- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

( Mark One)

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

 

For the quarterly period ended August 31, 2009

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

For the transition period from ______________ to ______________

Commission File Number: 333-118259

CHINA SUN GROUP HIGH-TECH CO.

(Exact name of registrant as specified in its charter)

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

1 Hutan Street, Zhongshan District

Dalian, The People’s Republic of China

(Address of principal executive offices) (Zip Code)

011 – 86- (411) 8288 9800/ 8289 2736

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes  □ No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    □   Yes □   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o	Accelerated filer   o
Non-accelerated filer  o (Do not check if a smaller reporting company)	Smaller reporting company   þ

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

□  Yes  þ No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

□  Yes   □ No

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

There are presently 53,422,971 shares of common stock, $.001 par value, issued and outstanding as of October 9, 2009.

 

 

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TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

 

		Page
Item 1.	Financial Statements.	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	7
Item 4.	Controls and Procedures.	7

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings.	8
Item 1A.	Risk Factors.	8
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	8
Item 3.	Defaults Upon Senior Securities.	8
Item 4.	Submission of Matters to a Vote of Security Holders.	8
Item 5.	Other Information.	8
Item 6.	Exhibits.	8

 

2 

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PART I – FINANCIAL INFORMATION

Item 1.                      Financial Statements.

 

CHINA SUN GROUP HIGH-TECH CO.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

		Page
Condensed Consolidated Balance Sheets as of August 31, 2009 and May 31, 2009		F-2
Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended August 31, 2009 and 2008		F-3
Condensed Consolidated Statements of Cash Flows for the three months ended August 31, 2009 and 2008		F-4
Condensed Consolidated Statement of Stockholders’ Equity for the three months ended August 31, 2009		F-5
Notes to Condensed Consolidated Financial Statements		F-6 – F-15

 

 

F-1

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CHINA SUN GROUP HIGH-TECH CO.

CONDENSED CONSOLIDATED BALANCE SHEET

AS OF AUGUST 31, 2009 AND MAY 31, 2009

(Currency expressed in United States Dollars (“US$”), except for number of shares)

		August 31, 2009				May 31, 2009
		(Unaudited)				(Audited)
ASSETS
Current assets:
Cash and cash equivalents		$	11,413,650			$	9,209,953
Accounts receivable, trade			1,387,333				1,580,220
Inventories			437,802				1,657,023
Value-added tax receivable			-				124,627
Deposits and prepayments			228,565				439,560
Total current assets			13,467,350				13,011,383
Non-current assets:
Technical know-how			2,601,883				2,608,059
Property, plant and equipment, net			20,414,033				19,630,119
TOTAL ASSETS		$	36,483,266			$	35,249,561
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade		$	8,741			$	847,796
Income tax payable			1,388,179				1,476,030
Other payables and accrued liabilities			1,194,844				1,022,303
Total liabilities			2,591,764				3,346,129
Commitments and contingencies
Stockholders’ equity:
Convertible preferred stock, $0.001 par value; 2,000,000 shares authorized; none of shares issued and outstanding as of August 31, 2009 and May 31, 2009			-				-
Common stock, $0.001 par value; 100,000,000 shares authorized; 53,422,971 shares issued and outstanding as of August 31, 2009 and May 31, 2009			53,423				53,423
Additional paid-in capital			9,585,204				9,585,204
Accumulated other comprehensive income			2,992,276				3,067,549
Statutory reserve			1,387,775				1,387,775
Retained earnings			19,872,824				17,809,481
Total stockholders’ equity			33,891,502				31,903,432
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	36,483,266			$	35,249,561

See accompanying notes to condensed consolidated financial statements.

 

 

F-2

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CHINA SUN GROUP HIGH-TECH CO.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED AUGUST 31, 2009 AND 2008

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

		Three months ended August 31,
		2009				2008
Revenues, net		$	9,313,336			$	10,986,891
Cost of revenue (inclusive of depreciation)			6,254,566				6,834,309
Gross profit			3,058,770				4,152,582
Operating expenses:
Sales and marketing			23,294				369,681
Research and development			25,575				24,641
Depreciation			64,503				63,793
General and administrative			177,175				475,306
Total operating expenses			290,547				933,421
INCOME FROM OPERATIONS			2,768,223				3,219,161
Other income:
Interest income			8,058				8,011
INCOME BEFORE INCOME TAXES			2,776,281				3,227,172
Income tax expense			(712,938	)			(838,385	)
NET INCOME		$	2,063,343			$	2,388,787
Other comprehensive (loss) income:
- Foreign currency translation (loss) gain			(75,273	)			387,157
COMPREHENSIVE INCOME		$	1,988,070			$	2,775,944
Net income per share – Basic and diluted		$	0.04			$	0.04
Weighted average number of shares outstanding during the period – Basic and diluted			53,422,971				53,422,971

 

See accompanying notes to condensed consolidated financial statements.

 

 

F-3

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CHINA SUN GROUP HIGH-TECH CO.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED AUGUST 31, 2009 AND 2008

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

		Three months ended August 31,
		2009				2008
Cash flows from operating activities:
Net income		$	2,063,343			$	2,388,787
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			210,253				165,331
Changes in operating assets and liabilities:
Accounts receivable, trade			189,105				223,770
Inventories			1,215,028				2,460,702
Value-added tax receivable			359,074				619,916
Deposits and prepayments			209,908				(457,664	)
Accounts payable, trade			(836,861	)			231,921
Customer deposits			-				593,685
Income tax payable			(84,338	)			838,385
Other payables and accrued liabilities			(60,292	)			25,436
Net cash provided by operating activities			3,265,220				7,090,269
Cash flows from investing activities:
Purchase of plant and equipment			(16,313	)			(3,068	)
Addition of construction in progress			(1,024,155	)			-
Net cash used in investing activities			(1,040,468	)			(3,068	)
Effect of exchange rate changes on cash and cash equivalents			(21,055	)			122,692
NET CHANGE IN CASH AND CASH EQUIVALENTS			2,203,697				7,209,893
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			9,209,953				3,879,114
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	11,413,650			$	11,089,007
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes		$	797,276			$	-
Cash paid for interest		$	-			$	-
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer from construction in progress to property, plant and equipment		$	2,560,385			$	-

 

See accompanying notes to condensed consolidated financial statements.

 

 

F-4

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CHINA SUN GROUP HIGH-TECH CO.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED AUGUST 31, 2009

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

		Convertible preferred stock								Common stock								Additional paid-in				Accumulated other comprehensive				Statutory				Retained				Total stockholders’
		No. of share				Amount				No. of share				Amount				capital				income				reserve				earnings				equity
Balance as of June 1, 2009			-				-				53,422,971			$	53,423			$	9,585,204			$	3,067,549			$	1,387,775			$	17,809,481			$	31,903,432
Net income for the period			-				-				-				-				-				-				-				2,063,343				2,063,343
Foreign currency translation adjustment			-				-				-				-				-				(75,273	)			-				-				(75,273	)
Balance as of August 31, 2009			-			$	-				53,422,971			$	53,423			$	9,585,204			$	2,992,276			$	1,387,775			$	19,872,824			$	33,891,502

 

See accompanying notes to condensed consolidated financial statements.

 

 

F-5

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CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2009

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

NOTE － 1                BASIS OF PRESENTATION

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

In the opinion of management, the consolidated balance sheet as of May 31, 2009 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended August 31, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year ending May 31, 2010 or for any future periods.

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended May 31, 2009.

 

NOTE-2                   ORGANIZATION AND BUSINESS BACKGROUND

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

The Company, through its operating subsidiaries in the PRC, mainly engages in the production and sales of cobaltosic oxide and lithium cobalt oxide, both anode materials used in lithium ion rechargeable batteries in the PRC. The operation activity was commenced from April 2006.

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

 

NOTE-3                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

l	Use of estimates

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

l	Basis of consolidation

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

 

 

F-6

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CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2009

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

l	Revenue recognition

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

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

l	Cash and cash equivalents

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

l	Accounts receivable

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

l	Inventories

Inventories include material, labor and manufacturing overhead and are stated at lower of cost or market value, cost being determined on a weighted average method. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of August 31, 2009, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.

l	Technical know-how

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

l	Property, plant and equipment

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

	Depreciable life		Residual value
Building	40 years		5%
Plant and machinery	5-40 years		5%
Office equipment	5 years		5%
Motor vehicle	5 years		5%

Expenditure for repairs and maintenance is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.

 

 

F-7

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CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2009

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

l	Construction in progress

Construction in progress is stated at cost, which includes the cost of construction, acquisition of plant and equipment and other direct costs attributable to the construction. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized interest is incurred during the period of construction.

l	Valuation of long-lived assets

Long-lived assets primarily include technical know-how and property, plant and equipment. In accordance with SFAS No. 144, “ Accounting for the Impairment or Disposal of Long-Lived Assets ,” the Company periodically reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. Determining the fair value of long-lived assets includes significant judgment by management, and different judgments could yield different results. There has been no impairment as of August 31, 2009.

l	Comprehensive income

SFAS No. 130, “Reporting Comprehensive Income” establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during the period from non-owner sources. Accumulated comprehensive income consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.

l	Income taxes

The Company accounts for income tax using SFAS No. 109 “Accounting for Income Taxes,” which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred income taxes are provided for the estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefits from loss carry-forwards and provisions, if any. Deferred tax assets and liabilities are measured using the enacted tax rates expected in the periods of recovery or reversal and the effect from a change in tax rates is recognized in the consolidated statement of operations and comprehensive income in the period of enactment. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.

The Company also adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. In accordance with FIN 48, the Company also adopted the policy of recognizing interest and penalties, if any, related to unrecognized tax positions as income tax expense. For the period ended August 31, 2009 and 2008, the Company did not have any interest and penalties associated with tax positions. As of August 31, 2009, the Company did not have any significant unrecognized uncertain tax positions.

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

 

 

F-8

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CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2009

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

l	Net income per share

The Company calculates net income per share in accordance with SFAS No. 128, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.

l	Foreign currencies translation

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

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

In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with SFAS No 52. “ Foreign Currency Translation” , using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

Translation of amounts from RMB into US$1 has been made at the following exchange rates for the respective year:

		August 31, 2009				August 31, 2008
Period-end RMB:US$1 exchange rate			6.8412				6.8452
Average monthly RMB:US$1 exchange rate			6.8427				6.8991

l	Segment reporting

SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in the financial statements. The Company operates one reportable business segment in the PRC.

l	Fair value measurement

The Company adopts SFAS No. 157, “ Fair Value Measurements” (FAS 157), for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis and for all non-financial instruments accounted for at fair value on a non-recurring basis. SFAS 157 establishes a new framework for measuring fair value and expands related disclosures. The Company has also adopted FASB FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly . Adoption of the FSP had an insignificant effect on the Company’s financial statements.

 

 

F-9

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CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2009

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

FAS 157 establishes a new framework for measuring fair value and expands related disclosures. Broadly, FAS 157 framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. FAS 157 establishes a three-level valuation hierarchy based upon observable and non-observable inputs. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

For financial assets and liabilities, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.

l	Recent accounting pronouncements

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

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140” (“FAS 166”). FAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. FAS 166 is effective for fiscal years beginning after November 15, 2009. The Company will adopt FAS 166 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“FAS 167”). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. FAS 167 is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. The Company will adopt FAS 167 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.

In June 2009, the FASB issued SFAS No. 168, “ The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles, ” (“Codification”), which supersedes all existing accounting standard documents and will become the single source of authoritative non-governmental U.S. GAAP. All other accounting literature not included in the Codification will be considered non-authoritative. The Codification was implemented on July 1, 2009 and will be effective for interim and annual periods ending after September 15, 2009. The Company expects to conform its consolidated financial statements and related notes to the new Codification for the quarter ending November 30, 2009.

NOTE-4                   ACCOUNTS RECEIVABLE, NET

The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, the Company has determined that no allowance for doubtful accounts is required for the period ended August 31, 2009 and 2008.

 

 

F-10

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CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2009

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

 

 

NOTE-5                   TECHNICAL KNOW-HOW

In March 2009, the Company’s subsidiary, Dalian Xinyang High-Tech Development Co. Ltd (”DLXY”) entered into an agreement (the “Agreement”) with an independent third party, Mr. Wang Ka Gui to acquire the technology to develop a new product, lithium iron phosphate, which is used as anode material for the new generation of lithium ion batteries. Pursuant to the Agreement, Mr. Wang Ka Gui agreed not to re-sell or disclose to third party under the confidentiality covenant. The total purchase price of the technology was approximately $2,608,059 (equivalent to RMB17,800,000). The Company has determined that the technology has an estimated useful life of 15 years and is being amortized on a straight-line method over its useful life when its products are approved by the government agency. The approval was granted to the Company in late August 2009.

To make use of this technology, the Company has developed a production facility for the manufacturing purpose of lithium ion batteries under this technology and the development project is completed in September 2009 and will begin depreciating at the time when the assets are substantially complete and ready for their intended use. As of August 31, 2009, the Company has totally expended $2,560,385 on developing the plant and machinery for the application of the technology which was recorded under “Property, plant and equipment” in Note 6.

 

NOTE-6                   PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net, consisted of:

		August 31, 2009				May 31, 2009
		( Unaudited)				(Audited)
Building		$	6,308,373			$	6,308,373
Plant and machinery			13,757,724				11,181,025
Office equipment			205,467				205,467
Motor vehicle			34,816				34,816
Construction in progress			-				1,540,220
Foreign translation difference			2,140,944				2,187,536
			22,447,324				21,457,437
Less: accumulated depreciation			(1,906,463	)			(1,696,209	)
Less: foreign translation difference			(126,828	)			(131,109	)
Property, plant and equipment, net		$	20,414,033			$	19,630,119

Depreciation expenses for the period ended August 31, 2009 and 2008 were $210,253 and $165,331, which included $145,750 and $101,538 in cost of revenue, respectively.

 

NOTE-7                   OTHER PAYABLES AND ACCRUED LIABILITIES

Other payables and accrued liabilities consisted of:

		August 31, 2009				May 31, 2009
		(Unaudited)				(Audited)
Welfare payable		$	292,568			$	293,262
Accrued operating expense			149,171				126,209
Payable to equipment vendor			-				83,623
Purchase price payable for technical know-how			390,282				391,209
VAT payable			234,823				-
Other payable			128,000				128,000
Other payables and accrued liabilities		$	1,194,844			$	1,022,303

 

F-11

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CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2009

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

NOTE-8                   INCOME TAXES

For the period ended August 31, 2009 and 2008, the local (“United States of America”) and foreign components of income before income taxes were comprised of the following:

		Three months ended August 31,
		2009				2008
Tax jurisdiction from:
– Local		$	(62,543	)		$	(127,016	)
– Foreign			2,838,824				3,354,188
Income before income taxes		$	2,776,281			$	3,227,172

The provision for income taxes consisted of the following:

		Three months ended August 31,
		2009				2008
Current tax:
– Local		$	-			$	-
– Foreign			-				-
Deferred tax:
– Local			-				-
– Foreign			712,938				838,385
Income tax expense		$	712,938			$	838,385

The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company operates in various countries: United States of America and the PRC that are subject to tax in the jurisdictions in which they operate, as follows:

United States of America

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

As of August 31, 2009, the operation in the United States of America incurred $1,025,403 of cumulative net operating losses carryforwards for federal tax purposes, which are available to offset future taxable income. The Company has provided for a full valuation allowance for any future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.

The PRC

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

 

 

F-12

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CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2009

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

The reconciliation of income tax rate to the effective income tax rate based on income before income taxes from the operation in the PRC for the periods ended August 31, 2009 and 2008 are as follows:

		Three months ended August 31,
		2009				2008
Income before income taxes		$	2,838,824			$	3,354,188
Income statutory tax rate			25	%			25	%
Income taxes calculated at statutory income tax rate			709,706				838,547
Add: items not deductible to taxes
- Provision and accrued expenses			1,826				(162	)
- Prior year’s adjustment			1,406				-
Income tax expense		$	712,938			$	838,385

The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of August 31, 2009 and May 31, 2009:

		August 31, 2009				May 31, 2009
		(Unaudited)				(Audited)
Deferred tax assets:
- Net operating loss carryforwards		$	348,987			$	327,723
Less: valuation allowance			(348,987	)			(327,723	)
Deferred tax assets		$	-			$	-

Management believes that it is more likely than not that the deferred tax assets will not be fully realizable in the future. Accordingly, the Company provided for a full valuation allowance against its deferred tax assets of $348,987 as of August 31, 2009. During the period ended August 31, 2009, the valuation allowance increased by $21,264, primarily relating to net operating loss carryforwards from the local tax regime.

 

NOTE-9                   CONCENTRATIONS OF RISK

The Company is exposed to the following concentrations of risk:

(a)	Major customers

For the periods ended August 31, 2009 and 2008, the customers who account for 10% or more of revenues of the Company are presented as follows:

		Three months ended August 31, 2009							August 31, 2009
		Revenues				Percentage of revenues			Trade accounts receivable
Customer B		$	1,755,308				19	%		$	609,975
Customer D			1,640,989				18	%			302,466
Customer E			1,919,462				21	%			352,837
Customer F			927,200				10	%			-
Total:		$	6,242,959				67	%		$	1,265,278

 

 

 

F-13

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CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2009

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

 

		Three months ended August 31, 2008								August 31, 2008
		Revenues				Percentage of revenues				Trade accounts receivable
Customer B		$	7,239,841				66	%		$	1,097,151
Customer D			2,613,066				24	%			-
Total:		$	9,852,907				90	%		$	1,097,151

For the periods ended August 31, 2009 and 2008, 100% of the Company’s revenues were derived from customers located in the PRC.

(b)	Major vendors

For the periods ended August 31, 2009 and 2008, the vendors who account for 10% or more of purchases of the Company are presented as follows:

 

		Three months ended August 31, 2009								August 31, 2009
		Purchases				Percentage of purchase				Accounts payable
Vendor A		$	2,544,963				54	%		$	-
Vendor B			1,240,858				26	%			-
Vendor C			946,971				20	%			-
Total:		$	4,732,792				100	%		$	-

 

		Three months ended August 31, 2008								August 31, 2008
		Purchases				Percentage of purchase				Accounts Payable
Vendor B		$	2,171,834				32	%		$	-
Vendor C			2,179,175				32	%			978,788
Total:		$	4,351,009				64	%		$	978,788

For the periods ended August 31, 2009 and 2008, 100% of the Company’s purchases were derived from vendors located in the PRC.

(c)         Credit risk

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

(d)         Exchange rate risk

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

 

 

F-14

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CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2009

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

(e)         Economic and political risks

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

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

NOTE-10                      COMMITMENTS AND CONTINGENCIES

(a)         Operating lease commitment

The Company leases an office premise under a non-cancelable operating lease for a term of 10 years, due July 25, 2010. Costs incurred under this operating lease are recorded as rental expense and totaled approximately $1,826 and $1,812 for the period ended August 31, 2009 and 2008.

As of August 31, 2009, the Company has the future minimum rental payments of $6,698 under the operating lease agreement within the next 12 months.

(b)         Capital commitment

On June 9, 2007, the Company’s subsidiary, DLXY entered into an African Mining Project Contract of Cooperation (the “Purchase Agreement”) with Shengbao Group and South African Shengbao Mining Enterprises (“Shengbao”). Pursuant to the Purchase Agreement, DLXY is obliged to purchase the prospecting and mining rights of a cobalt ore mine for a purchase price of $2 million over a term of 15 years. As of August 31, 2009, the Company had the capital commitment of $2 million in the purchase of the prospecting and mining rights which was contracted for but not provided in the financial statements.

 

 

F-15

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Item 2.                      Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

Three Months Ended August 31, 2009 and August 31, 2008

Net Revenue

Net revenue for the three months period ended August 31, 2009 totaled $9,313,336, as compared to $10,986,891 for the three months ended August 31, 2008. This represents a decrease of $1,673,555 or 15% for the three months period compared to 2008. The decrease in revenue was primarily attributable to the general decrease of the market prices.

Cost of Revenue

Cost of revenue for the three months period ended August 31, 2009 totaled $6,254,566, compared to $6,834,309 for the three months ended August 31, 2008. This represents a decrease of $579,743 or 8% for the three months period compared to 2008. The decrease in cost of revenue was primarily attributable to general decrease of the market prices.

Gross Profit

 

Gross profit for the three months period ended August 31, 2009 was $3,058,770, a decrease of $1,093,812 or 26% from $4,152,582 for the corresponding period in 2008.  The decrease in gross profit was primarily due to the transformation of production lines and consequently both production and sales volume decreased. The decrease in sales margin was mainly due to higher rate of decrease of market prices than the decrease of prices for material costs.

Sales and Marketing Expenses

Sales and marketing expenses for the three months period ended August 31, 2009 totaled $23,294, compared to $369,681 for the three months ended August 31, 2008. This represents a decrease of $346,387 or 94% for the three months period compared to 2008. The decrease was primarily attributable to the one-off advertising and promotion expenses of $559,000 during the three months period ended August 31, 2008.

General and Administrative Expenses

           General and administrative expenses for the three months period ended August 31, 2009 totaled $177,175, compared to $475,306 for the three months ended August 31, 2008. This represents a decrease of $298,131 or 63% for the three months period compared to 2008. The decrease was primarily attributable to the one-off property repairing expenses of $210,000 during the three months period ended August 31, 2008.

Income from Operations

Income from operations for the three months period ended August 31, 2009 totaled $2,768,223, compared to $3,219,161 for the three months ended August 31, 2008. This represents a decrease of $450,938 or 14% for the three months period compared to 2008. The decrease resulted primarily from the general decrease of the market prices.

 

Income Taxes

Provision for income tax expense was $712,938 for the three months ended August 31, 2009, a decrease of $125,447 or 15% as compared to $838,385 for the corresponding period in 2008. The decrease resulted primarily from the decrease in sales during the period.

Net Income

Net income for the three months ended August 31, 2009 was $2,063,343, a decrease of $325,444 or 14% as compared to the net income of $2,388,787 for the corresponding period in 2008. The decrease was primarily attributable to the decrease in sales in the three months ended August 31, 2009.

 

 

 

3

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Liquidity and Capital Resources

Cash and Cash Equivalents

Our cash and cash equivalents were $9,209,953 at the beginning of the three months ended August 31, 2009 and increased to $11,413,650 by the end of period. There was an increase of $2,203,697 or 24% for the three months period ended August 31, 2009.

Net cash provided by operating activities

During the three months period ended August 31, 2009, net cash generated from operating activities was $3,265,220. The cash inflow from operation for the period was primarily attributable to net income generated from sales of products and decrease of inventories.

Net cash used in investing activities

 

Net cash used in investing activities was $1,040,468 for the three months ended August 31, 2009. The cash outflow was primarily attributable to the payment for construction of production lines and purchase of plant and equipment during the period.

Cash paid for income Taxes

 

Cash paid for income tax expense was $797,276 for the three months ended August 31, 2009. There was no cash paid for the income taxes for the same period in 2008. 

As of August 31, 2009, we had working capital of $10,875,586, as compared to $9,665,254 at May 31, 2009, due primarily to the decrease of accounts payables by $839,055 and increase of cash and cash equivalents by $2,203,697, offset by decreases in accounts receivable of $192,887, inventories of $1,219,221, deposits, prepayment and other receivables of $335,622. In light of our working capital of $10,875,586 as at August 31, 2009, we believe that we had current and available capital resources sufficient to fund planned operations for the current fiscal year.

 

Trends

 

Currently, many companies in the cobalt product industry are looking to directly own cobalt producing mines which will provide direct access and supply to cobalt ore, the primary raw material in the cobalt product industry. In June 2007, we acquired certain rights to a cobalt mine in Africa. We anticipate that this acquisition will help us avoid export limitations imposed by the Congo, reduce freight expenses, and help ensure a stable supply of cobalt ore.

 

We are not aware of any trends, events or uncertainties that have or are reasonably likely to have a material impact on our short-term or long-term liquidity.

 

Inflation

 

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

 

Material Commitments for Capital Expenditures

 

Currently, we own the prospecting and mining rights of a cobalt mine in Congo. We plan to start the construction of a processing plant in Congo in the second quarter of the 2010 fiscal year. We anticipate that the construction of the plant will cost approximately $2,000,000 to $3,000,000.

 

 

 

4

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General

 

We believe that we currently have sufficient income generated from our operations to meet our operating and/or capital needs.

 

However, we will continue to evaluate various sources of capital to meet our growth requirements. Such sources will include debt financings, the issuance of equity securities, and entrance into other financing arrangements. There can be no assurance, however, that any of the contemplated financing arrangements described herein will be available and, if available, can be obtained on terms favorable to us.

 

Contractual Obligations and Commitments

We leased an office premise under a non-cancelable operating lease agreement for a period of ten years, due July 25, 2010. The annual lease payment is $6,698.

On June 9, 2007, our subsidiary, DLXY entered into an African Mining Project Contract of Cooperation (the “Purchase Agreement”) with Shengbao Group and South African Shengbao Mining Enterprises (“Shengbao”). Pursuant to the Purchase Agreement, DLXY is obliged to purchase the prospecting and mining rights of a cobalt ore mine for a purchase price of $2 million over a term of 15 years.  As of August 31, 2009, DLXY had the capital commitment of $2 million in the purchase of the prospecting and mining rights which was contracted for but not provided in the financial statements.

Liquidity and Capital Resources

Cash and Cash Equivalents

Our cash and cash equivalents were $9,209,953 at the beginning of the three months ended August 31, 2009 and increased to $11,413,650 by the end of period. There was an increase of $2,203,697 or 24% for the three months period ended August 31, 2009.

Net cash provided by operating activities

During the three months period ended August 31, 2009, net cash generated from operating activities was $3,265,220 compared to $7,090,269 for the corresponding period in 2008, a decrease of $3,825,049.

This decrease was resulted primarily due to the decrease in cash inflows from gross profit, accounts payable and decrease of inventory by $1,093,812, $1,068,782, and $1,245,674 respectively as well as the payment for income tax for $797,276 compared to the corresponding period in 2008.

Net cash used in investing activities

 

Net cash used in investing activities was $1,040,468 for the three months ended August 31, 2009, an increase of $1,037,400 or 33,814% from $3,068 for the same period in 2008. The increase was primarily attributable to the addition of construction of production lines during the period in 2009.

Cash paid for income Taxes

 

Cash paid for income tax expense was $797,276 for the three months ended August 31, 2009. There was no cash paid for the income taxes for the same period in 2008. 

As of August 31, 2009, we had working capital of US$10,875,586, as compared to $9,665,254 at May 31, 2009, due primarily to the decrease of accounts payables by $839,055 and increase of cash and cash equivalents by $2,203,697, offset by decreases in accounts receivable of $192,887, inventories of $1,219,221, deposits, prepayment and other receivables of $335,622. In light of our working capital of $10,875,586 as at August 31, 2009, we believe that we had current and available capital resources sufficient to fund planned operations for the current fiscal year.

 

Trends

 

Currently, many companies in the cobalt product industry are looking to directly own cobalt producing mines which will provide direct access and supply to cobalt ore, the primary raw material in the cobalt product industry. In June 2007, we acquired certain rights to a cobalt mine in Africa. We anticipate that this acquisition will help us avoid export limitations imposed by the Congo, reduce freight expenses, and help ensure a stable supply of cobalt ore.

 

We are not aware of any trends, events or uncertainties that have or are reasonably likely to have a material impact on our short-term or long-term liquidity.

 

 

5

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Inflation

 

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

 

Material Commitments for Capital Expenditures

 

Currently, we own the prospecting and mining rights of a cobalt mine in Congo. We plan to start the construction of a processing plant in Congo in the second quarter of the 2010 fiscal year. We anticipate that the construction of the plant will cost approximately $2,000,000 to $3,000,000.

 

General

 

We believe that we currently have sufficient income generated from our operations to meet our operating and/or capital needs.

 

However, we will continue to evaluate various sources of capital to meet our growth requirements. Such sources will include debt financings, the issuance of equity securities, and entrance into other financing arrangements. There can be no assurance, however, that any of the contemplated financing arrangements described herein will be available and, if available, can be obtained on terms favorable to us.

 

Contractual Obligations and Commitments

We leased an office premise under a non-cancelable operating lease agreement for a period of ten years, due July 25, 2010. The annual lease payment is $6,698.

On June 9, 2007, our subsidiary, Dalian Xinyang High-Tech Development Co. Ltd (“DLXY”) entered into an African Mining Project Contract of Cooperation (the “Purchase Agreement”) with Shengbao Group and South African Shengbao Mining Enterprises (“Shengbao”). Pursuant to the Purchase Agreement, DLXY is obliged to purchase the prospecting and mining rights of a cobalt ore mine for a purchase price of $2 million over a term of 15 years.  As of August 31, 2009, DLXY had the capital commitment of $2 million in the purchase of the prospecting and mining rights which was contracted for but not provided in the financial statements.

Critical accounting policies and estimates

Revenue recognition

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

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

 

 

6

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Account receivables and allowance for doubtful accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. We extend unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’ assessment of known requirements, aging of receivables, payment history, the customers’ current credit worthiness and the economic environment. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

  New Financial Accounting Pronouncements

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140” ("FAS 166"). FAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. FAS 166 is effective for fiscal years beginning after November 15, 2009. The Company will adopt FAS 166 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” ("FAS 167"). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. FAS 167 is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. The Company will adopt FAS 167 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.

In June 2009, the FASB issued SFAS No. 168, “ The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles, ” (“Codification”), which supersedes all existing accounting standard documents and will become the single source of authoritative non-governmental U.S. GAAP. All other accounting literature not included in the Codification will be considered non-authoritative. The Codification was implemented on July 1, 2009 and will be effective for interim and annual periods ending after September 15, 2009. The Company expects to conform its consolidated financial statements and related notes to the new Codification for the quarter ending November 30, 2009.

Item 3.                      Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4.                      Controls and Procedures.

Evaluation of our Disclosure Controls

As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Based upon their controls evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective at a reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting during our first fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

7

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PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

There is no material legal proceeding pending against us.

Item 1A.

Risk Factors.

Not applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.

Defaults Upon Senior Securities.

None.

 

Item 4.

Submission of Matters to a Vote of Security Holders.

None.

Item 5.

Other Information.

In March 2009, the Company’s subsidiary, DLXY, entered into an agreement (the “Agreement”) with an independent third party, Mr. Wang Ka Gui to acquire the technology to develop a new product,

lithium iron phosphate, which is used as anode material for the new generation of lithium ion batteries.

Pursuant to the Agreement, Mr. Wang Ka Gui agreed to be bound by a confidentiality clause by which he would not re-sell or disclose the technology to a third party. The total purchase price of the technology was approximately $2,608,059 (equivalent to RMB17,800,000). Approval for the technology was granted to the Company in late August 2009.  A copy of the agreement is provided as Exhibit 10.1 to this 10-K hereto.

To make use of this technology, the Company has developed a production facility for the

manufacturing purpose of lithium ion batteries under this technology and the development project was

completed in September 2009.

Item 6.

Exhibits.

Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.

  

Exhibit No.		SEC Ref. No.		Title of Document
1		31.1		Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
2		10.1		Lithium Iron Phosphate Technology Transfer Agreement, dated March 5, 2009, by and between DLXY and Wang Ka Gui Technology Group.
3		31.2		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
4		32.1		Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
5		32.2		Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

8

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SIGNATURES

 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA SUN GROUP HIGH-TECH CO.
Date: October 15, 2009	By:	/s/ Bin Wang
		Name:  Bin Wang
		Title:   President, Chief Executive Officer and Chairman
		(Principle Executive Officer)

 

	.
Date: October 15, 2009	By:	/s/ Ming Fen Liu
		Name:  Ming Fen Liu
		Title:   Chief Financial Officer
		(Principle Executive Officer)

 

 

 

9