China Education Alliance (PINK:CEU)

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.

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.

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.

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.

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?

I do not like CEU in my first impression. My reasons are as follows:

1. Company structure.

CEU applies a 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. 

2. Revenue of CEU

CEU has three parts of revenue: online education, training center, and advertising. CEU reported a USD 12 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.

3. The online discussions of CEU

There is some negative information on CEU in different forums in China. The key issues are about the bad human resource management. It seems that it keeps firing and hiring people.

4. SAT/SAIC files

Based on the structure, if ZHLD is an FIE and its file shall be filed to SAT and SAIC at the same time. However, it has several domestic owned enterprises (DES) which means we need more DD into these operations to derive a conclusion.

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,

As you informed, I attended the conference call of CEU.  As we discussed, without real time questions,  this conference call was a kind of waste of time .

In the session, the CFO made a mistake regarding the SAIC/SAT file.  As ZHLD (the main subsidiary of CEU in Harbin) is a FIE, the annual inspection of ZHLD shall be jointly done by SAIC, SAT, SAFE and several other government authorities (the disclosed annual inspection report is clearly a joint report).  The income statement filed to SAIC shall be the same as the income statement filed to SAT.  The CFO acknowledged that SAT file shall be more accurate and said that it is usually not disclose to public.  He did not realize the joint inspection issue. 

For the training center, the CFO claimed that when the video was taken, the training center was under renovation.  However, he can not explain where the students have their classes when the building was under renovation. 

For the confirmation of bank balance issued by the CPA firm, the date of the document is Nov. 5th, 2010 (a Friday) and the filing date of the 10-Q in SEC is Nov. 8 (Mon.).  I am not sure whether the CPA and CEU can finish the10-Q that fast or not. 

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.

Confirmations of the cash balance as of September 30, 2010 were conducted at the following financial institutions:

   • ICBC, Harbin Kunlun Branch, in the amount of RMB 315,787,237.07, located in 36 Kangshun Street, Nangang District , Harbin, Heilongjiang Province, China.

   • 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.

As of September 30, 2010 the Company also maintained approximately $8.6 million in its J. P. Morgan and EastWest Bank accounts in the U.S. and approximately $1.3 million at ICBC in Beijing, which Sherb also verified by reviewing the relevant bank statements

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.

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.