- Quarterly Report (10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

( Mark One)

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

 

For the quarterly period ended August 31, 2011

OR

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

 

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

¨  Yes  þ No

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

There are presently 55,962,971 shares of common stock, $0.001 par value, issued and outstanding as of October 3, 2011.

 

 

 

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TABLE OF CONTENTS

  

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements.	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	2
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	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.	(Removed and Reserved)	8
Item 5.	Other Information.	8
Item 6.	Exhibits.	9
Signatures		10

 

 

1

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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, 2011 and May 31, 2011 (Audited)		F-2
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended August 31, 2011 and 2010		F-3
Condensed Consolidated Statements of Cash Flows for the Three  Months Ended August 31, 2011 and 2010		F-4
Condensed Consolidated Statement of Stockholders’ Equity for the Three Months ended August 31, 2011		F-5
Notes to Condensed Consolidated Financial Statements		F-6 – 15

  

 

F-1

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CHINA SUN GROUP HIGH-TECH CO.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF AUGUST 31, 2011 AND MAY 31, 2011

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

		August 31, 2011				May 31, 2011
		(Unaudited)				(Audited)
ASSETS
Current assets:
Cash and cash equivalents		$	22,685,197			$	21,810,394
Accounts receivable, trade			4,716,245				2,465,862
Inventories			706,437				610,025
Deposits and prepayments			463,420				1,026
Total current assets			28,571,299				24,887,307
Non-current assets:
Technical know-how, net			2,417,935				2,420,278
Property, plant and equipment, net			27,771,575				27,805,208
TOTAL ASSETS		$	58,760,809			$	55,112,793
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade		$	150,819			$	-
Income tax payable			593,225				536,647
Other payables and accrued liabilities			1,113,046				1,163,324
Total liabilities			1,857,090				1,699,971
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized; none of shares issued and outstanding			-				-
Common stock, $0.001 par value; 100,000,000 shares authorized; 55,962,971 shares issued and outstanding as of August 31, 2011 and May 31, 2011			55,963				55,963
Additional paid-in capital			11,790,789				11,790,789
Accumulated other comprehensive income			6,463,022				5,457,233
Statutory reserve			3,342,358				3,342,358
Deferred compensation			(96,000	)			(96,000	)
Retained earnings			35,347,587				32,862,479
Total stockholders’ equity			56,903,719				53,412,822
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	58,760,809			$	55,112,793

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, 2011 AND 2010

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

(Unaudited)

		Three months ended August 31,
		2011				2010
Revenues, net		$	11,489,266			$	11,753,459
Cost of revenue (inclusive of depreciation and amortization)			7,637,851				8,046,456
Gross profit			3,851,415				3,707,003
Operating expenses:
Sales and marketing			37,199				31,326
Research and development			33,955				20,933
General and administrative			443,606				400,385
Total operating expenses			514,760				452,644
INCOME FROM OPERATIONS			3,336,655				3,254,359
Other income:
Interest income			13,573				10,639
INCOME BEFORE INCOME TAXES			3,350,228				3,264,998
Income tax expense			(865,120	)			(834,263	)
NET INCOME		$	2,485,108			$	2,430,735
Other comprehensive income:
- Foreign currency translation gain			1,005,789				107,243
COMPREHENSIVE INCOME		$	3,490,897			$	2,537,978
Net income per share – Basic and diluted		$	0.04			$	0.05
Weighted average common shares outstanding – Basic and diluted			55,962,971				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, 2011 AND 2010

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

(Unaudited)

 

		Three months ended August 31,
		2011				2010
Cash flows from operating activities:
Net income		$	2,485,108			$	2,430,735
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment			540,221				401,323
Amortization of technical know-how			45,996				43,601
Changes in operating assets and liabilities:
Accounts receivable, trade			(2,181,553	)			(106,097	)
Inventories			(84,361	)			630,519
Deposits and prepayments			(457,376	)			(6,736	)
Accounts payable, trade			149,188				(1,738,029	)
Income tax payable			46,282				(407,449	)
Other payables and accrued liabilities			(67,717	)			105,284
Net cash provided by operating activities			475,788				1,353,151
Cash flows from investing activities:
Purchase of plant and equipment			(5,151	)			(48,486	)
Net cash used in investing activities			(5,151	)			(48,486	)
Effect of exchange rate changes on cash and cash equivalents			404,166				47,228
NET CHANGE IN CASH AND CASH EQUIVALENTS			874,803				1,351,893
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			21,810,394				18,017,266
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	22,685,197			$	19,369,159
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes		$	818,838			$	1,241,712
Cash paid for interest		$	-			$	-

 

See accompanying notes to condensed consolidated financial statements.

 

 

F-4

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CHINA SUN GROUP HIGH-TECH CO.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED AUGUST 31, 2011

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

(Unaudited)

 

		Preferred stock								Common stock								Additional				Accumulated other																Total
		No. of share				Amount				No. of share				Amount				paid-in capital				comprehensive income				Statutory reserve				Deferred compensation				Retained earnings				stockholders’ equity
Balance as of June 1, 2011			-			$	-				55,962,971			$	55,963			$	11,790,789			$	5,457,233			$	3,342,358			$	(96,000	)		$	32,862,479			$	53,412,822
Net income for the period			-				-				-				-				-				-				-				-				2,485,108				2,485,108
Foreign currency translation adjustment			-				-				-				-				-				1,005,789				-				-				-				1,005,789
Balance as of August 31, 2011			-			$	-				55,962,971			$	55,963			$	11,790,789			$	6,463,022			$	3,342,358			$	(96,000	)		$	35,347,587			$	56,903,719

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, 2011

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

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

 

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

 

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 People Republic of China (the “PRC”), mainly engages in the production and sales of cobaltosic oxide and lithium iron phosphate, both anode materials used in lithium ion rechargeable batteries in the PRC.

 

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.

 

·	Use of estimates

 

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

 

·	Basis of consolidation

 

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

 

 

F-6

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CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2011

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

(Unaudited)

 

·	Cash and cash equivalents

 

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

 

The Company maintains cash balances at one financial institution in the PRC, which are insured by China Citic Bank. The Company has cash concentration risk of $22,684,648 as of August 31, 2011.

 

·	Accounts receivable

 

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

 

·	Inventories

 

Inventories include material, labor and manufacturing overhead and are stated at lower of cost or market value, cost being determined on a weighted average method. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of August 31, 2011, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.

 

·	Technical know-how

 

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

 

Amortization expense for the three months ended August 31, 2011 and 2010 were $45,996 and $43,601, respectively, which was recorded in cost of revenue.

 

·	Property, plant and equipment

 

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

 

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

 

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

 

Depreciation expense for the three months ended August 31, 2011 and 2010 were $540,221 and $401,323, which included $479,060 and $335,000 in cost of revenue, respectively.

 

 

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, 2011

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

(Unaudited)

 

·	Valuation of long-lived assets

 

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

 

·	Revenue recognition

 

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

 

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

 

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

 

·	Comprehensive income

 

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

 

·	Income taxes

 

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

 

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

 

 

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, 2011

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

(Unaudited)

For the three months ended August 31, 2011 and 2010, the Company did not have any interest and penalties associated with tax positions. As of August 31, 2011, the Company did not have any significant unrecognized uncertain tax positions.

 

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

 

·	Net income per share

 

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

 

·	Foreign currencies translation

 

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

 

The reporting currency of the Company is United States Dollar ("US$"). The Company's subsidiaries in the PRC, maintain their books and records in their local currency, Renminbi Yuan ("RMB"), which is 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 ASC Topic 830-30, “ Translation of Financial Statement ”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

 

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

 

		August 31, 2011				August 31, 2010
Period-end RMB:US$1 exchange rate			6.3801				6.8130
Average period RMB:US$1 exchange rate			6.4498				6.8041

 

·	Related parties

 

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

 

·	Segment reporting

 

ASC Topic 280,  “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in the financial statements. For the three months ended August 31, 2011, the Company operates one reportable business segment in the PRC.

 

 

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, 2011

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

(Unaudited)

 

·	Fair value of financial instruments

 

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

 

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

 

o

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

 

o

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

 

o

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

 

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

 

·	Recent accounting pronouncements

 

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

 

NOTE － 4      ACCOUNTS RECEIVABLE

 

The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, the Company has determined that no allowance for doubtful accounts is required for the periods ended August 31, 2011 and 2010.

 

NOTE － 5      OTHER PAYABLES AND ACCRUED LIABILITIES

 

Other payables and accrued liabilities consisted of:

 

		August 31, 2011				May 31, 2011
VAT payable		$	355,886			$	216,198
Welfare payable			446,323				438,326
Payable to equipment vendors			32,915				223,043
Accrued operating expenses			149,922				157,757
Other payable			128,000				128,000
Other payables and accrued liabilities		$	1,113,046			$	1,163,324

 

 

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, 2011

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

(Unaudited)

NOTE － 6      INCOME TAXES

 

For the three months ended August 31, 2011 and 2010, the local (“United States of America”) and foreign components of income before income taxes were comprised of the following:

 

		Three months ended August 31,
		2011				2010
Tax jurisdiction from:
– Local		$	(117,327	)		$	(78,761	)
– Foreign			3,467,555				3,343,759
Income before income taxes		$	3,350,228			$	3,264,998

 

The provision for income taxes consisted of the following:

 

		Three months ended August 31,
		2011				2010
Current tax:
– Local		$	-			$	-
– Foreign			865,120				834,263
Deferred tax:
– Local			-				-
– Foreign			-				-
Income tax expense		$	865,120			$	834,263

 

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, 2011, the operation in the United States of America incurred $3,815,903 of cumulative operating losses carryforwards for federal tax purposes, which are available to offset future taxable income. The net operating loss carryforwards begin to expire in 2030, if unutilized. The Company has provided for a full valuation allowance for any future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.

 

 

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, 2011

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

(Unaudited)

 

The PRC

 

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

 

The reconciliation of income tax rate to the effective income tax rate based on income before income taxes from the operation in the PRC for the three months ended August 31, 2011 and 2010 are as follows:

 

		Three months ended August 31,
		2011				2010
Income before income taxes		$	3,467,555			$	3,343,759
Income statutory tax rate			25	%			25	%
Income taxes calculated at statutory income tax rate			866,889				835,940
Tax effect of non-deductible items			(1,769	)			(1,677	)
Income tax expense		$	865,120			$	834,263

 

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

 

		August 31, 2011				May 31, 2011
Deferred tax assets:
- Net operating loss carryforwards		$	1,297,407			$	1,257,516
Less: valuation allowance			(1,297,407	)			(1,257,516	)
Deferred tax assets		$	-			$	-

 

As of August 31, 2011 and May 31, 2011, the Company has provided for a full valuation allowance against the aggregate deferred tax assets of $1,297,407 and $1,257,516 on the expected future tax benefits from the net operating losses carryforwards as the management believes it is more likely than not that these assets will not be realized in the future. For the three months ended August 31, 2011, the valuation allowance increased by $39,891, primarily relating to net operating losses carryforwards from the local tax regime.

 

NOTE － 7      SEGMENT INFORMATION BY PRODUCTS

 

The Company operates in one reportable operating segment in the production and sales of batteries material in the PRC, as defined by ASC Topic 280. Summarized financial information concerning the Company’s major products is shown in the following table for the three months ended August 31, 2011 and 2010:

 

		Three months ended August 31,
		2011				2010
Lithium iron phosphate		$	4,115,518			$	2,600,013
Cobaltosic oxide			7,373,748				9,153,446
		$	11,489,266			$	11,753,459

 

 

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, 2011

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

(Unaudited)

 

NOTE － 8      CONCENTRATIONS OF RISK

 

The Company is exposed to the following concentrations of risk:

 

(a)         Major customers

 

For the three months ended August 31, 2011 and 2010, the customer who accounts for 10% or more of revenues of the Company and its outstanding balance at the period-end are presented as follows:

 

		Three months ended August 31, 2011								August 31, 2011
		Revenues				Percentage of revenues				Trade accounts receivable
Customer A		$	2,192,751				19	%		$	486,086
Customer B			1,519,990				13	%			550,148
Customer C			1,409,353				12	%			634,177
Customer D			1,345,183				12	%			582,836
Customer E			1,229,344				11	%			470,212
Customer F			1,188,869				10	%			470,927
Total:		$	8,885,490				77	%		$	3,194,386

		Three months ended August 31, 2010								August 31, 2010
		Revenues				Percentage of revenues				Trade accounts receivable
Customer B		$	1,604,079				14	%		$	691,245
Customer C			1,933,665				16	%			557,712
Customer D			2,140,839				18	%			-
Customer E			1,421,390				12	%			-
Customer G			1,235,872				11	%			297,094
Total:		$	8,335,845				71	%		$	1,546,051

 

All of the customers are located in the PRC.

 

(b)	Major vendors

 

For the three months ended August 31, 2011 and 2010, the vendor who accounts for 10% or more of purchases of the Company and its outstanding balance at the period-end are presented as follows:

 

		Three months ended August 31, 2011								August 31, 2011
		Purchases				Percentage of purchase				Accounts payable
Vendor A		$	2,807,468				41	%		$	-
Vendor B			1,235,373				18	%			-
Vendor C			1,211,254				18	%			22,765
Total:		$	5,254,095				77	%		$	22,765

 

 

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, 2011

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

(Unaudited)

 

		Three months ended August 31, 2010								August 31, 2010
		Purchases				Percentage of purchase				Accounts payable
Vendor A		$	2,495,799				38	%		$	300,976
Vendor B			1,389,693				21	%			-
Vendor C			1,760,441				27	%			-
Vendor D			803,835				12	%			-
Total:		$	6,449,768				98	%		$	300,976

 

All of the vendors are located in the PRC.

 

(c)         Credit risk

 

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

 

(d)        Exchange rate risk

 

The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ 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.

 

(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 － 9       COMMITMENTS AND CONTINGENCIES

 

The Company’s subsidiary operating in PRC was committed under several non-cancelable operating leases for the terms from 5 to 10 years, with monthly rentals, due through July 2020. Costs incurred under this operating lease are recorded as rental expense and totaled approximately $3,101 and $2,939 for the three months ended August 31, 2011 and 2010.

 

As of August 31, 2011, the Company has the future minimum rental payments under the operating lease agreement in the next five years and thereafter, as follow:

 

 

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, 2011

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

(Unaudited)

 

Year ending August 31,
2012		$	17,055
2013			17,055
2014			17,055
2015			17,055
2016			12,403
Thereafter			47,547
Total:		$	128,170

 

NOTE － 10    SUBSEQUENT EVENTS

 

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

 

 

F-15

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

 

We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under this item as well as items elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.

 

The nature of our business makes predicting the future trends of our revenues, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the factors discussed above in the section entitled “Risk Factors” and the following:

 

·	the effect of political, economic, and market conditions and geopolitical events;

·	legislative and regulatory changes that affect our business;

·	the availability of funds and working capital;

·	the actions and initiatives of current and potential competitors;

·	investor sentiment; and

·	our reputation.

 

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

 

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

 

Overview

 

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

 

At August 31, 2011 we had 12 production lines and corollary process flow equipment, with a total annual production capacity of 2,500 tons.

 

Since 2007, we have pursued a market-oriented strategy by engaging in the manufacturing, marketing and distribution of cobaltosic oxide. In 2008 we successfully developed proprietary processes for the manufacture of lithium iron phosphate (“LIP”), which is quickly becoming the preferred cathode material for lithium ion batteries.  The increase in sales of LIP is the primary reason for the substantial increase in our revenues and gross margins in 2011.  We believe that sales from LIP will continue to represent a larger percentage of our revenues and gross margins in the near future.

 

 

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Since we began manufacturing LIP in quantity in the second quarter of fiscal year 2011, we have focused on expanding sales and increasing production of LIP. By the end of fiscal year 2011, six of our ten cobaltosic oxide production lines have been converted to lithium iron phosphate production lines, while the remaining four production lines continue to produce cobaltosic oxide. We plan to increase the manufacturing capacity for lithium iron phosphate by converting two additional production lines, if market conditions allow.

 

Our current operations and all of our customers are based in China. China is the world leader in the manufacture of lithium ion batteries and the second largest exporter. The production of lithium ion batteries and lithium-related products in China increased by 82% in 2010 compared to 2009.  In addition, the PRC government has announced a national electric automobile strategy and is expected to spend up to US $15 billion in the next decade on this strategy. The national electric automobile strategy is an important part of the PRC’s Twelfth Five-Year Plan. It is expected that 1 million electric automobiles would be put to use by 2015 and that a critical component of these automobiles would be lithium ion batteries.

 

Management believes that our proprietary innovative technologies and processes, access to cheap labor, stable supply of low-cost raw materials and state-of-the-art equipment positions us to benefit from these growth opportunities.

 

For the three months ended August 31, 2011, we produced 240 tons of cobaltosic oxide and 217 tons of lithium iron phosphate.

 

Since June 2010, we adjusted our business strategy from mass-production to production based on customers’ needs and the availability of supporting products. During the three months ended August 31, 2011, our major customers were Henan Huanyu Sai Er New Energy Technology Co., Ltd (“Huanyu”), CITIC Guo’an Mengguli Ltd, Guangzhou Hongsen Material Co., Ltd. Tianjin B&M Science and Technology Ltd ; Dalian Dahua International Trade Co., Ltd.and Beijing Easpring Co., Ltd .   The sales to these customers totaled 77% of our sales volume of 457 tons for the three months ended August 31, 2011. We have also entered into Supply Agreements with the foregoing customers to supply them with lithium iron phosphate. They will continue to be our key customers for the rest of fiscal year 2012. We are working persistently to increase our customer base in Shenzhen and Shandong.

 

Results of Operations

 

Comparison of Three Months Ended August 31, 2011 to Three Months Ended August 31, 2010

 

Net Revenue

 

Net revenue for the three months ended August 31, 2011 was $11,489,266, compared to $11,753,459 for the three months ended August 31, 2010, a decrease of $264,193 or 2.2%.  One hundred percent (100%) of the net revenue decrease was attributed to a decrease in sales of our old product cobaltosic oxide. Sales of cobaltosic oxide for the three months ended August 31, 2011 totaled 240 tons and $7,373,748, a decrease of 48 tons and $1,779,698, or 17% in quantity and 19% in dollar value, from 288 tons and $9,153,446 for the comparable period in 2010, while sales of lithium iron phosphate for the three months ended August 31, 2011 totaled 217 tons and $4,115,518, an increase of 84.12 tons and $1,515,505, or 63% in quantity or 58% in dollar value, from 132.88 tons and $2,600,013 for the comparable period in 2010.

 

Changes in Sales Amount and Volume

 

		Sales Amount $)								Change
Product		Q1 of 2012				Q1 of 2011				$				%
Cobaltosic oxide			7,373,748				9,153,446				-1,779,698				-19	%
Lithium iron phosphate			4,115,518				2,600,013				1,515,505				58	%
Total			11,489,266				11,753,459				-264,193				-2.2	%

 

		Sales Volume (Ton)								Change
Product		Q1 of 2012				Q1 of 2011				Tons				%
Cobaltosic oxide			240				288				-48				-17	%
Lithium iron phosphate			217				132.88				84.12				63	%
Total			457				420.88				36.12				8.5	%

 

 

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Cost of Revenue

 

Cost of revenue for the three months ended August 31, 2011was $7,637,851, compared to $8,046,456 for the three months ended August 31, 2010, a decrease of $408,605 or 5%. This decrease in cost of revenue resulted from the decrease in sales.

 

Gross Profit

 

Gross profit for the three months ended August 31, 2011 was $3,851,415, an increase of $144,412 or 3.9% from $3,707,003 for the three months ended August 31, 2010.  One hundred percent (100%) of the increase in gross profit was attributable to an increase in sales of our new product, lithium iron phosphate.  The gross profit margins for cobaltosic oxide and lithium iron phosphate are 23% and 52%, respectively.

 

Sales and Marketing Expenses

 

Sales and marketing expenses for the three months period ended August 31, 2011 totaled $37,199, compared to $31,326 for the three months ended August 31, 2010, an increase of $5,873 or 18.7%. The increase was primarily attributable to the salary raise for the sales personnel.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended August 31, 2011 was $443,606, compared to  $400,385 for the three months ended August 31, 2010, an increase of $43,221 or 10.8%. The increase  in general and administrative expenses was primarily due to the promotion expenses of $14,719 paid to PR newswire, consulting expenses of $10,000 and the director fees of $7,500 incurred during the three months ended August 31, 2011, while there was no such expense incurred during the three months ended August 31, 2010.

 

Research and Development Expenses

 

Research and development expenses for the three months ended August 31, 2011 were $33,955, compared to $20,933 for the three months ended August 31, 2010, an increase of $13,022 or 62%. The increase was primarily attributable to an increase in salaries paid to research and development personnel.

 

Income from Operations

 

Income from operations for the three months ended August 31, 2011 was $3,336,655, an increase of $82,296 or 2.5%, compared to $3,254,359 for the three months ended August 31, 2010.  There was no significant fluctuation in income from operations.

 

Other Income

 

Other income for the three months ended August 31, 2011 was $13,573, compared to other income of $10,639 for the three months ended August 31, 2010, an increase of $2,934 or 27.6% .The increase resulted primarily from an increase in interest income on deposits incurred during the three months ended August 31, 2011compared to the three months ended August 31, 2010.

 

Income Taxes

 

Provisions for income tax expenses were $865,120 for the three months ended August 31, 2011compared to $834,263 for the three months ended August 31, 2010, an increase of $30,857 or 3.7%.  The increase resulted primarily from the increase in gross profit and hence profit before taxation in the Company’s PRC subsidiaries.  The Company was established under the laws of the State of Delaware and is subject to U.S. federal income tax and Delaware annual reporting requirements. No provision for income taxes in the United States has been made as the Company has no income taxable in the United States. The Company’s PRC subsidiaries expect to use their retained earnings to support their PRC operations, and do not expect to declare any dividends within the foreseeable future.

 

 

4

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Foreign Currency Translation Gain

 

The foreign currency translation gain for the three months ended August 31, 2011 was $1,005,789, an increase of $898,546 or 838% as compared to $107,243 for the same period in 2010. The increase was resulted from  devaluation of US dollar.

 

Net Income

 

Net income for the three months ended August 31, 2011 was $2,485,108, an increase of $54,373 or 2.2% as compared to the net income of $2,430,735 for the three months ended August 31, 2010.  The increase resulted primarily from the increase in gross profit and hence profit before taxation in the Company’s PRC subsidiaries.

 

Liquidity and Capital Resources

 

Cash and Cash Equivalents

 

Our cash and cash equivalents were $21,810,394 at the beginning of the three months ended August 31, 2011, and increased to $22,685,197 at the end of the three months ended August 31, 2011, an increase of $874,803 or 4%. This net change in cash and cash equivalents represents the combined effects of cash generated in the total amount of $475,788 from operating activities, and effects of exchange rate changes of $404,166 offset by cash used in the total amount of $5,151 from investing activities for the three months ended August 31, 2011.

 

On August 31, 2011, the majority of our cash was held in RMB denominated bank deposits in the PRC financial institution.

 

Our decision to maintain high cash reserves is mainly based upon (1) the projected need for new manufacturing equipment for lithium iron phosphate production in fiscal 2012 estimated to be approximately $7.44 million , (2) the projected conversion of two additional lithium iron phosphate production lines during Q2 of fiscal year 2012 and the relevant capital expenditure forecasted to be approximately $8 million, and (3) the projected purchase of new R&D equipment in the amount of approximately $3 million in fiscal year 2012.

 

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

 

Net Cash Provided by Operating Activities

 

Net cash provided by our operating activities was $475,788 for the three months ended August 31, 2011, a decrease of $877,363 or 64.8% as compared to the cash of $1,353,151 provided by operating activities for the same period in 2010. The net cash provided by operating activities was primarily due to the net income of $2,485,108, the increase in accounts payable of $149,188, and the increase in income tax payable of $46,282 which offset by an increase in accounts receivable of $2,181,553, the increase in inventory of $84,361, the increase in deposits and prepayments of $457,376 and the decrease in other payables and accrued liabilities of $67,717 for the three months ended August 31, 2011.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities was $5,151 for the three months ended August 31, 2011. The cash outflow was attributable to the purchase of plant and equipment in the amount of $5,151 during the three months ended August 31, 2011.

 

Net cash used in financing activities

 

There was no net cash generated or used for financing activities for the three months ended August 31, 2011.

 

Income Taxes

 

Cash paid for income tax expense was $818,838 for the three months ended August 31, 2011.

 

 

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.

 

General

 

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

 

Contractual Obligations and Commitments

 

We are committed under several non-cancelable operating lease agreements, with terms from five to ten years, due through July 25, 2020. Annual lease payments are $17,055 over the next four years, $12,403 for the fifth year and $47,547 for periods thereafter. We have a minimum rental payment obligation totaling $128,170.

 

On November 30, 2010, DLXY entered into an unconditional 2011 Supply Agreement for Dynamic Lithium Battery Materials with Huanyu.  Pursuant to the terms of the Supply Agreement, we are obligated to supply a minimum of 470 tons of lithium iron phosphate to Huanyu during the 2011 calendar year. At August 31, 2011, we have supplied 341.22 tons of lithium iron phosphate to Huanyu.  The purchase price of the lithium iron phosphate and other relevant commercial terms and conditions are determined by the parties on a monthly basis.

 

On April 20, 2011, DLXY entered into an unconditional 2011 Supply Agreement for Dynamic Lithium Battery Materials with ABAT.  Pursuant to the terms of the Supply Agreement, we are obligated to supply a total of 170 tons of lithium iron phosphate materials to ABAT during the 2011 calendar year. At August 31, 2011, we supplied 52.94 tons of lithium iron phosphate to ABAT.  The purchase price of the lithium iron phosphate materials and other relevant commercial terms and conditions are determined by the parties on a monthly basis.

 

Critical Accounting Policies

 

Revenue recognition

 

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

 

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

 

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

 

Accounts receivables and allowance for doubtful accounts

 

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

 

 

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Foreign currencies translation

 

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

 

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

 

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

 

New Financial Accounting Pronouncements

 

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

 

Item 3.         Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

Item 4.         Controls and Procedures.

 

Evaluation of Our Disclosure Controls

 

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

 

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

 

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

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal controls over financial reporting during the quarter ended August 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Limitations on the Effectiveness of Disclosure Controls and Procedures

 

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

 

 

7

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PART II – OTHER INFORMATION

 

Item 1.         Legal Proceedings.

 

We know of no material legal proceeding pending against us.

 

Item 1A.      Risk Factors.

 

Not applicable.

 

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

 

None.

 

Item 3.         Defaults Upon Senior Securities.

 

None.

 

Item 4.         (Removed and Reserved.)

 

Item 5.         Other Information.

 

None.

 

 

8

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Item 6.         Exhibits.

 

EXHIBIT INDEX

 

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

 

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SIGNATURES

 

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

 

	CHINA SUN GROUP HIGH-TECH CO.
Date: October 14, 2011	By:	/s/ Guosheng Fu
		Name: Guosheng Fu
		Title: Chief Executive Officer
		(Principle Executive Officer)

 

Date: October 14, 2011	By:	/s/ Ming Fen Liu
		Name: Ming Fen Liu
		Title: Chief Financial Officer
		(Principle Executive Officer)

 

 

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