HQGE HQ Global Education Inc (CE)

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 February 28, 2011

 

¨	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 incorporation or organization)		(I.R.S. Employer Identification No.)

 

27th Floor, BOBO Fortune Center, No.368, South Furong Road,

Changsha City, Hunan Province, 410007

People’s 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 (§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 April 14, 2011, 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		3
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of February 28, 2011 and August 31, 2010	3
	Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended February 28, 2011 and 2010	4
	Condensed Consolidated Statements of Cash Flows for the six months ended February 28, 2011 and 2010	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
PART II.  OTHER INFORMATION		22
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	(Removed and Reserved)	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
SIGNATURES		23

 

PART I.  FINANCIAL INFORMATION

ITEM 1. Financial Statements (Unaudited)

HQ GLOBAL EDUCATION INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

		February 28,				August 31,
		2011				2010
ASSETS
CURRENT ASSETS
Cash		$	10,689,312			$	5,225,764
Accounts receivable			10,925,634				9,023,824
Other receivables			273,254				40,972
Inventory			700,470				674,200
Advances to vendors			6,264,832				552,344
Total current assets			28,853,502				15,517,104
PROPERTY AND EQUIPMENT, NET			31,974,709				29,009,794
INTANGIBLE ASSETS, NET			2,076,645				2,029,519
TOTAL ASSETS		$	62,904,856			$	46,556,417
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term loans		$	1,301,045			$	1,314,744
Long-term loans - current portion			661,936				235,038
Accounts payable			1,172,687				2,278,346
Payroll tax payable			3,912				3,232
Payroll payable			360,921				341,098
Unearned revenues			5,737,946				-
Due to shareholder			340,000				-
Other payables and accrued liabilities			848,567				850,905
Total current liabilities			10,427,014				5,023,363
Long-term loans, less current portion			-				477,421
Due to shareholder, net of current portion			-				310,000
Other long-term payables			99,247				96,757
TOTAL LIABILITIES			10,526,261				5,907,541
COMMITMENTS AND  CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $0.001 par value, 40,000,000 shares authorized, none issued and outstanding			-				-
Common Stock, $0.0001 par value 100,000,000 shares authorized, 33,000,000 shares issued and outstanding			3,300				3,300
Additional paid-in capital			1,226,674				1,226,674
Accumulated other comprehensive income			3,392,010				1,785,928
Statutory reserve			12,880,440				10,339,551
Retained earnings			34,876,171				27,293,423
Total shareholders' equity			52,378,595				40,648,876
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	62,904,856			$	46,556,417

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

 

HQ GLOBAL EDUCATION INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

		For the three months ended								For the six months ended
		February 28,								February 28,
		2011				2010				2011				2010
Revenues
-Fee based		$	10,230,667			$	5,333,367			$	22,429,375			$	14,131,443
-Service based			2,263,853				1,531,729				6,706,903				5,742,731
			12,494,520				6,865,096				29,136,278				19,874,174
Cost of revenue
-Fee based			(5,047,583	)			(2,481,332	)			(11,225,311	)			(6,774,451	)
-Service based			(1,852,153	)			(1,175,194	)			(5,822,167	)			(4,740,567	)
			(6,899,736	)			(3,656,526	)			(17,047,478	)			(11,515,018	)
Gross profit			5,594,784				3,208,570				12,088,800				8,359,156
Selling expenses			(170,485	)			(107,664	)			(339,710	)			(243,758	)
General and administrative expenses			(754,040	)			(476,672	)			(1,534,442	)			(928,236	)
Income from operations			4,670,259				2,624,234				10,214,648				7,187,162
Other expenses
Interest expenses, net			(31,071	)			(25,766	)			(61,645	)			(45,127	)
Other expenses			(331	)			(553	)			(29,366	)			(969,950	)
Total other expenses			(31,402	)			(26,319	)			(91,011	)			(1,015,077	)
Income before income taxes			4,638,857				2,597,915				10,123,637				6,172,085
Provision for income taxes			-				-				-				-
Net income			4,638,857				2,597,915				10,123,637				6,172,085
Other comprehensive income
Foreign currency translation income			730,859				5,762				1,606,082				19,627
Comprehensive Income		$	5,369,716			$	2,603,677			$	11,729,719			$	6,191,712
Basic and diluted income per common share		$	0.14			$	0.11			$	0.31			$	0.28
Basic and diluted weighted average common shares outstanding			33,000,000				23,416,667				33,000,000				21,950,276

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

 

HQ GLOBAL EDUCATION INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		For the six months ended
		February 28,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	10,123,637			$	6,172,085
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,219,282				900,645
Loss on disposal of property & equipment			-				969,369
Changes in assets and liabilities
(Increase) decrease in -
Accounts receivable			(1,559,644	)			(4,692,513	)
Other receivables			(210,609	)			(47,810	)
Inventory			(2,057	)			848,808
Increase (decrease) in -
Accounts payable			(1,173,539	)			626,130
Payroll Payable			7,496				36,575
Payroll Taxes payable			557				21,852
Unearned revenues			5,670,973				1,527,334
Other payables and accrued liabilities			(3,347	)			531,454
Net cash provided by operating activities			14,072,749				6,893,929
CASH FLOWS FROM INVESTING ACTIVITIES:
Advance payment for acquisition of intangible assets			(3,273,452	)			-
Acquisition of intangible assets			-				(30,757	)
Advance payment for acquisition of property & equipment			(2,352,775	)			(999,635	)
Acquisition of property & equipment			(3,095,572	)			(6,032,061	)
Net cash used in investing activities			(8,721,799	)			(7,062,453	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term loan			233,109				-
Repayments on short-term loan			(293,266	)			-
Repayments on long-term loan			(75,197	)			(36,615	)
Proceeds from loans to related party			-				1,924,491
Net cash provided by (used in) financing activities			(135,354	)			1,887,876
EFFECT OF EXCHANGE RATE CHANGE ON CASH			247,952				2,993
NET INCREASE IN CASH			5,463,548				1,722,345
CASH, BEGINNING OF PERIOD			5,225,764				3,848,040
CASH, END OF PERIOD		$	10,689,312			$	5,570,385
Supplemental disclosures of cash flow information:
Interest paid		$	57,561			$	52,128

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

HQ GLOBAL EDUCATION INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  ORGANIZATION AND BASIS OF PRESENTATION

HQ Global Education Inc. (“the Company”) provides a wide range of educational programs and services through vocational schools, consisting primarily of customized education programs for various vocational skills and vocational training services to a varied student population throughout the People’s Republic of China.

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 (“PRC”) on September 30, 2009 and is primarily engaged in providing business administration, planning and consulting services. Substantially all of Risetime and GEI’s operations are conducted in the PRC through Xiangtan Nicestar, and through contractual arrangements with Xiangtan Nicestar’s consolidated affiliated entities in the PRC, 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, PRC on November 20, 2008 and is primarily engaged in providing vocational education service and vocational skills training service.

In connection with the acquisition on February 2010, 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 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 acquisition since there was a change of control. Accordingly, Risetime and its subsidiaries are treated as the continuing entity for accounting purposes.

In March 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.

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 obligate 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 consolidated financial statements. For the same reason, Xiangtan Nicestar accounts for Oya as a VIE and includes Oya’s accounts in its consolidated financial statements.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("U.S. GAAP") 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 29, 2010. Operating results for the three and six months ended February 28, 2011 are not necessarily indicative of the results that may be expected for the full year.

 

Note 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed consolidated financial statements include the accounts 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.

The Company has 11 VIEs including Oya. Oya operates four private secondary vocational schools (Changsha Huanqiu, Shaoshan Huanqiu, Hunan New HQ Technical School and Tianzhen Huanqiu Technical Secondary School) and a public secondary vocational school (Shaoshan Vocational School) in China. Through Changsha Huanqiu, the Company operates five public secondary vocational schools, Yingjing Vocational School, Tianquan Vocational School, Shimian Vocational School, Lushan Vocational School and Shaoyang Vocational School.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with 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, 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.

Accounts receivable

Accounts receivable consist of balances receivable for the charges of education services provided and for tuition revenues. Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible amounts. As of February 28, 2011 and August 31, 2010, total accounts receivable were $10,925,634 and $9,023,824 respectively, of which, $9,071,016 and $6,946,895 were tuition due from governmental organizations and associations under the impoverished student aid programs for the periods ended February 28, 2011 and August 31, 2010.

According to the Company's policy, accounts receivable over 90 days are considered overdue. 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, management estimates an 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 recorded as a change in allowance for doubtful accounts. As of February 28, 2011 and August 31, 2010, the allowance for doubtful accounts was $-0-.

Intangible assets

Intangible assets are accounted for in accordance with the provisions of ASC 350, "Goodwill and Other Intangible Assets". Under ASC 350, 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 finite useful life are amortized over their useful live.

Revenue recognition

The Company recognizes revenues in accordance ASC 605 “Revenue Recognition 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.

(a)	Tuition revenue received for educational programs and services is recognized proportionately according to the progress the students completing the educational programs in the school. Tuition paid in advance is recorded as unearned revenues.

(b)

The Company provides off-campus internship programs for students. The Company has arrangements with certain regional corporations in which these entities are the sponsors for off-campus internship programs which last two to three months. The Company collects a fixed amount of fees from both the internship sponsor and the student after the student is admitted into the programs. Revenue is recognized upon completion of the internship program.

 

(c)	The Company provides other services mainly cafeteria and laundry services for students and the revenue from such services is recognized upon completion of the service.

Fair value of financial instruments

The Company follows the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The Company's financial instruments include cash, accounts receivable, advances to vendors, other receivables, accounts payable, accrued expenses, taxes payable, notes payable, other payables and accrued liabilities, unearned revenues, and short-term loans payable. Management has estimated that the fair value of these financial instruments approximate their carrying amounts due to their 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.

The Company did not have assets and liabilities that are measured at fair value on a recurring basis.

Earnings per share

Basic earnings per share (EPS) is measured as net income divided by the weighted average common shares outstanding for the period. Diluted EPS includes the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. 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. The Company does not have any potential diluted shares outstanding as of February 28, 2011 and August 31, 2010.

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 acquisition 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.

Foreign currency translation

The Company’s condensed consolidated financial statements are 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. Since substantially all operations of the Company are conducted in the PRC, the functional currency of the Company is Renminbi (“RMB”). The condensed consolidated financial statements of the Company have been translated into U.S. dollars. The financial statements are first prepared in RMB and then are 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.

		February 28, 2011				August 31, 2010				February 28, 2010
Period end exchange rate (RMB: US$)			6.5716				6.8074				6.8260
Average exchange rate for the period (RMB: US$)			6.6493				6.8178				6.8278

Note 3. RELATED PARTY TRANSACTIONS

The balance due to shareholder consists of the following:

		As of February 28,				As of August 31,
		2011				2010
Loan from Mr. Guangwen He (1)		$	310,000			$	310,000
Rental and other expenses payable to
Mr. Guangwen He (2)			30,000				-
Total			340,000				310,000

(1).	The loan from Mr. Guangwen He, a major shareholder of the Company, is unsecured, bears no interest, with term of two years and is payable on February 28, 2012.

(2).	The Company rents office facilities from Mr. Guangwen He under a fifteen-year agreement for annual rental of US$ 76,085.

Note 4. SHORT-TERM LOANS

As of February 28, 2011, the short-term borrowings consisted of four loans. Two loans of $304,338 (RMB 2,000,000) and $456,507 (RMB 3,000,000) were borrowed from Changsha Foundation for Education. The two loans were unsecured and bear interest at 5% and 6% per annum, and mature on March 17, 2011 and July 15, 2011, respectively.

In addition to the loans mentioned above, the Company entered into two short-term bank loan arrangements. One loan in the amount of $235,862 (RMB1, 550,000) was borrowed from Ningxiang Rural Credit Cooperative Union. The loan bears interest at 8.96% per annum due on December 28, 2011. This loan is secured by one of the company’s buildings with the cost of $349,989. Another loan amounted to $304,338 (RMB2,000,000) from China Construction Bank Shaoshan Branch, bearing interest at 5.84% per annum and is due on March 23, 2011. This loan was secured by a land use right of the Company with cost of $582,124.

The Company repaid the short-term loan of $304,338 (RMB 2,000,000) borrowed from Changsha Foundation for Education on March 21, 2011. The short-term loan of $304,338 (RMB2, 000,000) borrowed from China Construction Bank Shaoshan Branch was repaid on March 23, 2011. Interest incurred on these loans was $8,202 and $ 16,304 for the three and six months ended February 28, 2011 and $-0- for the three and six months ended February 28, 2010.

Note 5. LONG-TERM LOANS

The details of long-term loans outstanding as of February 28, 2011, which are used for operations, are as follows:

Lender		Term								Interest rate				Principal
		From				To								RMB				US$
Long-term loan - Current Portion
Ningxiang Rural Credit Cooperative Union		Sep 1, 2009				Aug 21, 2011					8.64	%			1,600,000				243,470
Ningxiang Rural Credit Cooperative Union		Nov 25, 2008				Nov 13, 2011					10.80	%			1,350,000				205,428
Ningxiang Rural Credit Cooperative Union		Nov 25, 2008				Nov 13, 2011					10.80	%			1,400,000				213,038
															4,350,000				661,936

The details of long-term loans outstanding as of August 31, 2010 are as follows:

The loans borrowed from Ningxiang Rural Credit Cooperative Union were collateralized by buildings with an aggregate cost of $1,109,593 and land use rights with an aggregate cost of $48,446.

 

The $73,450 loan was repaid in October 2010. For the three and six months ended February 28, 2011 and 2010, the Company incurred $35,538, $71,304, $32,455and $56,836 interest on the above loans respectively.

Note 6.  TAXES

Corporation income tax (“CIT”) and business tax

The Company is governed by the Income Tax Law of the People's Republic of China ("PRC") concerning the private-run enterprises. 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. 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 these regulations, 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.

Note 7.  STATUTORY RESERVE

According to Law of the PRC 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 six months ended February 28, 2011 and 2010, the Company has made appropriations in the amount of $2,540,889 and $1,543,665 to this statutory reserve, respectively. As of February 28, 2011 and August 31, 2010, the balances of the statutory reserve were $12,880,440 and $10,339,551, respectively.

Note 8.  SEGMENT INFORMATION

In accordance with ASC 280, "Segment Reporting", establishes standards for reporting information about operating segments on a basis consistent with the Company's internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company's business segments.

The Company is mainly engaged in providing vocational education service and vocational skills training service. The Company's chief operating decision maker ("CODM") has been identified as the CEO who reviews the financial information of separate operating segments when making decisions about allocating resources and assessing performance of the group. Based on management's assessment, the Company has determined that it has three operating segments which are Vocational Education, Order-oriented Service, and Campus services. These three operating segments are also identified as reportable segments. The Company adjusted its operating segments and has reclassified results of all periods presented to conform to the revised operating segments disclosures as of February 28, 2011 and 2010.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The CODM evaluates performance based on each reporting segment's revenues, cost of revenues, and gross profit, and selling expenses and G&A expenses are not separated to each segment. The CODM does not review balance sheet information to measure the performance of the reportable segments, nor is this part of the segment information regularly provided to the CODM. Revenues, cost of revenues, gross profit, total capital expenditure and total depreciation and amortization by segment were as follows:

For the three months ended February 28, 2011

		Vocational  Education				Order-oriented  Service				Campus  Services				Unallocated  Amounts				Consolidated
Net revenues			8,811,986				1,418,681				2,263,853				-				12,494,520
Cost of revenues			4,839,485				208,098				1,852,153				-				6,899,736
Gross profit			3,972,501				1,210,583				411,700				-				5,594,784
Depreciation and amortization			339,199				11				255,212				48,304				642,726
Total capital expenditures			1,160,468				-				1,350,295				2,349,754				4,860,517