WEB NEWS Auditor trail
Item 4.01. Changes in Registrant’s Certifying Accountant.
China Education Alliance, Inc. (the “Company”) was notified that, effective April 30, 2016, AWC (CPA) Limited (“AWC”) has merged (the “Merger”) with Dominic K.F. Chan & Co (“DKFC”) and formed DCAW (CPA) Limited (“DCAW”), which is registered with the Public Company Accounting Oversight Board (PCAOB).
As a result of the Merger, AWC resigned as the Company’s independent registered public accounting firm on April 30, 2016. On May 12, 2016, the Company engaged DCAW (CPA) Limited as its independent registered public accounting firm. The engagement of DCAW was approved by the Audit Committee of the Company’s board of directors on May 12, 2016.
The audit reports of AWC on the financial statements of the Company as of and for the years ended December 31, 2014 and 2013 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
Comments & Business Outlook
Item 2.01. Completion of Acquisition or Disposition of Assets.
On December 31, 2015, China Education Alliance, Inc., a North Carolina corporation (the “Company”) sold its 60% equity interest in Harbin Tianlang Culture and Education School (“Tianlang”) to Zhi Yang, a holder of Tianlang’s remaining 40% equity interest (the “Purchaser”), for a total cash consideration of RMB 3,000,000 yuan (approximately $458,193). The sale of the equity interest in Tianlang was made pursuant to an equity transfer agreement dated December 31, 2015 (the “Agreement”), by and between the Purchaser and Harbin Zhong He Li Da Education Technology, Inc., the Company’s wholly owned subsidiary (“ZHLD”). Pursuant to the Agreement, the Purchaser paid RMB 300,000 yuan (approximately $45,819) to ZHLD upon execution of the Agreement and will pay the reminder upon completion of the registration of the change in equity interest holders with relevant authorities.
Comments & Business Outlook
Three months ended September 30,
Nine months ended September 30,
2015
2014
2015
2014
Revenue
Online education revenue
$
83,465
$
134,879
$
252,444
$
392,526
Training center revenue
83,030
936,700
290,491
1,993,285
Total revenue
166,495
1,071,579
542,935
2,385,811
Cost of Revenue
Online education costs
1,007,182
1,062,915
3,116,396
3,170,379
Training center costs
72,424
590,279
352,202
1,365,283
Total cost of revenue
1,079,606
1,653,194
3,468,598
4,535,662
Gross Profit/(Loss)
Online education gross loss
(923,717
)
(928,036
)
(2,863,952
)
(2,777,853
)
Training center gross profit
10,606
346,421
(61,711
)
628,002
Total gross loss
(913,111
)
(581,615
)
(2,925,663
)
(2,149,851
)
Operating Expenses
Selling expenses
752,592
3,398,742
2,529,595
5,794,444
Administrative expenses
4,599,770
9,742,804
14,863,893
18,447,595
Depreciation and amortization
275,149
742,605
1,024,774
1,758,769
Total operating expenses
5,627,511
13,884,151
18,418,262
26,000,808
Loss from operations
(6,540,622
)
(14,465,766
)
(21,343,925
)
(28,150,659
)
Other Income (Expense)
Other income(expenses), net
(777
)
(6,891
)
(1,018
)
31,132
Loss on disposal of property and equipment
(16,586
)
(385
)
(47,831
)
(16,547
)
Impairment loss on intangible assets
5,798
-
(620,124
)
-
Interest income
6,729
35,663
36,665
123,533
Total other income/(Expense), net
(4,836
)
28,387
(632,308
)
138,118
Net Loss Before Provision for Income Tax
(6,545,458
)
(14,437,379
)
(21,976,233
)
(28,012,541
)
Income taxes:
Current
-
-
-
-
Deferred
-
-
-
-
Net Loss
(6,545,458
)
(14,437,379
)
(21,976,233
)
(28,012,541
)
Net Loss attributable to the noncontrolling interests
(2,301
)
2,762
(383,774
)
(203,563
)
Net Loss - attributable to CEAI and Subsidiaries
$
(6,543,157
)
$
(14,440,141
)
$
(21,592,459
)
$
(27,808,978
)
Net Loss per common stock-basic and diluted
$
(0.62
)
$
(1.36
)
$
(2.04
)
$
(2.63
)
Weighted Average Shares Outstanding-basic and diluted
10,582,530
10,582,530
10,582,530
10,582,530
The Components of Other Comprehensive Income
Net Loss
$
(6,543,157
)
$
(14,440,141
)
$
(21,592,459
)
$
(27,808,978
)
Foreign currency translation adjustment
(537,225
)
55,794
(350,745
)
(395,643
)
Comprehensive Loss
$
(7,080,382
)
$
(14,384,347
)
$
(21,943,204
)
$
(28,204,621
)
Management Discussion and Analysis
Revenue for the three months ended September 30, 2015 (the “September 30, 2015 Quarter”) decreased by $905,084, or 84%, to $166,495 from $1,071,579 for the three months ended September 30, 2014 (the “September 30, 2014 Quarter”).
Revenue from the online education division includes revenue generated from online examination orientated material downloads, tutorial exercise downloads, and advertisement income. Revenue generated by the online education division decreased by $51,414, or 38%, to $83,465 for the September 30, 2015 Quarter from $134,879 for the September 30, 2014 Quarter.
Revenue from the training center division is mostly from after school tutoring for primary and middle school students. Revenue generated by the training center division decreased by $853,670, or 91% to $83,030 for the September 30, 2015 Quarter from $936,700 for the September 30, 2014 Quarter.
The decline in revenue for the quarter ended September 30, 2015 was a result of decline in revenue across all of our business due to continuously weakening brand recognition in the main targeted market and increased competition from new competitors. One of our tutoring schools, Tianlang, continues to be affected by the policy of Harbin local government prohibiting teachers of public schools from engaging in any tutoring/training activities outside of public schools as it had to cut its class offerings dramatically as a result of these policies since the last quarter of 2014 and has not been able to locate and hire qualified non-public school teachers to restore its operations to the prior scale.
Despite our belief in the opportunities presented by the rise of the online education industry in China and our continuous efforts on the development and promotion of our online education Platform launched in October 2014, we have not been successful in turning over our online education business. Since the launch of the Platform to the date of this report, we have been offering free access to the Platform to teachers and students aiming to quickly develop the user base and achieve a leading position within the industry. However, we did not achieve our original plan. As such we decided to extend the free trial period for additional six months in order to retain the existing schools and further market and promote our Platform. However, there can be no assurance that we will be able to attract enough educational institutions and teachers as planned during the extended period and if we fail, our revenue will be adversely affected.
As a result of the foregoing, we had net loss attributable to the Company and its subsidiaries of $6,543,157, or negative return of $0.62 per share basic and diluted, for the September 30, 2015 Quarter, as compared to net loss of $14,440,141 or negative return of $1.36 per share basic and diluted, for the September 30, 2014 Quarter.
Comments & Business Outlook
China Education Alliance, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
Three months ended June 30,
Six months ended June 30,
2015
2014
2015
2014
Revenue
Online education revenue
$
85,199
$
130,383
$
168,979
$
257,647
Training center revenue
101,592
459,155
207,461
1,056,585
Total revenue
186,791
589,538
376,440
1,314,232
Cost of Revenue
Online education costs
1,042,140
1,072,595
2,109,214
2,107,464
Training center costs
156,521
377,479
279,778
775,004
Total cost of revenue
1,198,661
1,450,074
2,388,992
2,882,468
Gross Profit/(Loss)
Online education gross loss
(956,941
)
(942,212
)
(1,940,235
)
(1,849,817
)
Training center gross profit/(loss)
(54,929
)
81,676
(72,317
)
281,581
Total gross loss
(1,011,870
)
(860,536
)
(2,012,552
)
(1,568,236
)
Operating Expenses
Selling expenses
884,813
1,185,254
1,777,003
2,395,702
Administrative expenses
5,096,159
5,001,944
10,264,123
8,704,791
Depreciation and amortization
304,909
523,968
749,625
1,016,164
Total operating expenses
6,285,881
6,711,166
12,790,751
12,116,657
Loss from operations
(7,297,751
)
(7,571,702
)
(14,803,303
)
(13,684,893
)
Other Income (Expense)
Other income(expenses), net
(830
)
9,967
(241
)
38,023
Loss on disposal of property and equipment
(21,109
)
(10,709
)
(31,245
)
(16,162
)
Impairment loss on intangible assets
(625,922
)
-
(625,922
)
-
Interest income
12,459
42,284
29,936
87,870
Total other income/(expense), net
(635,402
)
41,542
(627,472
)
109,731
Net Loss Before Provision for Income Tax
(7,933,153
)
(7,530,160
)
(15,430,775
)
(13,575,162
)
Income taxes:
Current
-
-
-
-
Deferred
-
-
-
-
Net Loss
(7,933,153
)
(7,530,160
)
(15,430,775
)
(13,575,162
)
Net Loss attributable to the noncontrolling interests
(326,805
)
(138,388
)
(381,473
)
(206,325
)
Net Loss - attributable to CEAI and Subsidiaries
$
(7,606,348
)
$
(7,391,772
)
$
(15,049,302
)
$
(13,368,837
)
Net Loss per common stock-basic and diluted
$
(0.72
)
$
(0.70
)
$
(1.42
)
$
(1.26
)
Weighted Average Shares Outstanding-basic and diluted
10,582,530
10,582,530
10,582,530
10,582,530
The Components of Other Comprehensive Income
Net Loss
$
(7,606,348
)
$
(7,391,772
)
$
(15,049,302
)
$
(13,368,837
)
Foreign currency translation adjustment
109,653
60,654
186,480
(451,437
)
Comprehensive Loss
$
(7,496,695
)
$
(7,331,118
)
$
(14,862,822
)
$
(13,820,274
)
Management Discussion and Analysis
Revenue
Revenue from the online education division includes revenue generated from online examination orientated material downloads, tutorial exercise downloads, and advertisement income. Revenue generated by the online education division decreased by $45,184, or 35%, to $85,199 for the June 30, 2015 Quarter from $130,383 for the June 30, 2014 Quarter.
Revenue from the training center division is mostly from after school tutoring for primary and middle school students. Revenue generated by the training center division decreased by $357,563, or 78% to $101,592 for the June 30, 2015 Quarter from $459,155 for the June 30, 2014 Quarter.
The decline in revenue for the quarter ended June 30, 2015 was a result of decline in revenue across all of our business. We believe the main reason was our continuously weakening brand recognition in the main targeted market and increased competition from new competitors. In addition, in the middle of 2014, the local government in Harbin announced policies prohibiting teachers of public schools from engaging in any tutoring/training activities outside of public schools. Since all the teachers previously hired by Tianlang were public school teachers, Tianlang had to cut its class offerings dramatically as a result of these policies, which directly affected our revenue for the training center division. Although we strive to locate and hire qualified non-public school teachers, we are unable to restore our teaching/training operations to the prior scale within a short period of time. We do not foresee any notable improvement on our training center division for the coming quarter due to the limited availability of qualified non-public school teachers, therefore, we conducted an impairment test on Tianlang as of June 30, 2015, and recognized an impairment loss of $625,922 for the June 30, 2015 Quarter.
However, we believe the rise of the online education industry in China presents a good opportunity for us to improve and develop our online education business. We have been focusing on the development and promotion of our online education business and launched the Platform in October 2014.
During the initial operation period of the Platform, we offer free access to the platform to teachers and students in order to quickly develop the user base and establish an interactive teaching and learning platform with an aim to achieve a leading position within the industry. After this initial promotion period, we will share with teachers and educational institutions the platform usage, maintenance and service fees paid by students. Our plan is to contract up to one thousand educational institutions and reputable teachers in China by the end of 2015. As of the date of this report, we have entered into agreements with over 100 schools and educational institutions that will use our Platform and services to offer live or on demand online courses. We hope that the Platform will start to generate revenue upon expiration of the one year free trial period. However, there can be no assurance that we will be able to sign up educational institutions and teachers as planned and if we fail, our revenue will be adversely affected.
Net Loss
As a result of the foregoing, we had net loss attributable to the Company and its subsidiaries of $7,606,348, or negative return of $0.72 per share basic and diluted, for the June 30, 2015 Quarter, as compared to net loss of $7,391,772 or negative return of $0.70 per share basic and diluted, for the June 30, 2014 Quarter.
Comments & Business Outlook
China Education Alliance, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
Three months ended March 31,
2015
2014
Revenue
Online education revenue
$
83,780
$
127,264
Training center revenue
105,869
597,430
Total revenue
189,649
724,694
Cost of Revenue
Online education costs
1,067,074
1,034,869
Training center costs
123,257
397,525
Total cost of revenue
1,190,331
1,432,394
Gross Profit/(Loss)
Online education gross loss
(983,294
)
(907,605
)
Training center gross profit
(17,388
)
199,905
Total gross loss
(1,000,682
)
(707,700
)
Operating Expenses
Selling expenses
892,190
1,210,448
Administrative expenses
5,167,964
3,702,847
Depreciation and amortization
444,716
492,196
Total operating expenses
6,504,870
5,405,491
Loss from operations
(7,505,552
)
(6,113,191
)
Other Income (Expense)
Other income(expenses), net
589
28,056
Loss on disposal of property and equipment
(10,136
)
(5,453
)
Impairment loss on intangible assets
-
-
Interest income
17,477
45,586
Total other income/(Expense), net
7,930
68,189
Net Loss Before Provision for Income Tax
(7,497,622
)
(6,045,002
)
Income taxes:
Current
-
-
Deferred
-
-
Net Loss
(7,497,622
)
(6,045,002
)
Net Loss attributable to the noncontrolling interests
(54,668
)
(67,937
)
Net Loss - attributable to CEAI and Subsidiaries
$
(7,442,954
)
$
(5,977,065
)
Net Loss per common stock-basic and diluted
$
(0.70
)
$
(0.56
)
Weighted Average Shares Outstanding-basic and diluted
10,582,530
10,582,530
The Components of Other Comprehensive Income
Net Loss
$
(7,442,954
)
$
(5,977,065
)
Foreign currency translation adjustment
76,827
(512,091
)
Comprehensive Loss
$
(7,366,127
)
$
(6,489,156
)
Mana gement Discus sion and Analysis
Revenue
Revenue for the quarter ended March 31, 2015 decreased by $535,045, or 74%, to $189,649 from $724,694 for the quarter ended March 31, 2014.
Revenue from the online education division includes revenue generated from online examination orientated material downloads, tutorial exercise downloads, and advertisement income. Revenue generated by the online education division decreased by $43,484, or 34%, to $83,780 for the quarter ended March 31, 2015 from $127,264 for the quarter ended March 31, 2014.
Revenue from the training center division is mostly from after school tutoring for primary and middle school students. Revenue generated by the training center division decreased by $491,561, or 82% to $105,869 for the quarter ended March 31, 2015 from $597,430 for the quarter ended March 31, 2014.
The decline in revenue for the quarter ended March 31, 2015 was a result of decline in revenue across all of our business. We believe the main reason was our continuously weakening brand recognition in the main targeted market and increased competition from new competitors. In addition, in the middle of 2014, the local government in Harbin announced policies prohibiting teachers of public schools from engaging in any tutoring/training activities outside of public schools. Since all the teachers previously hired by Tianlang were public school teachers, Tianlang had to cut its class offerings dramatically as a result of these policies, which directly affected our revenue for the training center division. Although we strive to locate and hire qualified non-public school teachers, we are unable to restore our teaching/training operations to the same scale within a short period of time as the quarter ended March 31, 2014. We do not foresee any notable improvement on our training center division for the coming quarter due to the limited availability of qualified non-public school teachers.
However, we believe the rise of the online education industry in China presents a good opportunity for us to improve and develop our online education business. We have been focusing on the development and promotion of our online education business and launched the Platform by the end of 2014.
During the initial operation period of the Platform, we offer free access to the platform to teachers and students with an aim to quickly develop the user base, establish an interactive teaching and learning platform with an aim to achieve a leading position within the industry. After this initial promotion period, we will share with teachers and educational institutions the platform usage, maintenance and service fees paid by students. Our plan is to contract up to one thousand educational institutions and reputable teachers in China by the end of 2015. As of the date of this report, we have entered into agreements with over 100 schools and educational institutions that will use our Platform and services to offer live or on demand online courses. We hope that the Platform will start to generate revenue upon expiration of the one year free trial period. However, there can be no assurance that we will be able to sign up educational institutions and teachers as planned and if we fail, our revenue will be adversely affected.
Net Loss
As a result of the foregoing, we had net loss attributable to the Company and its subsidiaries of $7,442,954, or negative return of $0.70 per share basic and diluted, for the quarter ended March 31, 2015, as compared to net loss of $5,977,065 or negative return of $0.56 per share basic and diluted, for the quarter ended March 31, 2014.
Comments & Business Outlook
China Education Alliance, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
Year ended December 31
2014
2013
Revenue
Online education revenue
$
508,623
$
2,168,803
Training center revenue
2,218,948
4,541,027
Total revenue
2,727,571
6,709,830
Cost of Revenue
Online education costs
4,182,498
5,300,181
Training center costs
1,547,042
2,259,012
Total cost of revenue
5,729,540
7,559,193
Gross Profit/(Loss)
Online education gross loss
(3,673,875
)
(3,131,378
)
Training center gross profit
671,906
2,282,015
Total gross loss
(3,001,969
)
(849,363
)
Operating Expenses
Selling expenses
6,776,783
10,217,712
Administrative expenses
23,747,084
8,701,767
Depreciation and amortization
2,368,586
3,286,947
Total operating expenses
32,892,453
22,206,426
Loss from operations
(35,894,422
)
(23,055,789
)
Other Income (Expense)
Other income(expenses), net
29,985
(24,355
)
Loss on disposal of property and equipment
(38,210
)
(22,859
)
Impairment loss on intangible assets
(3,254,308
)
(2,746,622
)
Interest income
147,403
215,976
Total other expense, net
(3,115,130
)
(2,577,860
)
Net Loss Before Provision for Income Tax
(39,009,552
)
(25,633,649
)
Income taxes:
Current
-
-
Deferred
-
-
Net Loss
(39,009,552
)
(25,633,649
)
Net Loss attributable to the noncontrolling interests
(1,633,647
)
(963,874
)
Net Loss - attributable to CEAI and Subsidiaries
$
(37,375,905
)
$
(24,669,775
)
Net Loss per common stock-basic and diluted
$
(3.53
)
$
(2.33
)
Weighted Average Shares Outstanding-basic and diluted
10,582,530
10,582,530
The Components of Other Comprehensive Income
Net Loss
$
(37,375,905
)
$
(24,669,775
)
Foreign currency translation adjustment
(367,015
)
2,382,797
Comprehensive Loss
$
(37,742,920
)
$
(22,286,978
)
Management Discussion and Analysis
Revenue
Revenue from the online education division includes revenue generated from online examination orientated material downloads, tutorial exercise downloads, and advertisement income. Revenue generated by the online education division decreased by $1,660,180, or 77%, to $508,623 for the year ended December 31, 2014 from $2,168,803 for the prior year.
Revenue from the training center division is mostly from after school tutoring for primary and middle school students. Revenue generated by the training center division decreased by $2,322,079, or 51% to $2,218,948 for the year ended December 31, 2014 from $4,541,027 for the prior year.
The decline in revenue in the year 2014 was a result of decline in revenue across all of our business. We believe the main reason was our continuously weakening brand recognition in the main targeted market and increased competition from new competitors who entered into this market during the year 2014. In addition, in the middle of 2014, the local government in Harbin announced policies prohibiting teachers of public schools from engaging in any tutoring/training classes outside of public schools. Since all the teachers hired by Tianlang are public school teachers, Tianlang had to cut its class offerings dramatically as a result of these policies, which directly affected our revenue for the training center division.
However, we believe the rise of the online education industry in China presents a good opportunity for us to improve and develop our online education business. We have been focusing on the development and promotion of our online education business and successfully launched the Platform by the end of 2014.
During the initial operation period of the Platform, we offer free access to the platform to teachers and students with an aim to quickly develop the user base, establish an interactive teaching and learning platform with an aim to achieve a leading position within the industry. After this initial promotion period, we will share with teachers and educational institutions the platform usage, maintenance and service fees paid by students. Our plan is to contract up to one thousand educational institutions and reputable teachers in China by the end of 2015. As of the date of this report, we have entered into agreements with over 100 schools and educational institutions that will use our Platform and services to offer live or on demand online courses. We hope that the Platform will start to generate revenue upon expiration of the one year free trial period. However, there can be no assurance that we will be able to sign up educational institutions and teachers as planned and if we fail, our revenue will be adversely affected.
Net Loss
As a result of the foregoing, we had net loss attributable to the Company and its subsidiaries of $37,385,905, or negative return of $3.53 per share basic and diluted, for the year ended December 31, 2014, as compared to net loss of $24,669,775 or negative return of $2.33 per share basic and diluted, for the year ended December 31, 2013.
Investor Alert
Item 3.01 Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing.
Comments & Business Outlook
China Education Alliance, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
Three months ended September 30,
Nine months ended September 30,
2014
2013
2014
2013
Revenue
Online education revenue
$
134,879
$
506,725
$
392,526
$
1,901,324
Training center revenue
936,700
1,120,760
1,993,285
4,079,340
Total revenue
1,071,579
1,627,485
2,385,811
5,980,664
Cost of Revenue
Online education costs
1,062,915
1,356,547
3,170,379
4,120,051
Training center costs
590,279
667,079
1,365,283
1,954,031
Total cost of revenue
1,653,194
2,023,626
4,535,662
6,074,082
Gross Profit/(Loss)
Online education gross profit/(loss)
(928,036
)
(849,822
)
(2,777,853
)
(2,218,727
)
Training center gross profit
346,421
453,681
628,002
2,125,309
Total gross profit/(loss)
(581,615
)
(396,141
)
(2,149,851
)
(93,418
)
Operating Expenses
Selling expenses
3,398,742
3,697,071
5,794,444
6,033,210
Administrative expenses
9,742,804
3,089,854
18,447,595
6,586,752
Depreciation and amortization
742,605
839,763
1,758,769
2,433,982
Total operating expenses
13,884,151
7,626,688
26,000,808
15,053,944
Loss from operations
(14,465,766
)
(8,022,829
)
(28,150,659
)
(15,147,362
)
Other Income (Expense)
Other income(expenses), net
(6,891
)
(7,593
)
31,132
(10,400
)
Loss on disposal of property and equipment
(385
)
(4,324
)
(16,547
)
(14,456
)
Impairment loss on intangible assets
-
-
-
(606,032
)
Interest income
35,663
56,546
123,533
166,940
Total other income/(Expense), net
28,387
44,629
138,118
(463,948
)
Net Loss Before Provision for Income Tax
(14,437,379
)
(7,978,200
)
(28,012,541
)
(15,611,310
)
Income taxes:
Current
-
-
-
-
Deferred
-
-
-
-
Net Loss
(14,437,379
)
(7,978,200
)
(28,012,541
)
(15,611,310
)
Net Loss attributable to the noncontrolling interests
2,762
(131,331
)
(203,563
)
(321,574
)
Net Loss - attributable to CEAI and Subsidiaries
$
(14,440,141
)
$
(7,846,869
)
$
(27,808,978
)
$
(15,289,736
)
Net Loss per common stock-basic and diluted
$
(1.36
)
$
(0.74
)
$
(2.63
)
$
(1.44
)
Weighted Average Shares Outstanding-basic and diluted
10,582,530
10,582,530
10,582,530
10,582,530
The Components of Other Comprehensive Income
Net Loss
$
(14,440,141
)
$
(7,846,869
)
$
(27,808,978
)
$
(15,289,736
)
Foreign currency translation adjustment
55,794
326,018
(395,643
)
2,115,302
Comprehensive Loss
$
(14,384,347
)
$
(7,520,851
)
$
(28,204,621
)
$
(13,174,434
)
Management Discussion and Analysis
Revenue for the three months ended September 30, 2014 (the “September 30, 2014 Quarter”) decreased by $555,906, or 34%, to $1,071,579 from $1,627,485 for the three months ended September 30, 2013(the “September 30, 2013 Quarter”).
Revenue from the online education division includes revenue generated from online examination orientated material downloads, tutorial exercise downloads, and advertisement income. Revenue generated by the online education division decreased by $371,846, or 73%, to $134,879, for the September 30, 2014 Quarter from $506,725 for the September 30, 2013 Quarter.
Revenue from the training center division is mostly from after school tutoring for primary and middle school students. Revenue generated by the training center division decreased by $184,060, or 16% to $936,700 for the September 30, 2014 Quarter from $1,120,760 for the September 30, 2013 Quarter.
As a result of the foregoing, we had net loss attributable to the Company and its subsidiaries of $14,440,141, or negative return of $1.36 per share basic and diluted, for the September 30, 2014 Quarter, as compared to net loss of $7,846,869 or negative return of $0.74 per share basic and diluted, for the September 30, 2013 Quarter.
Comments & Business Outlook
China Education Alliance, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
Three months ended June 30,
Six months ended June 30,
2014
2013
2014
2013
Revenue
Online education revenue
$
130,383
$
767,888
$
257,647
$
1,394,599
Training center revenue
459,155
1,142,759
1,056,585
2,958,580
Total revenue
589,538
1,910,647
1,314,232
4,353,179
Cost of Revenue
Online education costs
1,072,595
1,409,183
2,107,464
2,763,504
Training center costs
377,479
570,107
775,004
1,286,952
Total cost of revenue
1,450,074
1,979,290
2,882,468
4,050,456
Gross Profit/(Loss)
Online education gross profit/(loss)
(942,212
)
(641,295
)
(1,849,817
)
(1,368,905
)
Training center gross profit
81,676
572,652
281,581
1,671,628
Total gross profit/(loss)
(860,536
)
(68,643
)
(1,568,236
)
302,723
Operating Expenses
Selling expenses
1,185,254
1,236,637
2,395,702
2,336,139
Administrative expenses
5,001,944
1,846,937
8,704,791
3,496,898
Depreciation and amortization
523,968
785,847
1,016,164
1,594,219
Total operating expenses
6,711,166
3,869,421
12,116,657
7,427,256
Loss from operations
(7,571,702
)
(3,938,064
)
(13,684,893
)
(7,124,533
)
Other Income (Expense)
Other income(expenses), net
9,967
(1,090
)
38,023
(2,807
)
Loss on disposal of property and equipment
(10,709
)
(7,363
)
(16,162
)
(10,132
)
Impairment loss on intangible assets
-
-
-
(606,032
)
Interest income
42,284
58,678
87,870
110,394
Total other income/(Expense), net
41,542
50,225
109,731
(508,577
)
Net Loss Before Provision for Income Tax
(7,530,160
)
(3,887,839
)
(13,575,162
)
(7,633,110
)
Income taxes:
Current
-
-
-
-
Deferred
-
-
-
-
Net Loss
(7,530,160
)
(3,887,839
)
(13,575,162
)
(7,633,110
)
Net Loss attributable to the noncontrolling interests
(138,388
)
(147,991
)
(206,325
)
(190,243
)
Net Loss - attributable to CEAI and Subsidiaries
$
(7,391,772
)
$
(3,739,848
)
$
(13,368,837
)
$
(7,442,867
)
Net Loss per common stock-basic and diluted
$
(0.70
)
$
(0.35
)
$
(1.26
)
$
(0.70
)
Weighted Average Shares Outstanding-basic and diluted
10,582,530
10,582,530
10,582,530
10,582,530
The Components of Other Comprehensive Income
Net Loss
$
(7,391,772
)
$
(3,739,848
)
$
(13,368,837
)
$
(7,442,867
)
Foreign currency translation adjustment
60,654
1,271,719
(451,437
)
1,789,284
Comprehensive Loss
$
(7,331,118
)
$
(2,468,129
)
$
(13,820,274
)
$
(5,653,583
)
Management Discussion and Analysis
Revenue
Revenue for the three months ended June 30, 2014 (the “June 30, 2014 Quarter”) decreased by $1,321,109, or 69%, to $589,538 from $1,910,647 for the three months ended June 30, 2013(the “June 30, 2013 Quarter”).
Revenue from the online education division includes revenue generated from online examination orientated material downloads, tutorial exercise downloads, and advertisement income. Revenue generated by the online education division decreased by $637,505, or 83%, to $130,383, for the June 30, 2014 Quarter from $767,888 for the June 30, 2013 Quarter.
Revenue from the training center division is mostly from after school tutoring for primary and middle school students. Revenue generated by the training center division decreased by $683,604, or 60% to $459,155 for the June 30, 2014 Quarter from $1,142,759 for the June 30, 2013 Quarter.
The decline in revenue for the June 30, 2014 Quarter was a result of decline in revenue across all of our business. We believe the main reason was our continuously weakening brand recognition in the main targeted market and the inability of our existing online education products to meet changing market demand. In addition, the lack of experience of our newly opened centers in on-site training, limited expansion capacity, coupled with fierce competition from the top education brands, make it very difficult to establish our brand value in a short period of time.
At present, online education is more widely recognized and accepted by students and educational institutions. We believe online education will gain more popularity in the next three to five years. Therefore, we have spent the past few years building the online education platform - “China Education Cloud Platform” and are currently in the process of testing the platform. Many students and teachers have participated in the testing and like the platform for its complete functions and advanced technologies. The platform is expected to be officially launched by the end of September this year. During the initial operation of the platform, we will offer free access to the platform to teachers and students in the first six months or a year to quickly develop the user base and establish a large database. After this initial promotion period, we will share with teachers the platform usage fee and service fee paid by students. We believe that our revenue will improve following the initial promotion period of this platform. In addition, instead of setting up more new training centers, we changed our strategy to focus on integrating and optimizing our existing resources in the training center division in order to maintain our current market share in an increasingly competitive environment.
As a result of the foregoing, we had net loss attributable to the Company and its subsidiaries of $7,391,772, or negative return of $0.70 per share basic and diluted, for the June 30, 2014 Quarter, as compared to net loss of $3,739,848 or negative return of $0.35 per share basic and diluted, for the June 30, 2013 Quarter.
Deal Flow
China Education Alliance, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
Three months ended March 31,
2014
2013
Revenue
Online education revenue
$
127,264
$
626,711
Training center revenue
597,430
1,815,821
Total revenue
724,694
2,442,532
Cost of Revenue
Online education costs
1,034,869
1,354,321
Training center costs
397,525
716,845
Total cost of revenue
1,432,394
2,071,166
Gross Profit/(Loss)
Online education gross loss
(907,605
)
(727,610
)
Training center gross profit
199,905
1,098,976
Total gross profit/(loss)
(707,700
)
371,366
Operating Expenses
Selling expenses
1,210,448
1,099,502
Administrative expenses
3,702,847
1,649,961
Depreciation and amortization
492,196
808,372
Total operating expenses
5,405,491
3,557,835
Loss from operations
(6,113,191
)
(3,186,469
)
Other Income (Expenses)
Other income(expenses), net
28,056
(1,717
)
Loss on disposal of property and equipment
(5,453
)
(2,769
)
Impairment loss on intangible assets
-
(606,032
)
Interest income
45,586
51,716
Total other Income / (Expenses), net
68,189
(558,802
)
Net Loss Before Provision for Income Tax
(6,045,002
)
(3,745,271
)
Income taxes:
Current
-
-
Deferred
-
-
Net Loss
(6,045,002
)
(3,745,271
)
Net Loss attributable to the noncontrolling interests
(67,937
)
(42,252
)
Net Loss - attributable to CEAI and Subsidiaries
$
(5,977,065
)
$
(3,703,019
)
Net Loss per common stock-basic and diluted
$
(0.56
)
$
(0.35
)
Diluted Earnings Per Share
$
(0.56
)
$
(0.35
)
Weighted Average Shares Outstanding-basic and diluted
10,582,530
10,582,530
The Components of Other Comprehensive Income
Net Loss
$
(5,977,065
)
$
(3,703,019
)
Foreign currency translation adjustment
(512,091
)
517,565
Comprehensive Loss
$
(6,489,156
)
$
(3,185,454
)
Management Discussion and Analysis
Revenue
Revenue for the quarter ended March 31, 2014 decreased by $1,717,838, or 70%, to $724,694 from $2,442,532 for the quarter ended March 31, 2013.
Revenue from the online education division includes revenue generated from online examination orientated material downloads, tutorial exercise downloads, and advertisement income. Revenue generated by the online education division decreased by $499,447, or 80%, to $127,264, for the quarter ended March 31, 2014 from $626,711 for the quarter ended March 31, 2013.
Revenue from the training center division is comprised of tuition from examination-orientated after school training classes, language training classes, vocational training classes etc. Revenue generated by the training center division decreased by $1,218,391, or 67% to $597,430 for the quarter ended March 31, 2014 from $1,815,821 for the quarter ended March 31, 2013.
The decline in revenue for the quarter ended March 31, 2014 was a result of decline in revenue across all of our business. We believe revenue was affected by external factors including slowdown in economic growth within the PRC, untruthful allegations about our businesses, and increased competition. These factors contributed to the continuous decline in interest of existing and new students, which resulted in decrease in student enrollments and led to a decline in revenue as compared to the quarter ended March 31, 2013. We expect to improve the performance of our online education division in the future by providing students with more competitive, up-to-date study materials and easy access. We have contracted technology companies and hired our own professional IT technicians to design and build a new web-based platform, aiming to provide the long-distance teaching services encompassing online community system and online teaching management system. The platform is in the final testing stage and will be launched in the near future. Also, we will continue to implement the new strategic business development plan for 2014, which targets to optimize the operation of existing training centers while seeking good opportunities to expand our market share. As such, we predict that our revenue will gradually recover after we launch the new web-based platform and set up more training centers.
As a result of the foregoing, we had net loss attributable to the Company and its subsidiaries of $5,977,065, or negative return of $0.56 per share basic and diluted, for the quarter ended March 31, 2014, as compared to net loss of $3,703,019 or negative return of $0.35 per share basic and diluted, for the quarter ended March 31, 2013.
Comments & Business Outlook
China Education Alliance, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
Year ended December 31
2013
2012
Revenue
Online education revenue
$
2,168,803
$
4,539,378
Training center revenue
4,541,027
7,185,731
Total revenue
6,709,830
11,725,109
Cost of Revenue
Online education costs
5,300,181
7,199,678
Training center costs
2,259,012
2,895,065
Total cost of revenue
7,559,193
10,094,743
Gross Profit/(Loss)
Online education gross profit/(loss)
(3,131,378
)
(2,660,300
)
Training center gross profit
2,282,015
4,290,666
Total gross profit/(loss)
(849,363
)
1,630,366
Operating Expenses
Selling expenses
10,217,712
5,815,968
Administrative expenses
8,701,767
6,946,247
Depreciation and amortization
3,286,947
3,292,471
Total operating expenses
22,206,426
16,054,686
Loss from operations
(23,055,789
)
(14,424,320
)
Other Income (Expense)
Other expenses, net
(24,355
)
(5,138
)
Loss on disposal of property and equipment
(22,859
)
(118,581
)
Impairment loss on intangible assets
(2,746,622
)
(1,447,173
)
Interest income
215,976
1,867,440
Total other income/(Expense), net
(2,577,860
)
296,548
Net Loss Before Provision for Income Tax
(25,633,649
)
(14,127,772
)
Income taxes:
Current
-
-
Deferred
-
(319,255
)
Net Loss
(25,633,649
)
(14,447,027
)
Net Loss attributable to the noncontrolling interests
(963,874
)
(384,423
)
Net Loss - attributable to CEAI and Subsidiaries
$
(24,669,775
)
$
(14,062,604
)
Net Loss per common stock-basic and diluted
$
(2.33
)
$
(1.33
)
Weighted Average Shares Outstanding-basic and diluted
10,582,530
10,582,530
The Components of Other Comprehensive Income
Net Loss
$
(24,669,775
)
$
(14,062,604
)
Foreign currency translation adjustment
2,382,797
1,054,905
Comprehensive Loss
$
(22,286,978
)
$
(13,007,699
)
Management Discussion and Analysis
Results of Operations
Years ended December 31, 2013 and 2012
Revenue for the year ended December 31, 2013 decreased by $5,015,279, or 43%, to $6,709,830 from $11,725,109 for the year ended December 31, 2012.
Revenue from the online education division includes revenue generated from online examination orientated material downloads, tutorial exercise downloads, and advertisement income. Revenue generated by the online education division decreased by $2,370,575, or 52%, to $2,168,803 for the year ended December 31, 2013 from $4,539,378 for the year ended December 31, 2012.
Revenue from the training center division is comprised of tuition from examination-orientated after school training classes, language training classes, vocational training classes etc. Revenue generated by the training center division decreased by $2,644,704, or 37% to $4,541,027 for the year ended December 31, 2013 from $7,185,731 for the year ended December 31, 2012.
The decline in revenue for the year ended December 31, 2013 was a result of decline in revenue across all of our business. We believe revenue was affected by external factors including slowdown in economic growth within the PRC, untruthful allegations about our businesses, and increased competition. These factors contributed to the continuous decline in interest of existing and new students, which resulted in decrease in student enrollments and led to a decline in revenue as compared to the year ended December 31, 2012. We expect to improve the performance of our online education division in the future by providing students with more competitive, up-to-date study materials and easy access. We have contracted technology companies and hired our own professional IT technicians to design and build a new web-based platform, aiming to provide the long-distance teaching services encompassing online community system and online teaching management system. Additionally, we successfully established more than ten new training centers in Beijing during the fiscal year ended December 31, 2013, and these new centers have started operations since the third quarter of fiscal 2013. We will continue to implement the new strategic business development plan for 2014, which targets to optimize the operation of existing training centers while seeking good opportunities to expand our market share. As such, we predict that our revenue will gradually recover after we launch the new web-based platform and set up more training centers.
As a result of the foregoing, we had net loss attributable to the Company and its subsidiaries of $24,669,775, or negative return of $2.33 per share basic and diluted, for the year ended December 31, 2013, as compared to net loss of $14,062,604 or negative return of $1.33 per share basic and diluted, for the year ended December 31, 2012.
Comments & Business Outlook
Investor Alert
HARBIN, China, December 23, 2011 /PRNewswire-Asia-FirstCall / -- China Education Alliance, Inc. (NYSE: CEU) announced that on December 21, 2011, NYSE Regulation, Inc. (NYSE Regulation) delivered a notice to the company confirming that the exchange will suspend trading of the company's common stock on the NYSE prior to the opening of business on Thursday, December 29, 2011 and that the exchange intends to delist the company's common stock. The Company expects to commence trading on the over-the-counter (OTC) market that same day under a symbol yet to be determined.
Mr. Yu Xiqun, CEO of China Education Alliance commented: "We are very disappointed with the NYSE's decision to suspend trading and delist our shares. Since the onset of the unfounded allegations a year ago, we have at all times kept our doors open to all shareholders who have wanted to research our business inChina and have made ourselves available to help investors correctly understand our business. We have held two Annual General Meetings to discuss the future development goals and strategic plans of the Company. We have refused to be intimidated by rumors, none of which have proved true in more than one year. Our business performance has been recovering and our future prospects remains strong.
As of September 30, 2011 we achieved USD26.3 million in revenue and USD18.4 million of profit. We strongly believe our stock price and market value do not correctly reflect the performance and future prospects of our Company.
CFO Trail
HARBIN, China , November 30, 2011 /PRNewswire-Asia-FirstCall / -- China Education Alliance, Inc. (NYSE: CEU) announced today the appointment of Ms. Cloris Li as Chief Financial Officer, effective November 30, 2011 . Ms. Cloris Li replaces Ms. Alice Lee Rogers , who is taking on a new role as Vice President of the Company's North America business and operations. She became the Company's Chief Financial Officer in March 2011 .
Ms. Cloris Li has acquired substantial experience in professional accounting and auditing, financial planning, tax advising, risk control and internal controls. In 2010 and 2011, Ms. Cloris Li worked as a consultant for PricewaterhouseCoopers in China where she provided audit, internal control advisory and SOX compliance services to both private and public companies. Prior to that she was Vice President at China Authority Holding Inc., a Chinese investment firm that also provides advisory services to companies going public from 2007 to 2009. From 2004 to 2006, she was a senior auditor and tax advisor in Romano Business Accountants Pty. Ltd. In 2003, she worked as an associate at Zhejiang Xiacheng Certified Public Taxation Accounts and Zhejiang Hongda Certified Public Accounts. Ms. Cloris Li graduated with a BA in Accounting from Queensland University Technology in Australia . She is a Certified Public Accountant and a member of Certified Public Accountant Australia.
"We are pleased to have Cloris on board as our Chief Financial Officer," said Mr. Xiqun Yu , CEO of China Education Alliance, Inc. "She has been involved, and acquired relevant skills, in all aspects of the life of a public company in the financial markets. We are fully committed to transparency and best corporate governance practices and we believe that her financial skills and professional experience will help us reach a higher level. We expect Cloris to play a leading role in our business expansion and strengthen our internal financial controls, and financial planning and reporting.
"I also want to thank Ms. Alice Lee Rogers for her hard work and commitment to our Company. We look forward to continuing to work with her in her new role."
Comments & Business Outlook
Three months ended September 30
Nine months ended September 30
2011
2010
2011
2010
Revenues
Online education revenues
$ 5,330,692 $ 8,629,101 $ 14,458,244 $ 21,246,633
Training center revenues
4,147,879 5,223,860 11,618,155 11,013,279
Other Revenues
80,530 524,249 206,214 1,587,128
Total revenue
9,559,101 14,377,210 26,282,613 33,847,040
Cost of Goods Sold
Online education costs
1,586,084 1,281,634 4,888,630 3,524,119
Training center costs
1,170,677 1,081,937 2,985,553 2,344,862
Other costs
10,603 36,776 28,986 114,613
Total cost of goods sold
2,767,364 2,400,347 7,903,170 5,983,594
Gross Profit
Online education gross profit
3,744,607 7,347,467 9,569,614 17,722,514
Training center gross profit
2,977,203 4,141,923 8,632,602 8,668,417
Other gross profit
69,927 487,473 177,227 1,472,515
Total gross profit
6,791,737 11,976,863 18,379,443 27,863,446
Operating Expenses
Selling expenses
2,199,187 5,182,765 7,743,091 10,902,529
Administrative
1,358,716 781,169 5,046,511 1,808,209
Depreciation and amortization
475,871 219,435 1,198,840 716,909
Total operating expenses
4,033,773 6,183,369 13,988,441 13,427,647
Income/(Loss) from operations
2,757,963 5,793,494 4,391,002 14,435,799
Other Income/ (Expense)
Other income/(Expense)
(92,088 ) 631 (162,108 ) 21,769
Loss on disposal of fixed assets
(5,908 ) - (647,352 ) -
Interest income
470,716 61,384 1,377,097 158,919
Investment loss
- (526 ) - (8,132 )
Total other income/(Expense)
372,721 61,489 567,638 172,556
Net Income Before Provision for Income Tax
3,130,684 5,854,983 4,958,639 14,608,355
Income taxes:
Current
(54,622 ) (638,216 ) 175,429 (1,531,361 )
Deferred
(77,884 ) - 14,042 -
Net Income
2,998,178 5,216,767 5,148,111 13,076,994
Net Income attributable to the noncontrolling interests
177,136 161,018 96,530 101,333
Net Income/(Loss) - attributable to CEU and Subsidiaries
$ 3,175,313 $ 5,377,785 $ 5,244,640 $ 13,178,327
Basic Earnings Per Share
$ 0.30 $ 0.52 $ 0.50 $ 1.25
Diluted Earnings Per Share
$ 0.30 $ 0.51 $ 0.50 $ 1.25
Basic Weighted Average Shares Outstanding
10,582,503 10,441,245 10,568,979 10,509,797
Diluted Weighted Average Shares Outstanding
10,582,503 10,454,418 10,568,979 10,544,575
At the end of 2010, there were allegations that we failed to disclose material adverse facts about our business, operations, and prospects (the “Allegations”) which were cited by major websites and other media. The reason for the decrease was the result of the Company's name brand and imagine still in the process of slowly recovering. Some parents and students have been reluctant to use our services. As a result, there was a decrease in the number of students seeking our services both online and on-site. In addition, the morale of our employees and teachers was adversely affected, which led to unfavorable conditions in our daily operation.
Investor Alert
On October 28, 2011, a
purported derivative lawsuit was filed in the U.S. District Court for the Central District of California against certain of the Company's current or former directors and officers. The complaint in Padnos v. Yu, et al., No. 11-cv-8973 (C.D. Cal.) alleges that the defendants made or issued false and misleading statements about the Company's operations and financial performance in filings with the U.S. Securities and Exchange Commission, and thereby breached their fiduciary duties, enriched themselves, and damaged the Company. The derivative complaint seeks monetary damages and other relief, including costs and expenses. The Company believes the complaint has no merit and intends to vigorously oppose the lawsuit.
Legal Insights
On October 28, 2011, a purported derivative lawsuit was filed in the U.S. District Court for the Central District of California against certain of the Company's current or former directors and officers. The complaint in Padnos v. Yu, et al. , No. 11-cv-8973 (C.D. Cal.) alleges that the defendants made or issued false and misleading statements about the Company's operations and financial performance in filings with the U.S. Securities and Exchange Commission, and thereby breached their fiduciary duties, enriched themselves, and damaged the Company. The derivative complaint seeks monetary damages and other relief, including costs and expenses. The Company believes the complaint has no merit and intends to vigorously oppose the lawsuit.
Share Structure
At the Annual Meeting , the following proposals were approved:
Election of three directors in Class I, Xiaohua Gu , Liansheng Zhang , and Yizhao Zhang , to serve until the 2013 Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified, or until such director's earlier resignation, removal or death;
Ratification of the unanimous resolution of the Board of Directors on July 29, 2011 to effect a three-to-one reverse stock split of the Company's issued and outstanding shares and its attendant Articles of Amendment;
Ratification of the 2011 Incentive Stock Plan which has been approved by the Board of Directors;
Ratification of the appointment of Sherb & Co., LLP as the Company's independent registered public accounting firm for the fiscal year ending December 31, 2011 ;
Approval of the executive compensation disclosed in the Proxy Statement of the Company's executive officers; and
Approval of the frequency of future executive compensation votes shall be every three years.
Comments & Business Outlook
Financial Highlights for the Second Quarter ended June 30, 2011
Total revenue decreased 10.2% year-over-year to $9.7 million.
Gross profit declined to $7.0 million, or to 71.2% of sales, compared to $9.1 million, or to 83.4% of sales during the same period in 2010.
On a GAAP-basis, net income was $1.9 million compared with net income of $4.3 million during the same period in 2010.
Non-GAAP net income was $3.0 million compared with non-GAAP net income of $4.4 million in the second quarter of 2010. Non-GAAP fully diluted earnings per share were $0.10, compared with EPS of $0.14 per fully diluted share in the second quarter of 2010.
"We are encouraged by the early signs of an improvement in our business following the baseless allegations made against the Company at the end of last year. The strategic promotional and marketing campaigns that we implemented in response to the allegations have been successful in restoring our reputation," said Xiqun Yu, Chairman and Chief executive Officer of China Education Alliance. "We continue to execute on our strategy of acquiring businesses to explore our educational platform."
Business Outlook
China Education Alliance continues to execute its strategy to augment its National Expansion Plan with the completion of several acquisitions.
During the quarter, the Company established a new Board of Directors following its purchase of a 60% interest in Harbin Tianlang Culture and Education School. The Company appointed three out of the five new directors and co-manages the school with the previous majority owner.
In June, the Company also acquired the aforementioned, Noah International, for RMB16 million in cash. Its financial statement was been consolidated with the Company's balance sheets as of May 2011.
"We continue to identify opportunities to expand our platform with quality businesses that fit our overall business strategy. We are pleased that our recent acquisitions positively contributed to sales in the current quarter," said Chairman Yu.
2011 Guidance
The Company reiterates that it expects full year 2011 total revenues to be between $47 million and $52 million.
Investor Alert
ARBIN, China, July 30, 2011 /
PRNewswire-Asia -FirstCall/ -- China Education Alliance, Inc. ("China Education Alliance" or the "Company") (NYSE: CEU), a China-based education resource and services company, today announced that the Company was notified by the New York Stock Exchange ("NYSE") on July 12, 2011 that the Company was not in compliance with the NYSE continued listing standard requiring a listed security to maintain a minimum average closing price of $1.00 per share over a consecutive 30-trading-day period. The NYSE noted that the minimum average closing price is the only listing criteria the Company is not in compliance with. The Company has six months from receipt of the notification to bring its share price and average share price back above $1.00.
Acquisition Activity
HARBIN, China, June 1, 2011 /PRNewswire-Asia / -- China Education Alliance, Inc. ("China Education Alliance" or the "Company") (NYSE: CEU), a China-based education resource and services company, today announced that the company successfully acquired Noah International Education Group (or "Noah International"), the largest multi-language learning institute in Northern China offering courses of English, Japanese, Korean, Russian, German, French, Spanish, Italian, Arabic, etc. in Northern China, for RMB 16 million in cash.
Currently, Noah International serves a student body of roughly 1,000 students with its two training centers in Harbin and Changchun, and generates annual revenue of RMB 10 million and net profit of RMB 3 million. There are courses designed for Junior college students, part time, summer and winter classes as well as VIP one-on-one classes, catering to the mass population. Noah runs a successful and effective system for teaching foreign languages to white-collars and foreign language enthusiasts.
As a result of the rapid economic growth in China, every year there are about a million Chinese students that leave China to go study abroad and seek further study to overcome language barriers. China's foreign trade expansion increases the demand for people with multi-lingual skills. With an increasing number of foreigners visiting and living in China each year, it is increasingly important for the locals to master various foreign languages. Given the small number of multi-language education institutes in China, Noah's long term goal is to maintain its leadership position in the market.
Mr. Yu, CEO of China Education Alliance, commented, "The acquisition of Noah International Education Group is a new attempt by China Education Alliance to integrate a variety of quality educational resources. This should help enhance our brand name. In addition, Noah's students can enroll in the other courses that China Education Alliance provides and grow our customer base. After the acquisition we will maintain the existing business model and expand Noah's business by leveraging CEU's wide range of educational resources. We believe this will have a positive impact on CEU's performance going forward".
Acquisitions
On May 31, 2011, China Education Alliance, Inc. entered into
Share Transfer Agreements (the “Agreements”) with the shareholders of Changchun City Chaoyang District Nuoya Foreign Languages School (“Changchun Nuoya”) and Harbin City Nangang District Nuoya Foreign Languages School (“Harbin Nuoya”), two foreign language schools that have a total of 1,000 current students, based in the People’s Republic of China.
Comments & Business Outlook
Financial Highlights for the First Quarter ended March 31, 2011
Total revenue decreased 18.8% year-over-year to $7 million.
Gross profit declined to $4.6 million or to 66.0% of sales, compared to $6.8 million, or to 79.3% of sales last year.
Non-GAAP net income was $0.5 million compared with $3.7 million last year. On a GAAP-basis, net loss was $0.5 million compared with net income of $3.7 million last year.
Non-GAAP fully diluted earnings per share were $0.02, compared with EPS of $0.12 per fully diluted share in the first quarter of 2010.
"As a result of the unfounded allegations made against the Company at the end of 2010, we faced a difficult quarter with numerous challenges to retain our high-quality teachers and attract new students. Our business relies on our reputation in the market and these allegations hindered our business performance considerably . We implemented strategic promotional and marketing campaigns to improve our corporate brand image and to restore our reputation, and we are beginning to see a stabilization in the business," said Mr. Xiqun Yu, Chairman and Chief Executive Officer of China Education Alliance. "We remain confident in growing our core business and seeking new opportunities to expand our platform as we continue to explore M&A opportunities."
Business Outlook
"We will continue to focus on designing and providing premium online education and vocational training services with our high-quality teachers and exclusive training materials. We plan to establish 50 additional training centers in 10 different cities in China this year. We also expect to grow organically as well as through mergers or acquisitions if we can find quality businesses at attractive valuation levels that fit our overall business strategy," said Chairman Yu.
2011 Guidance
The Company expects full year 2011 total revenues to be between $47 million and $52 million .
Comments & Business Outlook
Fourth Quarter Highlights :
Total revenue increased 19.3% year-over-year to $12.4 million .
Gross profit rose 16.4% to $10.2 million or 82.3% of sales, compared to 84.3% of sales, or $8.78 million, in the fourth quarter of 2009.
Operating income decreased 53.6% .
Net income decreased 53.5% year-over-year to $2.1 million .
EPS was $0.06 per fully diluted share, compared to EPS of $0.15 per fully diluted share in the fourth quarter of fiscal 2009
"We are pleased with our solid growth in online education and our training center businesses due to industry organic growth, which validates our focus on exam-oriented educational services and vocational training programs in China ," said Mr. Xiqun Yu, Chairman and Chief Executive Officer of China Education Alliance. "Going forward, we will continue to develop and deliver high quality supplemental education resources and professional training programs. This will help us continue our business expansion and reaffirm our position as one of the leading education resource and service company in China ."
Comments & Business Outlook
HARBIN, China, March 16, 2011 /PRNewswire-Asia-FirstCall / -- China Education Alliance, Inc. announced today that it purchased 60% of the equity interests of Harbin Tianlang Culture and Education School ("Tianlang") for RMB35,000,000. This acquisition is advantageous to China Education Alliance's comprehensive integration of its training programs. Tianlang currently has 5,000 students and generates an annual profit of RMB10 million.
Mr. Yu Xiqun, Chairman and Chief Executive Officer of China Education Alliance, commented, "The acquisition of Tianlang is the beginning of the implementation of the Company's National Expansion Plan. We plan to complete two to three similar acquisitions within one month after we acquired Tianlang. We have established offices in 27 provinces and cities nationwide. By thoroughly studying the market demand for training programs in different regions, as well as using our talented teachers, we hope to add 100 new teaching centers through establishment or acquisition within one year. We are confident that we will become one of the few large-scale educational institutions in China."
CFO Trail
On February 28, 2011, Mr. Zibing Pan resigned as Chief Financial Officer and director of the Company, effective March 1, 2011.
On February 28, 2011, the board of directors appointed Alice Lee Rogers as our new Chief Financial Officer. The appointment was effective March 1, 2011. Ms. Rogers’ nomination and compensation have been approved by the Company’s Nominating Committee and Compensation Committee respectively.
Analyst Reports
Rodman and Renshaw on CEU 01/21/2011
CEU – Termination of Coverage
TERMINATION OF COVERAGE
Effective immediately, we are terminating coverage of China Education Alliance (NYSE: CEU) to allocate resources more effectively within our coverage universe. Effective upon the termination of coverage, any of our prior financial projections on this stock should not be relied upon. Our last rating on CEU shares was 'Under Review.’
COMPANY DESCRIPTION
Founded in 1996, China Education Alliance is a private education company that provides online and on-site learning services to children ages 6-18 for their standardized secondary school exams. In early 2009, the company expanded into vocational training for adults 18+ given the surging unemployment rates for recent college graduates in China. Geographically, CEU’s operations began in Heilongjiang Province but recently expanded into adjacent regions including Liaoning (2008) and Inner Mongolia (2009). It has three reporting segments: 1) online education 2) training center; and 3) advertising.Notice Regarding Privacy and Confidentiality:
Comments & Business Outlook
HARBIN , China , Jan. 19, 2011 /PRNewswire-Asia-FirstCall / -- China Education Alliance, Inc. ("China Education Alliance" or the "Company") (N YSE: CEU), a China-based education resource and services company , today announced it has engaged Christensen to design, facilitate, and execute its investor and media relations programs. Christensen assists companies to strengthen brand recognition in the global capital markets and financial media.
"We are confident that we can leverage Christensen's global reach and expertise within the financial community and appropriate media outlets to establish a comprehensive investor relations program to effectively communicate China Education Alliance's growth story," said Mr. Xiqun Yu, chairman and CEO, of China Education Alliance.
Investor Alert
On January 6, 2011, the Company was served notice of a
stockholder class action lawsuit filed on December 28, 2010 in the U.S. District Court for the Central District of California against the Company, Xiqun Yu, the Company’s Chief Executive Officer, Susan Liu, the Company’s ex-Chief Financial Officer and Zibing Pan, the Company’s Chief Financial Officer.
Notable Share Transactions
HARBIN, China, Dec. 8, 2010 /PRNewswire-Asia-FirstCall / -- China Education Alliance, Inc. (today announced that its board of directors authorized a stock repurchase program. The program authorizes a buyback of the Company's common stock up to a value of $10 million and is valid through December 1, 2011. The program will be initialized by having the company funds utilized to open a brokerage account in the United States.
Mr. Xiqun Yu, Chairman and Chief Executive Officer of China Education Alliance, Inc. stated, "After careful consideration from our shareholders and advisors, the Company is pleased to announce the authorization to repurchase the Company's common stock. Today there is no other investment China Education Alliance can make with a higher return then making it in ourselves. We are fully committed to receiving feedback and taking recommendations from our investors, evaluating all our options and acting in the best interest of all shareholders."
Research
China Education (NYSE:CEU) has been the newest casualty of fraud allegations brought on by a wave of short attacks on the ChinaHyrid space. We understand why investors may have targeted CEU due to its nearly $20 million equity raise it closed on October 5, 2009, a raise which really made little sense for a company that revealed $31.5 million in cash on its balance sheet just prior to the deal.
I have discussed my thoughts on the SAIC issue in several instances throughout 2010 .
CEU is a Foreign Invested Enterprise (FIE), inferring that SAIC filings should have been audited by a local PRC firm and should be the same filings that were submitted to the PRC State Administration of Taxation (SAT). Investors may wrongfully assume that the auditor's verification of cash balances pokes a hole in the FIE, SAT, SEC chain relationship. Remember that there are at least two types of fraud to consider: Business fraud vs. tax fraud .
For the more serious issue of business fraud , investors will have to make their own assumptions, but the Kerrisdalecap allegations are very compelling. We would urge kerrisdalecap to continue its investigation against CEU, especially the charge that the vocational business is a hoax. It may also entail uncovering a scheme to prove that either the auditor or that some or all of five CEU’s banks have colluded with the company to manipulate cash balances. Another tactic that could be used would be for the company to arrange a short-term transfer of cash to its accounts via a loan.
It is certainly a good sign that companies are finally getting off their rumps and commenting about auditors actually seeing bank statements. This is something we have urged IR firms to make happen for some time now. Although we can be thankful for their efforts, we need more, as evidenced by CEU disastrous reaction to the company's emergency conference call this morning..
Even if the auditors give a stamp of verification on existing cash balances basically endorsing operations, tax fraud could still exist if they do not publicly and independently verify SAT documents as opposed to just viewing a tax certificate provided by the company. Regardless, CEU needs to make its SAT documents public . If they can be reconciled with SEC filings and shown that they differ from SAIC documents it could be a big win for the ChinaHybrid space, give additional credence to the veracity of SAIC filings and discredit the SAIC, SAT, SEC relationship for FIE's that we believe to be accurate. It is time for CEU and Sherb to man up and set an example for other ChinaHybrid firms. If you have nothing to hide, show us your hand . We have initiated a preliminary investigation into the operations of CEU, especially since management commented that it will not make SAT documents available.
Please reference our Qingdao Footwear Inc (OTC BB:QING) note for what can happen when tax fraud is found in China.
Investor Alert
Investigation Journal - CEU
Conversation between the GeoTeam and Attorney (Bob) who is coordinating due diligence proceedings:
Monday, November 29, 2010
GeoTeam:
Please take a closer look at CEU as it is the newest company where fraud has been insinuated.
December 3, 2010
Bob:
Can you send me the Kerrisdale report? Foreign invested entity structure (FIE) where ZHLD is directly owned by the offshore company. ZHLD directly owns several domestic owned subsidiaries (DES) in China. However, ZHLD and Beijing HuaYu HuiZhong offer online service through www.edu-chn.com and www.360ve.com which contribute 60% of the revenue. Based on PRC law, these online business can not be performed by wholly foreign owned enterprise and/or Sino-foreign joint venture enterprise with a foreign investor who holds more than 50% of the shares. I really do now know how these two subsidiaries obtained their licenses. It is possible that these two subsidiaries obtained their licenses before the reverse merger and they did not report the status change. million training center revenue. This is really high in a regional city such as Harbin. At the same time, I searched online and can not figure out what kind of training that the training center provides. It may provide IT training.
GeoTeam:
What do you make of the information that was released in the press release regarding auditors verifying cash in several bank accounts?
Bob:
I read the 8-k of CEU. The standard form of bank balance provided by CEU is the form always used by CPA firms in China and the relevant banks stamped the firm to confirm the information in the firm. If the documents are real and accurate, it means that CEU did have lots of money on its bank account at the date of Sep. 30th, 2010. But, I really can not understand why CEU needs to put so many money on its bank account...it is too much.
GeoTeam:
How can the document be wrong? Could they are colluding with the bank with the big balance, but this seems like a stretch?
Bob:
At first, it can be forged...this is the worst case scenario. At the same time, CEU also can transfer money (borrow money for one day) to the identified bank account for one day for the purpose of confirmation by the auditor. But this is just conjecture at this point.
I would send a people to [learn about] the training center and continue with the DD.
December 5, 2010
GeoTeam:
Please take a look at this blog post and tell me what you think - http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_C/threadview?m=mm&bn=97188&tid=2712&mid=2712&tof=4&frt=2
Bob:
I did the similar thing as the blogger did. I tried to call several numbers (three numbers) that the training center has (got these numbers online). However, I did not call through any line. The site of the training center is exactly what the Kerrisdale report showed to us. I searched online, it is very hard to find what kind of training that the training center can provide. There is a site to say that the training center provides IT training but we do not know exactly what class the training center provides and how much is the tuition. Some sites say that this training center provides K-12 tutoring. We also cannot find the exactly what class the training center provides and what is the price for different classes. Based on the information from the website of www.edu-chn.com (the site of CEU), it has two other small training centers in different apartment buildings other than the big training center.
For the learning card business, it is a franchise business of CEU to promote the online learning resource. The customers can purchase the prepaid card and use the money in the card to download the study materials online. I am not sure how many people purchase this card and use it online. There is lots of promotion of the business card business of CEU. But I do see some people claimed that this franchise business of learning card of CEU is a cheating business.
December 7, 2010
Bob:
Maj,He did not realize the joint inspection issue. I am not sure whether the CPA and CEU can finish the10-Q that fast or not.
Conference Call Notes
View Q Information:
Alan & HSC Global Team:
1.) Click on www.meetingsight.com ,
2.) Enter User Name 744KMcClendon,
3.) Enter Password 2530818,
4.) Enter Conference Number 4390901.
Zack Pan & CEU:
2.) Click on www.meetingsight.com ,
2.) Enter User Name 744KMcClendon01,
3.) Enter Password 253081801,
Operator : Good day, ladies and gentlemen, and thank you for standing by. Welcome to the China Education Alliance Shareholder Update Conference Call. During this Conference call, all participants are in a listen-only mode except speakers. As a reminder, this conference is being recorded.Alan Sheinwald: Thank you very much. Good morning, everybody in North America and good evening to those of you in China, and welcome to the China Education Alliance shareholder update conference call. With us today is Chairman and CEO of the Company, Mr. Xiqun Yu, and Chief Financial Officer, Mr. Zack Pan, who will be the translator and will also be speaking on behalf of Mr. Yu.Zack Pan: The following is the TRANSLATION OF MR. YU’S OPENING COMMENTSThis concludes translation of Mr. Yu’s opening remarks .
Additionally, our website was updated today to include several pictures of our facilities to bridge the gap for our investors who are not able to visit China. We have also posted a video tutorial showing investors a step by step process of how to use our prepaid cards online. Both the pictures and video can be found at www.chinaeducationalliance.com .
TOPICS:
Gross margins are different with different business segments and at different companies. Our high gross margin was mainly due to the Company’s effective control on costs. Our higher gross margins are typically received with our on-line course materials, versus our on-site training revenue that requires physical classrooms and teachers. On-line materials typically have higher set up and implementation costs, or fixed costs, and minimal variable costs on a per unit basis, or on a student by student basis. Due to this structural advantage of on-line education, and our large on-line student customer base, we are able to achieve high gross margins. Our high margins are a reflection of our educational products. Other educational company’s margins might differ from ours that might be due to their own course material offered and their own operating structure. The student focus of our on-line effort is geared to middle and high school students. The student focus of other on-line educational companies might be different from ours resulting in different gross profit margins.
The majority of our cards are sold by our sales people to students. We have around 200 sales people located at different areas in North China, not including part-time sale agent
3. How does the company explain the declining balance of deferred revenue yet 30+% higher online and combined sales figures in 2009 relative to 2008?
Our deferred revenue declined slightly from approximately $1.2 million in 2008 to $1.0 million in 2009. Our deferred revenue reflects the unearned portion of debit cards sold in the online division and unearned tuition from training centers. The deferred revenue is not necessarily in direct proportion to our revenue. Usually our deferred revenue remains at a relatively low level, as most students consume their debit cards in a short period of time, and mostly tuition fees are expensed monthly. So a change in deferred revenue is not necessarily related to students’ enrollment, and also has no significant impact in subsequent periods.
We realize that some free download learning material is available online. However, most students view the free available material as inferior products. We believe that our testing material is the most updated, high quality and relevant material to the locale of the students. Most our materials are prepared by famous local and popular teachers, and they are either members of the high school entrance or college entrance exam paper committee, or certified top-level teachers. We promote our products to students and parents with this information.INTERNAL CONTROLS:
AUDITOR:
We have an independent audit committee consisting of 3 highly trained professionals. Sherb & Co. LLP has been doing a competent job for us and their audit is thorough and strict. Meanwhile, we are also sensitive to our shareholder’s suggestions, and we will take these suggestions into consideration.
7. Why the change in auditors every couple of years and why not hire a big-4 audit firm to give credibility to the company?
It was not the Company’s intent to change auditors frequently. We have listened to our investors at different stages of the Company’s growth. Our current auditor, Sherb & Co., LLP, has been auditing us for three years and they have always delivered timely and accurate service. We will continue to evaluate our investor’s request and make the best decision both for the Company and investorsSAIC AND SEC FILINGS:
Every U.S. listed Chinese company with actual business operations in China has to file financial statements with at least three agencies: The SEC, China's State Administration of Industry and Commerce (SAIC), and the Chinese State Administration of Taxation (SAT).SAIC
http://www.saic.gov.cn ) is primarily responsible for business registration, business licenses and acts as the government supervisor of corporations. The SAIC is the Chinese government registrar for official documents like articles of incorporation, legal persons, registered capital and company ownership. In order to renew their annual business licenses, all Chinese companies must file a so-called 'Company Annual Inspection Report' with the SAIC between March and June every year. This report includes financial statements such as balance sheet and income statement, but those numbers are not verified or audited by the SAIC. The agency is primarily concerned with legal compliance issues and not with operating data or taxes.http://www.chinatax.gov.cn ) are much more similar to SEC filings than what has to be submitted to the SAIC for business licenses. The SAT requires audited financial data including balance sheet, income statement and cash flow statement and the tax bureaus audit those reports quite frequently themselves and fine offenders who under-report to the SAT. Financial statements to the SAT are much more reliable than SAIC filings. It is with the SAT numbers that our auditor verifies our earnings. Unfortunately, these reports are not readily available to the public.
There are several legitimate reasons for SAIC reported financial statements not to match those numbers filed with the SEC. First of all, the SAIC is the business registrar and not the Chinese equivalent of the SEC. The SAIC does neither review nor audit financial statements submitted with the annual inspection report. Most companies see the sole purpose of an SAIC filing in getting their business license renewed, and some even hire a third party to do the filing for them. In our case, we have outsourced our filing work to a third party agent too and their filings are as a matter of custom, not reviewed by us because the SAIC does not require reviewed or require audited financial statements. Oftentimes, Chinese companies access SAIC filings to learn more about their competitors to gain a commercial advantage. As a result many companies have understated their financial results in such filings. Investors knowledgeable in the China field do not rely on SAIC filings as a basis for determining the company’s financial position. Rather they rely on a company’s tax filings and payments to the authorized PRC government authorities.
Another reason is the difference in accounting principles. Chinese documents are audited under PRC GAAP, while SEC filings are based on U.S. GAAP standards for financial reporting. There are many differences between those standard, starting with how revenue is recognized. I can't get into detail here but the bottom line is that certain key numbers don't have to be the same in order to still both be correct.SHARE BUYBACK
At this point in time, our focus will be on restoring investor confidence in us and using assets to expand our operations. However, we are keeping all our options open and may consider a share buyback at the appropriate time.
11. Will the CEO buy shares?
As in the past we will release our 2011’s revenue and earnings projection when we release our 2010 annual report.
15. How do most of your customers pay for the online tests?
The Company employs a sales force of approximately 200 individuals working on a salary and commission basis that sell our cards to students. Each salesperson has its own customer base. When customers need cards they usually contact our sales rep, and the cards are delivered to their hands on time
Our two major lines of revenue:
Almost all our online revenues are from prepaid cards. Revenue is recognized upon downloading of exam preparation materials being accessed by the student /customer in accordance to US GAAP and our revenue recognition policy. Prepaid sales cards are distributed primarily in the Northern provinces. Since we derive all our online revenue through the sales of prepaid card as opposed to payment online, we have disabled the credit card payment function on our website and it has been disabled for some time. We have presently removed the credit card payment option on our website.
Our technicians maintain and monitor our website daily. Maintenance work is usually conducted after hours, which is day time in the U.S. Also, there could be some delay in accessing our website from overseas as our server is primarily located in China. Based on our daily monitoring record, we do not see many errors. We would be happy to demonstrate the use of our website at our tours later this month.
21. How do you explain the low traffic counts to the company’s websites? Please provide some user metrics and how those have trended during the past 2 years.
There is no global standard for statistics on website traffic and there are several different measurement criteria that may be used. We believe that the Alexa website is a useful tool to gauge our website traffic. Alexa ranks us as 1,845th in China and 15,259th globally. This rank has been stable in the past. If you are interested, you may do a search on Alexa.com and look for our website at www.edu-chn.com . Considering that we are 1,845 in all of China and the size of the Chinese population, we do not regard our website as having a low traffic count.
Our financial statements are accurate and we do not expect any adjustments. Actually, the SEC just finished reviewing our 2009 10K with some comments in late October. We then re-filed our 10K including these comments on October 28, 2010, but there was no revision to our financial statements.This concludes our formal comments.
Analyst Reports
Rodman & Renshaw on CEU 10/07/2010
CEU: Investor Call Inadequate; Rating Under Review WHAT HAPPENED?
China Education Alliance (NYSE: CEU) hosted a prepared 45-minute call to address shareholders’ concerns over the fraud allegations initiated by Kerrisdale Capital in its 28-page report.
OUR VIEW
We were initially encouraged by CEU’s timely responses, as the company 1) categorically denied all allegations contained in the report; 2) announced a conference call to address shareholder concerns; 3) verified that the company’s auditor, Sherb & Co., LLP has confirmed its cash balance as of the end of 3Q10; and 4) announced its annual shareholder meeting to be held on December 20th in Beijing, while also welcoming investors to their Harbin facilities the following day.
However, the forcefulness of CEU’s response is inadequate in quelling investor concerns and in debunking the allegations. In addition to proof that its secondary education portal, www.edu-chn.com
Rating Under Review. The stock has been treading at little above the $2.50 cash on its balance sheet, and we believe that there has been overly negative reaction to the call. That said, we are placing our rating under review given the lack of clarity on CEU’s near-term revenue and earnings prospects. As noted on the call, the branding of an education company goes hand-in-hand with its ability to generate revenues. Therefore, the fact that the CEU brand is tarnished, even if temporarily, will impact its revenue-generating prospects near-term, in our view. We also believe that unless the company releases more substantive evidence of the extent of its operations as depicted by its SEC filings, CEU shares will continue to be driven by speculative plays, resulting in a high degree of volatility.Notice Regarding Privacy and Confidentiality:
Investor Alert
China Education Alliance, Inc. issued a press release and announced today that on November 5, 2010, as an added supplement to the Company’s third quarter financial review, the Company’s auditor, Sherb & Co., LLP (“Sherb”) also performed confirmation procedures on most of the Company’s bank balances in the People’s Republic of China (“PRC”). These procedures were performed by staff members from Sherb’s Beijing office.
• Agricultural Bank of China, Huijin Branch, in the amount of RMB 37, 533,479.85, located in 14 Hongzhuan Street, Daoli District, Harbin, Heilongjiang Province, China.
• Agricultural Bank of China, Huijin Branch, in the amount of USD 7,052,922.91, located in 14 Hongzhuan Street, Daoli District, Harbin, Heilongjiang Province, China.
• Harbin Bank, Keji Branch, in the amount of RMB 97,274.63, located in 323, Tianshun Street, Nangang District, Harbin, Heilongjiang Province, China.
• China Everbright Bank, Harbin Hongqi Branch, in the amount of RMB 52,305,796.33, located in 257, Hongqi Street, Nangang District, Harbin, Heilongjiang Province, China.
The enhanced procedures were applied to approximately $67 million in deposits, or 86%, of the Company’s total cash balance of approximately $78 million. Such procedures included visits to the PRC financial institutions, meeting bank personnel and obtaining cash balance information as of September 30, 2010.
Investor Alert
The Company categorically denies all the allegations contained in the blog and regards such baseless accusations very seriously. While the Company, as a matter of policy, does not respond to third party research reports, it is consulting with its advisors and legal counsel on the appropriate response in order to preserve investor confidence and shareholder value. Additional information will be forthcoming. The management team, including Mr. Yu, China Education Alliance, Inc. Chairman and CEO, welcomes investors and shareholders to visit their Harbin headquarters.
The Company will explore all options available to it, including without limitation, aggressively pursuing legal remedies for damages caused to the Company and its shareholders.
Investor Alert
See Full Report
We believe that China Education Alliance (CEU) is fabricating its SEC financial statements. We believe that the company’s revenue and profit are highly overstated in its SEC filings and that the company is mostly a hoax.
We have put together a 30-page report on CEU and why we believe it is a fraud.
Our evidence includes :
The company’s websites do not work, despite the fact that CEU is an online education provider and its websites are the company’s main revenue-generating assets. We have recorded three videos here , here and here which show that the main www.edu-chn.com and www.pk1234567.com websites have non-functioning payment methods and are full of broken links and HTML errors.
The company’s websites receive a fraction of the visitor traffic generated by comparable sites such as those operated by China Distance Education Holdings (DL), which reports lower revenue and lower margins than CEU despite having functioning websites, a larger number of web assets, operational payment schemes and no broken links on their sites.
We hired an investigator to visit the company’s training center in Harbin and found it to be barren of desks and teaching equipment. We provide a video where we present a slideshow of the empty building. We also explain why we are confident we visited the correct location.
The company’s local filings to the Chinese government show that the online business generated less than $1 million in revenue in 2008. We provide SAIC filings from 2006, 2007 and 2008, including both original Chinese photocopies as well as English translations.
The company’s financial figures are not believable when compared to publicly traded comparable companies. CEU reports higher margins and revenue growth when compared to DL, CEDU and CAST, despite having a non-functioning website and a vacant training center.
The company has had 4 low-quality auditors in the past 6 years. In contrast, the comparable Chinese education providers DL, CEDU and CAST all have top-4 auditors.
The company raised capital in 2009 at an irrationally low valuation without providing a sensible rationale for why the capital was needed. It already supposedly had $38 million of cash on its balance sheet prior to its unnecessary capital raise.
Analyst Reports
Rodman & Renshaw on CEU
3Q10 Results. CEU reported 3Q10 EPS of $0.17, a penny below the consensus EPS estimate of $0.18, as a modestly better-than-expected topline and gross margin was offset by operating expenses that we view to be crucial for brand-building and driving sales of online debit cards. Consolidated sales rose 40.5% YoY to $14.4MM, with outperformance in online education, which grew 49.6% to $8.6MM. Training center revenues grew 35.6% YoY to $5.2MM. The gross margin expanded 294 bps YoY to 83.3%, sustaining momentum from LQ. The SG&A rate rose 605 bps YoY to 43.0%, as a result of a 70.1% increase in SG&A dollars to $6.0MM. Overall, the net income margin came in at 36.6% vs. 40.8% LY.
Appropriately focused on the topline. We are pleased with CEU’s focus on growing its topline. In light of the company’s less than 5% market share in the four Northeastern provinces (Heilongjiang, Jilin, Liaoning, and Inner Mongolia), we believe that market share capture should remain the company’s top priority. Given that the start of the school year was an opportune time for brand-building and boosting sales of its online debit cards, the heighted sales & marketing spend in 3Q10 should pay dividends throughout the school year, in our view. Already, we have noticed that deferred revenues (unearned portion of debit cards sold and tuition payments received) have risen to $2.2MM from $0.84MM LQ and vs. $1.25MM LY, which should bode well for 4Q10 sales.
Near-term Catalysts. 1) CFO Zack Pan will be presenting at two investor conferences over the next two weeks; 2) Cash deployment plans – potential $7-$9MM acquisition of a building in Beijing to erect a flagship training center and establish CEU’s brand name in the education epicenter of China; as well as a potential acquisition of a vocational training company.Maintaining Market Outperform Rating and 12-month PT of $9. We are revising our 4Q10 EPS estimate to $0.17 from $0.19 previously to account for modestly higher SG&A expenses compared with our previous forecast, but are maintaining our 2011 EPS estimate of $0.76. Trading at 7.0x our 2011 EPS estimate, we still view CEU shares as significantly undervalued compared to their Chinese education peers listed in the U.S., which are trading at an average 2011 P/E of 27.3x. These peers, on average, have comparable topline growth rate outlooks as CEU (expected 2011 sales growth: 36.1% for peers vs. 30.0% for CEU) but carry significantly lower net margins (expected 2011 net margin: 15.3% vs. 38.0% for CEU). As CEU’s organic EPS growth accelerates from single-digits currently to 20-30% for 2011, it would be more difficult for investors to not see the value. Our 12-month price target of $9 assumes nearly 12x our 2011 EPS estimate, in our view. Notice Regarding Privacy and Confidentiality:
Comments & Business Outlook
Revenue for the
three months ended September 30, 2010 increased by
$4,145,532, or 40.5%, to $14,377,210 compared to $10,231,678 for the three months ended September 30, 2009 (the “September 30, 2009 quarter”)
Net income of $5,258,415, or $.17 per share for both basic and diluted, for the September 30, 2010 quarter, as compared with net income of $4,178,718, or $.18 per share for basic and $.16 for diluted, for the September 30, 2009 quarter.
We believe the education market in China is large and significantly fragmented. Our current activities are primarily in the Northeast four provinces of China. China has about 150 million students aged 6 -18, which are the target of our education services. In the Northeast four provinces, there are about 10 million students in the 6-18 age group, while the number of student we are serving is only about 500,000 – 600,000, only about 5% of the students in our current market. Therefore, we believe that we have great potential to grow. Our growth will depend on how we penetrate and expand into the market. Our expansion may take the form of organic growth and acquisitions and the key to our growth will be the increase in students’ enrollment.
"We achieved strong growth in our online education and training center businesses. This acceleration in our organic revenue growth led to further margin expansion, signifying the high profitability of incremental revenues in our business model," stated Xiqun Yu , Chief Executive Officer of China Education Alliance, Inc. "Today our operations are centered within the four northeast provinces of China where there are an estimated 10 million students, aged 6 to 18. Of those students, we are currently providing our education services to approximately 500,000 to 600,000, or 5% of the addressable market. Going forward, we expect our growth initiative will enable us to penetrate this market and gain additional market share, and for this year, we remain confident in achieving our target of 30 percent revenue growth."
Liquidity Requirements
China education amends recent 10K :
This Annual Report on Form 10-K is being filed as Amendment No. 1 to our Annual Report on Form 10-K (the “Report”), which was originally filed on March 15, 2010 with the Securities and Exchange Commission ("SEC"). We are amending this Report in response to certain comments from the SEC. In particular, we have:
revised our Management’s Discussion and Analysis of Financial Condition and Results of Operations to provide a more detailed and quantitative analysis of known material trends and uncertainties in accordance with the SEC’s Interpretive Release No. 34-48960, “Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations” and enhanced discussion on our costs of sales for our online education division and training center.
revised our “Liquidity and Capital Resources” section to address in more detail the anticipated costs associated with our development of a nation-wide advertising campaign as well as the additional funding we will need for the expansion of our business through the sale of equity, if necessary;
We believe that our working capital, together with our cash flow from operations will be sufficient to enable us to meet our cash requirements for the next 12 months. However, in the long term we may incur additional expenses as we seek to expand our business to offer services in other parts of the PRC. During the next five years, we may incur substantial expenditure for acquisitions and the setup of new schools and training centers in new markets. During this five year expansion period we may require additional funding for the expansion purpose. At this time we are unable to accurately project the funding needs beyond the next twelve months since long-term needs depend on the availability and the scale of acquisitions we might make. The anticipated cost for the future expansion may also associate with the development of a nation-wide advertising campaign, which is estimated to be approximately additional 5% of our total revenue. If additional funds are needed in the future we anticipate obtaining such funds through the sale of equity . We cannot assure you that funding will be available if and when we require funding.
Comments & Business Outlook
Financial Highlights for the Three Months Ended June 30, 2010: 33.7% year-over-year to $10.85 million, $8.12 million in the second quarter of fiscal 29.9% year-over-year to $4.26 million, compared to $3.28 million in the second quarter of fiscal 2009. $0.14 per fully diluted share, compared to $0.13 in the second $4.74 million , compared to $3.72 million same 39.0% to $9.06 million or 83.4% of sales, compared to 80.2% of sales or $6.51 million in the second quarter of fiscal 2009.
"We are pleased to again report solid revenue and earnings growth driven largely by strong demand for our exam-oriented educational services and our vocational training programs in China," stated Xiqun Yu, Chief Executive Officer of China Education Alliance, Inc. "We remain optimistic about the opportunities for continued growth in both our supplemental education resources and in IT and professional training programs offered through our vocational centers. We remain focused on our expansion efforts into new geographic markets, which will be supported by enhanced marketing strategies to develop our core businesses. We are confident in achieving 30 percent revenue growth for the full year 2010, based on strong enrolment for our online educational services and our vocational training services ."
"We believe the education market in China is quite large and significantly fragmented. Our current activities are primarily in the Northeast four provinces of China. China has about 150 million students aged 6 -18, which are the target of our education services. In the Northeast four provinces, there are about 10 million students in the 6-18 age group, while the number of student we are serving is only about 500,000 – 600,000, only about 5% of the students in our current market. Therefore, we believe that we have great potential to grow. Our growth will depend on how we penetrate and expand into the market. Our expansion may take the form of organic growth and acquisitions and the key to our growth will be the increase in students’ enrollment.
Liquidity Requirements
We believe that our working capital, together with our cash flow from operations will be sufficient to enable us to meet our cash requirements for the next 12 months. However, we may incur additional expenses as we seek to expand our business to offer services in other parts of the People’s Republic of China as well as to market and continue the development of our vocational training activities, and it is possible that we may require additional funding for that purpose. It is possible that we may seek to acquire one or more businesses in the education field, and we may require financing for that purpose. We cannot assure you that funding will be available if and when we require funding.
GeoBargain Notes
We are removing China Education Alliance from the GeoBargain List: Stock no longer meets our EPS minimum growth rate criteria of 30%.
Added to GeoBargain
CEU is currently trading at $5.47 and reached a high of $7.48 on January 11, 2010.
Potential Valuation Scenarios
Valuation Scenarios GeoBargain
Data Inputs: a,b
Date
06/17/09
08/14/09
Price
$3.05
$5.02
12 Months Trailing Tax-Adjusted EPS a,b
$0.31
$0.36
Published 2009 Analyst Tax-Adjusted EPS Estimate a,b
$0.43
$0.38
Published 2010 Analyst Tax-Adjusted EPS Estimate a,b
n/a
$0.54
Future EPS Growth Rate Based on 2009 Tax-Adjusted Estimate a,b
53.6%
35.7%
Future EPS Growth Rate Based on 2010 Tax-Adjusted Estimate a,b
n/a
42.1%
Trailing P/E Ratio a,b
9.84
13.94
PEG Ratio Based on 2009 Growth Rate (P/E divided by growth rate) a,b
0.18
0.39
PEG Ratio Based on 2010 Growth Rate (P/E divided by growth rate) a,b
n/a
0.33
Short-Term Valuation Scenarios
Date
06/12/09
08/14/09
Price Based on P/E of 25 on Four Quarters Trailing EPS
$7.75
$9.00
Price Based on P/E of 20 on Four Quarters Trailing EPS
$6.20
$7.20
Price Based on P/E of 15 on 2009 Tax-Adjusted Analyst EPS Estimates
$7.75
$5.70
Price Based on P/E of 15 on 2010 Tax-Adjusted Analyst EPS Estimates
n/a
$8.10
Long-Term (6 to 18 Months Forward) Valuation Scenarios
Date
06/12/09
08/14/09
Price Based on P/E of 25 on 2009 Tax-Adjusted Analyst EPS Estimates
$10.75
$9.50
Price Based on P/E of 20 on 2009 Tax-Adjusted Analyst EPS Estimates
$8.60
$7.60
Price Based on P/E of 25 on 2010 Tax-Adjusted Analyst EPS Estimates
n/a
$13.50
Price Based on P/E of 20 on 2010 Tax-Adjusted Analyst EPS Estimates
n/a
$10.80
Peg Ratio Analysis - Common rule of thumb that PEG ratio should be
less than 1.0
PEG Ratio Less than 1?
YES
a China Education Alliance is not paying a full U.S. tax rate. The GeoTeam ® prefers to use U.S. fully-taxed EPS figures when calculating potential valuation scenarios. Therefore, all EPS numbers have been adjusted by the GeoTeam ® to reflect a standard U.S. tax rate of 36% b Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . The GeoTeam ® non-GAAP figures may, from time to time, differ from company supplied figures. These scenarios are not investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.
GeoBargain Notes
China Education Alliance announced its second quarter financial results on August 11, 2009.
Revenues increased 82% to $8.2 million
Earnings per share increased 86% to $0.13 and met analyst estimates .
The GeoTeam ® has updated The Company's financial snapshot and valuation scenario tables .
It is important to note that 2009 earnings per share analyst estimates have been reduced, as reflected in our valuation scenario tables. The estimates portray quarterly growth of 4% to 15% for the next four quarters before picking up again to over 45% in the company's September ending 2010 third quarter . This may have some bearing on investor valuation assumptions in the short-run. On the flip side the stock is still selling at a significant discount to its peer group and has a PEG ratio that is solidly under 1 .
Financials
2nd QUARTER 2009 vs. 2008 FINANCIAL SNAPSHOT ENDED JUNE
2nd Quarter 2009 2nd Quarter 2008 Period Change
GAAP Revenue
$8.2 million
$4.5 million
82.2%
GAAP EPS
$0.13
$0.07
85.7%
Tax Rate
13.6%
7.2%
89.9%
Fully Tax-Adjusted GAAP EPS b
$0.10
$0.05
100.0%
Fully Diluted Shares
25,085,474
24,818,668
1.1%
Source: See
Release
1st QUARTER 2009 vs. 2008 FINANCIAL SNAPSHOT ENDED MARCH
1st Quarter 2009 1st Quarter 2008 Period Change
GAAP Revenue
$8.2 million
$4.1 million
100.0%
GAAP EPS
$0.13
$0.08
62.5%
Tax Rate
4.9%
8.4%
-3.1%
Fully Tax-Adjusted GAAP EPS b
$0.09
$0.06
50.0%
Fully Diluted Shares
24,425,179
24,861,752
-0.02%
Source: See
Release
FULL YEAR 2008 vs. 2007 FINANCIAL SNAPSHOT ENDED DECEMBER
Full Year 2008 Full Year 2007 Period Change
GAAP Revenue
$24.9 million
$17.4 million
43.1%
GAAP EPS
$0.40
$0.14
187.7%
Geo Supplied Non-GAAP EPS a
$0.41
$0.30
30.0%
Tax Rate
6.3%
6.5%
-3.1%
Fully Tax-Adjusted GEO Supplied Non-GAAP EPS a
$0.28
$0.21
33.3%
Fully Diluted Shares
24,662,830
22,549,837
9.4%
a Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items contained in the company's filings. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . The GeoTeam ® non-GAAP figures may, from time to time, differ from company supplied figures.
b The GeoTeam ® tax rate calculations may deviate from the company's reported tax rate, arising from the different treatment, in China vs. the U.S.A , with regards to the deductibility of certain expenses as well as the tax liabilities associated with certain gains. These differences typically arise from non-cash items. China Education Allianceis not paying a full U.S. tax rate. The GeoTeam ® prefers to use U.S. fully-taxed EPS figures when calculating potential valuation scenarios. Therefore, EPS numbers have been adjusted by the GeoTeam ® to reflect a tax rate of 36% .
Research
GeoNuggets® - Quick Check List Highlighting Undiscovered Opportunities
Price = $2.90
Trailing EPS = $0.46
Fully-Taxed Trailing EPS = $0.31
EPS Estimate = $0.62
Fully-Taxed EPS Estimate = $0.43
P/E based on Fully-Taxed Trailing EPS = 9.35 Reasons for Optimism
CEUA meets 10 out of 10 GeoBargain® Requirements a
Requirement Comments
Recent 52-week High (generally within 3 months) $3.40 on 6/1/2009
30% EPS Growth Rate
Full year 2008 vs 2007 EPS growth rate of 33%
Forecast 2009 EPS growth rare of 54%
10% Revenue Growth
1st Qtr. 2009 vs 2008 revenue increased 102%.
Full year 2008 vs 2007 revenue growth rate of 43%
Strong Balance Sheet As of 1st Qtr 2009
Positive Cash Flow
$3.9 Million as of 1st Qtr. 2009
$9.8 million for 2008
Debt to Equity Ratio less than 20%
0%
Current Ratio is at least 2:1
15:1
Return on Equity is at least 15% 19.3% trailing, 20.5% for 2008
Minimum Pre-tax Operating Margins of 8% 41.4% as of 1st Qtr. 2009, 42.6% for 2008
Preferably Under 50 Million Shares 24.4 million shares as of Qtr. 2009
High Insider Ownership (generally greater than 15%)57.7% as of March 23, 2009
Limited Institutional Ownership (generally less than 20%)<20%
P/E Divided by EPS Growth Rate (PEG Ratio) is Less Than 1. 0.18
Over the last ten years, there has been increased awareness of the value of educating the youth of China . (Source Wikipedia). Initiatives to help students receive higher education and respected degrees has prompted a nationwide expansion of tools geared towards the edification of an increasing number of individuals. Although the Chinese government has always considered education an important component of its economic and social development, the recent emergence of its market economy has made schooling a top priority in order to maintain a healthy growth of available learning resources. CEUA provides services and products that meet the market demand for learning material that stresses the importance of doing well in standardized tests, a vehicle which the government has adopted as a predominant measure for evaluating students at different levels of the learning process. (Source 2008 10K) China Education Alliance is expanding into vocational training and education, adding another element of growth to its business. As China continues to focus on attaining its modernization goals, there will be an increasing number of people entering into vocational programs geared towards imparting technical skills to its students. In 2007, China had 14,832 secondary vocational and technical institutions. About 19.9 million students were studying in secondary and post-secondary vocational institutions. (Source Wikipedia) The Company uses a model of "vertical integration" that potentially guides students to use China Education Alliance resources throughout different stages of the learning process. This gives the Company the potential to receive a consistent long-term revenue stream. The Company is becoming more proactive in disseminating information about their story. They recently hired a qualified Investor Relations firm, a move that the GeoTeam has always maintained to be a required step to increase shareholder value. In fact, they just participated in the Red Chip Companies 2009 Small-cap Investor Conference Live Webcast event on June 16, 2009.
Potential Valuation Scenarios if the Company can achieve its EPS growth goals
Short-Term Potential value based on fully taxed adjusted trailing EPSa These scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.
Potential Valuation Scenarios
Valuation Scenarios Geo Bargain
Data Inputs:
Date
06/17/09
Price
$3.05
12 Months Trailing EPS a,b
$0.31
Published 2009 Analyst EPS Estimate $0.62
$0.43 a,b
Future EPS Growth Rate Based on 2009 Tax- Adjusted Estimate a,b
53.6%
Trailing P/E Ratio a,b
9.8
PEG Ratio (P/E divided by growth rate) a,b
0.18
Short-Term Valuation Scenarios
Date
06/12/09
Price Based on P/E of 25 on Four Quarters Trailing EPS
$7.75
Price Based on P/E of 20 on Four Quarters Trailing EPS
$6.20
Price Based on P/E of 15 on 2009 Tax-Adjusted Analyst EPS Estimates
$7.75
Long-Term (12 Months Forward) Valuation Scenarios
Date
06/12/09
Price Based on P/E of 25 on 2009 Tax-Adjusted Analyst EPS Estimates
$10.75
Price Based on P/E of 20 on 2009 Tax-Adjusted Analyst EPS Estimates
$8.60
Peg Ratio Analysis - Common rule of thumb that PEG ratio should be
less than 1.0
PEG Ratio Less than 1?
YES
a China Education Alliance is not paying a full U.S. tax rate. The
GeoTeam ® prefers to use U.S. fully-taxed EPS figures when calculating potential valuation scenarios. Therefore, all EPS numbers have been adjusted by the
GeoTeam ® to reflect a standard U.S. tax rate of 36%
Non-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . The
GeoTeam ® non-GAAP figures may, from time to time, differ from company supplied figures.
These scenarios are not investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.
