The
increase in salaries and travel expenses resulted from business expansion and
increase in the number of faculty. After the Company went public, we increased
our advertising expenses in the third quarter of 2010 which lead to an increase
in the advertising expenses compared to the same period of 2009. However, for
the nine months ended May 31, 2010, the advertising expenses decreased by 75.73%
when compared to the same period in 2009. Thus the operation expenses did not
represent a significant increase.
GENERAL AND ADMINISTRATIVE EXPENSES
The table below illustrates the details of general and administrative
expenses for the three months and nine months ended May 31, 2010 and 2009:
For the three months ended For the nine months ended
May 31, Comparison May 31, Comparison
------------------- -------------------- ------------------- --------------------
2010 2009 Amount Percent 2010 2009 Amount Percent
---- ---- ------ ------- ---- ---- ------ -------
US$ US$ US$ % US$ US$ US$ %
Salary and staff welfare 205,713 168,784 36,929 21.88 611,033 545,399 65,634 12.03
Office expenses 86,874 154,380 (67,506) (43.73) 293,100 418,582 (125,482) (29.98)
Maintenance 12,665 316 12,349 3,907.91 14,376 3,784 10,592 279.92
Rental 4,039 31,314 (27,275) (87.10) 65,270 87,744 (22,474) (25.61)
Depreciation 27,109 11,212 15,897 141.79 55,214 28,236 26,978 95.54
Travel expenses 70,597 10,784 59,813 554.65 110,967 45,491 65,476 143.93
Consulting 37,193 3,396 33,797 995.20 41,968 20,951 21,017 100.32
Entertainment 40,589 39,721 868 2.19 157,747 99,726 58,021 58.18
Others 82,883 50,939 31,944 62.71 146,223 110,464 35,759 32.37
------ ------- ------- -------- --------- --------- -------- ------
Total 567,662 470,846 96,816 20.56 1,495,898 1,360,377 135,521 9.96
======= ======= ======= ======== ========= ========= ======== ======
Our general and administrative expenses increased by 20.56% from $470,846
for the three months ended May 31, 2009 to $567,662 for the three months ended
May 31, 2010, and increased by 9.96% from $1,360,377 for the nine months ended
May 31, 2009 to $1,495,898 for the nine months ended May 31, 2010. This increase
was primarily due to the following two factors: First, after the Company went
public, it increased its administrative staff, leading to an increase in the
salaries and related expenses. In the meantime, business expansion and the
acquisition of our new campus resulted in the increase in related expenses
including travel expenses and consulting fees. Second, the new acquisition of
fixed assets led to an increase in depreciation expenses. Our office expenses
decreased in the third quarter of 2010 when compared to the same period of 2009,
which was mainly due to in 2009 more expenses incurred for our new campus -
Shaoshan Huanqiu.
OTHER EXPENSES
Other expenses increased by 81.47% from $26,223 in the three months ended
May 31, 2009 to $47,588 in the three months ended May 31, 2010. This increase
was mainly due to the donation to Association for Private Education of Ningxiang
County, Hunan Province in 2010. Other expenses increased from $80,424 in the
32
nine months ended May 31, 2009 to $1,062,665 in the nine months ended May 31,
2010, which was mainly attributable to the disposition of the aged equipment in
the first quarter of 2010.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash generated from operating
activities and financing activities.
As of May 31, 2010, our total assets were $48,368,898, representing an
increase of $17,137,625 or 54.87% when compared with $31,231,273 on August 31,
2009. As of May 31, 2010, we had $29,162,213 in current assets, representing an
increase of $13,270,869 or 83.51% when compared with $15,891,344 on August 31,
2009. As of May 31, 2010, non-current assets were $19,206,685, representing an
increase of $3,866,756 or 25.21% as compared to $15,339,929 on August 31, 2009.
Current assets as of May 31, 2010 consist of cash and cash equivalents of
$13,385,942, inventory of $332,189, net accounts receivable of $11,028,527,
other debtors of $374,296 and advances to vendors of $4,041,259.
The balance of accounts receivable (net of allowance) increased $5,315,036,
from $5,713,491 as of August 31, 2009 to $11,028,527 as of May 31, 2010.
Accounts receivable consist of subsidies from the Rain-dew project and fees from
the enterprises for the off-campus arrangements. Such increase is mainly
attributable to the accounts receivable due from Poverty Alleviation Office of
local governments and China Overseas Scholarship Development Foundation under
the Rain-dew project that started in September 2008, accounting for 96% of the
balance of accounts receivable. Due to the fact that such accounts receivable
are due from the government authorities, the management determines that no
reserve is necessary for the current reporting period and the balance of
doubtful accounts provision remains the same since August 31, 2009.
As of May 31, 2010, our total liabilities were $9,672,025, representing an
increase of $5,407,221 or 126.79% as compared to $4,264,804 on August 31, 2009.
As of May 31, 2010, the balance of loans outstanding was $2,021,119,
representing an increase of $256,994 or 14.57% as compared to $1,764,125 on
August 31, 2009. The increase is due to the increase in loans. Accounts payable
were $1,642,563 as of May 31, 2010, representing an increase of $314,941 or
23.72% as compared with $1,327,622 on August 31, 2009. Accounts payable were
primarily due to Changsha University of Science & Technology for the cooperative
education program, to maritime schools for the tuition we collected on behalf of
them under the cooperation agreements and to suppliers of teaching materials.
Unearned revenue mainly included tuition from students and consulting fees from
enterprises. As of May 31, 2010, the balance of unearned revenue was $3,237,823,
representing an increase of $3,229,548 when compared with $8,275 on August 31,
2009. The large increase in the balance of unearned revenue at the end of this
quarter was attributable to the tuition collected in March 2010 which, however,
was amortized into revenue on August 31, 2009.
As of May 31, 2010, stockholder's equity was $38,696,873, representing an
increase of $11,730,404 or 43.50% as compared to $26,966,469 on August 31, 2009.
Increase in net income is $11,721,045, from which $2,930,914 has been allocated
to statutory reserve and increase in accumulated other comprehensive income is
$9,359, which is related to the exchange gain or loss.
CASH FLOWS
As of May 31, 2010, the Company's cash and cash equivalents were
$13,385,942, representing an increase of $9,537,902 as compared with $3,848,040
on August 31, 2009.
For the nine months ended May 31, 2010, net cash flows provided by
operating activities were $14,427,904, representing an increase of $3,381,074 as
compared with $11,046,830 for the nine months ended May 31, 2009. The decrease
was mainly due to the fact that the second semester of 2009 started in February,
therefore the advance tuition received from students for the second semester was
recognized at the second quarter, whereas in 2010, the second semester started
in early March, therefore the tuition received from students was recognized in
the third quarter. This resulted in the significant increase in net cash flows
for the nine months ended May 31, 2010 as compared with the same period of 2009.
For the nine months ended May 31, 2010, net cash flows used in investing
activities were $7,904,908, representing an increase of $4,952,264 or 167.72% as
compared with $2,952,644 for the nine months ended May 31, 2009. The major
investment in the nine months of fiscal year 2010 refers to the acquisition of
school facilities, construction of the buildings and use of the land on the
Shaoshan, Shaoyang and Tianquan campuses. The financial resources were generated
from operating activities and credit funds.
For the nine months ended May 31, 2010, net cash flows provided by
financing activities were $3,014,950, representing an increase of $5,226,227 as
compared with net cash used in financing activities of $2,211,277 for the nine
months ended May 31, 2009. During the nine months ended May 31, 2010, there were
33
proceeds from repayment of a related party loan in the amount of $1,924,491,
proceeds from short-term loans in the amount of $578,503, proceeds from
long-term loans in the amount of $234,333, proceeds from shareholder's loan in
the amount of $310,000 and repayments on long-term loan in the amount of
556,540, whereas in the nine months ended May 31, 2009, there was shareholders'
loan of $1,198,942 and related party loan of $1,890,298 incurred.
CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations as of May 31, 2010:
Payments Due by Period
-------------------------------------------------------------------------------
June 1, 2010 June 1, 2011 June 1, 2012 June 1, 2013
through through through through After
May 31, May 31, May 31, May 31, May 31,
(In thousands) Total 2011 2012 2013 2014 2014
----- ---- ---- ---- ---- ----
Long-term debt obligations (1) $ 710,321 73,229 637,092 0 0 0
Operating lease (2) $ 753,944 144,707 136,073 183,947 157,566 131,651
Capital commitments (3) $ 13,476,800 5,347,073 117,180 117,180 117,180 7,778,187
---------- --------- ------- ------- ------- ---------
TOTAL CONTRACTUAL OBLIGATIONS $ 14,941,065 5,565,009 890,345 301,127 274,746 7,909,838
========== ========= ======= ======= ======= =========
----------
(1) The long-term debt obligations refers to the long-term loans we have
incurred as of May 31, 2010.
(2) We are obligated to pay rental for the campus of Shaoshan Huanqiu
Vocational Technical Secondary School and for our headquarters' office
space and warehouse. Lease periods vary from 14 months to 10 years with the
earliest expiration date of December 31, 2010 and the latest expiration
date of September 18, 2019.
(3) In exchange for obtaining the governmental approval to provide educational
services to the schools in Hunan Province and Sichuan Province, we
committed to the local governments to invest a total amount of
RMB122,800,000 (approximately US$17,987,060) for the expansion of those
schools during the terms of the cooperation agreement with them. The terms
of cooperation vary from 15 years to 20 years with the earliest expiration
date of July 15, 2021 and the latest expiration date of June 30, 2029.
Until May 31, 2010, we have invested $4,510,260 in several schools and the
balance of $13,476,800 will be invested within the remaining term of the
cooperation agreement.
FOREIGN CURRENCY TRANSLATION
Our reporting currency is the US dollars. Our functional currency is
Renminbi ("RMB"). Transactions denominated in currencies other than RMB are
translated into RMB at the exchange rate quoted by the People's Bank of China at
the dates of the transactions. Exchange gains and losses resulting from
transactions denominated in a currency other than that RMB are included in
statements of operations as exchange gains. The exchange rate as of May 31, 2010
was 6.8279, which didn't fluctuate significantly compared with the exchange rate
6.8306 as of the last fiscal year end of August 31, 2009. The average exchange
rate for the three months ended May 31, 2010 of 6.8266, slightly decreased
compared to the exchange rate of 6.8309 for the same period of 2009.
TAXATION
The PRC government also provides various incentives to companies that
engage in the development of vocational education. Such incentives include
reduced tax rates, tax exemptions and other measures. According to the Promotion
of Private Schools Act of PRC and the Notice of Tax Policy for Education
Activities (Caishui [2004] No.39), certain enterprises, organizations and
schools shall enjoy the same tax treatment as the government operated pubic
schools, and could be exempt from business tax and income tax accordingly. As
long as we meetthe requirements of the aforementioned regulations, we are exempt
from PRC business tax and income tax.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, FASB amended ASC 820 Disclosures about Fair Value
Measurements. This update provides amendments to Subtopic 820-10 that requires
new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number). The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company has determined the adoption of this rule does not have a material impact
on its financial statements.
In January 2010, FASB amended Accounting for Distributions to Shareholders
with Components of Stock and Cash. The amendments in this Update clarify that
the stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a
share issuance that is reflected in EPS prospectively and is not a stock
dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this rule to
have a material impact on its financial statements.
OFF BALANCE SHEET ARRANGEMENTS
We have not entered into any financial guarantees or other commitments to
guarantee the payment obligations of any third party. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholders' equity, or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any other variable
interest in any unconsolidated entity that provides financing, liquidity, market
risk or credit support to us or engages in leasing, hedging or research and
development services with us.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange
Act and are not required to provide the information required under this item.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended ( the "Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information 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. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As of May 31, 2010, the end of the fiscal quarter covered by this report,
we carried out an evaluation, under the supervision and with the participation
of our management, including our chief executive officer and our chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our chief executive officer and
chief financial officer concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were
effective at the reasonable assurance level to ensure that information required
to be disclosed in our reports under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information 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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting (as
defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the
quarter ended May 31, 2010 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We know of no pending legal proceedings to which we are a party which are
material or potentially material, either individually or in the aggregate. We
are from time to time, during the normal course of our business operations,
subject to various litigation claims and legal disputes. We do not believe that
the ultimate disposition of any of these matters will have a material adverse
effect on our financial position, results of operations or liquidity.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange
Act and are not required to provide the information required under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
35
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed herewith:
Exhibit No. Description
----------- -----------
31.1 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2 Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
----------
* Filed herewith.
36
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
July 20, 2010 HQ Global Education, Inc.
By: /s/ Guangwen He
-------------------------------------------
Guangwen He
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Yunjie Fang
-------------------------------------------
Yunjie Fang
Chief Financial Officer
(Principal Financial and Accounting Officer)
37