U.S.
Securities and Exchange Commission
Washington,
D.C. 20549
FORM
10-QSB/A
AMENDMENT
NO. 1
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[X]
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QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
for the quarterly period ended March 31,
2005
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[
]
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
for the transition period from _______ to
_______
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CHINA
EDUCATION ALLIANCE, INC.
(Exact
name of small business issuer as specified in its charter)
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North
Carolina
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56-2012361
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(State
or other jurisdiction of
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(IRS
Employer identification No.)
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incorporation
or organization)
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80
Heng Shan Rd. Kun Lun Shopping Mall
Harbin,
P.R. China 150090
(Address
of principal executive offices)
(86451)
8233-5794
(Issuer's
telephone number)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [x] No [ ]
Number
of
shares of common stock outstanding as of May
11,
2005: 57,915,000
Number
of
shares of preferred stock outstanding as of May
11,
2005: -0-
ITEM
1.
FINANCIALS
CHINA
EDUCATION ALLIANCE, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEET
MARCH
31,
2005
(UNAUDITED)
The
accompanying notes are an integral part of these financial
statements
2
CHINA
EDUCATION ALLIANCE, INC.
AND
SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
The
accompanying notes are an integral part of these financial
statements
3
CHINA
EDUCATION ALLIANCE, INC.
AND
SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
The
accompanying notes are an integral part of these financial
statements
4
CHINA
EDUCATION ALLIANCE, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
AS
OF MARCH 31, 2005 (UNAUDITED)
NOTE
1 BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to
the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In
the
opinion of management, the unaudited condensed consolidated financial statements
contain all adjustments consisting only of normal recurring accruals considered
necessary to present fairly the Company's financial position at March 31, 2005,
the results of operations for the three month period ended March 31, 2005,
and
cash flows for the three months ended March 31, 2005. The results for the period
ended March 31, 2005 are not necessarily indicative of the results to be
expected for the entire fiscal year ending December 31, 2005. These financial
statements should be read in conjunction with the Company's annual report on
Form 10-KSB as filed with the Securities and Exchange Commission.
NOTE
2 REVERSE MERGER
ABC
Realty Co. was organized under the laws of the State of North Carolina on
December 2, 1996. Harbin Zhong He Li Da Jiao Yu Ke Ji You Xian Gong Si ("ZHLD")
was registered in the People’s Republic of China ("PRC") on August 9, 2004 with
its principal place of business in Harbin, PRC.
ZHLD
is
principally engaged in the on-line education business serving, among other
customers, the local middle schools in Harbin, China.
On
September 15, 2004, ABC Realty Co. executed a Plan of Exchange with ZHLD and
Duane C. Bennett, Chairman of ABC Realty Co. pursuant to which ZHLD exchanged
all of its registered capital of $60,386 for 55,000,000 shares or approximately
95% of the common stock of China Education Alliance, Inc. ("China Education").
On December 13, 2004, China Education consummated the Plan of Exchange with
ZHLD. As a result of the Plan of Exchange, the transaction was treated for
accounting purposes as a capital transaction and recapitalization by the
accounting acquirer (ZHLD) and as a reorganization by the accounting acquiree
(China Education).
On
November 17, 2004, ABC Realty changed its name to China Education Alliance,
Inc.
5
CHINA
EDUCATION ALLIANCE, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
AS
OF MARCH 31, 2005 (UNAUDITED)
NOTE
2 REVERSE MERGER (CONTINUED)
Accordingly,
the financial statements include the following:
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(1)
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The
balance sheet consists of the net assets of the acquirer at historical
cost and the net assets of the acquiree at historical
cost.
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(2)
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The
statement of operations includes the operations of the acquirer for
the
periods presented and the operations of the acquiree from the date
of the
merger.
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China
Education and its wholly owned subsidiary ZHLD are hereafter referred to as
(the
"Company").
NOTE
3 PRINCIPLES OF CONSOLIDATION
The
accompanying consolidated financial statements for 2004 include the accounts
of
China Education from the date of merger and its wholly owned subsidiary of
ZHLD
from August 9, 2004 (Inception) to December 31, 2004.
The
accompanying unaudited consolidated financial statements for 2005 include the
accounts of China Education and its wholly owned subsidiary of
ZHLD.
All
significant intercompany transactions and balances have been eliminated on
consolidation.
NOTE
4 USE OF ESTIMATES
The
preparation of the financial statements in conformity with US GAAP requires
the
Company's management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reported periods. Actual
amounts could differ from those estimates.
NOTE
5 EARNINGS (LOSS) PER SHARE
Basic
earnings (loss) per share exclude dilution and are computed by dividing earnings
(loss) available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings (loss) per share are
computed by dividing earnings (loss) available to common shareholders by the
weighted average number of common shares outstanding adjusted to reflect
potentially dilutive securities. The company does not have any dilutive
securities outstanding as of March 31, 2005.
6
CHINA
EDUCATION ALLIANCE, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
AS
OF MARCH 31, 2005 (UNAUDITED)
NOTE
6 INVENTORIES
Inventories
at March 31, 2005 (unaudited) and December 31, 2004 consisted of the
following:
For
the
three months ended March 31, 2005 (unaudited), no provision for obsolete
inventories was recorded by the Company.
NOTE
7 NOTE PAYABLE
Balance
at March 31, 2005 (unaudited) and December 31, 2004:
Note
payable is due to a third party, is unsecured and bears interest at a rate
of
approximately 9% per annum. The Company scheduled monthly payments included
in
interest, each in the amount of $2,500 starting on October 15, 2004 and ending
on September 15, 2005, with the balance of $70,000 due and payable on September
15, 2005, at the option of the Company, in cash or in an equivalent amount
of
free trading common stock of the Company.
NOTE
8 SHAREHOLDERS’ EQUITY
(A) Stock
Issued in Reverse Merger
On
December 13, 2004, China Education issued 2,915,000 shares of common stock
for
the recapitalization with ZHLD (See Note 2).
(B) In
kind
contribution
During
2004, property and equipment of $2,405,498 was contributed by a stockholder
as
additional paid in capital. The property and equipment was recorded
at the
stockholder’s historical cost.
During
the quarter, the Company recorded additional paid in capital of $7,500 being
amount owed to and waived by the stockholders.
7
CHINA
EDUCATION ALLIANCE, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
AS
OF MARCH 31, 2005 (UNAUDITED)
NOTE
9 RELATED PARTY TRANSACTIONS
During
2004, property and equipment of $2,405,498 was contributed by a stockholder
as
additional paid in capital. The property and equipment was recorded at the
stockholders’ historical cost.
During
the quarter, the Company recorded additional paid in capital of $7,500 being
amount owed to and waived by the stockholders.
NOTE
10 COMPARATIVE FINANCIAL STATEMENTS
On
December 13, 2004, the Company acquired 100% of the capital stock of ZHLD,
a
corporation organized under the laws of the P.R. China ("PRC"), pursuant to
a
Share Exchange Agreement dated September 15, 2004. The ZHLD subsidiary,
incorporated in the PRC on August 9, 2004, has commenced its business in on-line
education servicing, among other customers, the local middle schools in Harbin,
China. The acquisition was accounted for as a reverse merger. Accordingly,
there
are no applicable financial statements for the comparable period for the three
months ended March 31, 2004
ITEM
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The
discussion contained in this prospectus contains "forward-looking statements"
that involve risk and uncertainties. These statements may be identified by
the
use of terminology such as "believes", "expects", "may", or "should", or
"anticipates", or expressing this terminology negatively or similar expressions
or by discussions of strategy. The cautionary statements made in this prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this prospectus. Our actual results could differ
materially from those discussed in this prospectus. Important factors that
could
cause or contribute to such differences include those discussed under the
caption entitled "risk factors," as well as those discussed elsewhere in this
prospectus.
OUR
COMPANY
We
were
incorporated in North Carolina on December 2, 1996. Starting from September
2004, we were engaged in the online education industry in China. We are planning
to develop our business by increasing the user base, the sales of our
self-developed educational software and the database which covers all levels
of
the basic education in China. Currently, we own www.edu-chn.com,
which
is the only website in China having copyrights of examination materials of
Chinese primary schools and middle schools, so that we legally provide target
users in the age group of 7 to 18 years with downloadable examination materials.
Our revenue is derived from the use by consumers of a debit card which is
purchased and is used to buy downloadable educational materials from our
website, which are primarily examination materials. Through cooperation with
the
local education committees and schools, we now have 270,000 using our online
services. We project over 450,000 users in the first half of 2005 and over
50
million users over the next two years, based on demographic trends and an
increase product offering on its web site. We also plan to provide other
services such as text book downloading and SMS. When visits to our web site
increase, and our membership base expands, we plan to expand our products into
the advanced education market and adult education market.
8
Results
of Operations.
For
the
period ended March 31, 2005 (Unaudited).
Sales.
Currently
our
business is on-line education serving the local middle schools in Harbin, China.
The sales of $78,617 for the three months ended March 31, 2005 were primarily
from the sales of debit cards for use to obtain educational materials posted
on
the Company's website at the time of the delivery, when title to the products
transfers and the customer bears the risk of loss.
Cost
of
Sales.
The
cost
of goods sold includes the purchase price and printing expenses for our debit
cards and the cost of copy rights of the exam materials plus other direct costs
associated with making the products available for resale. It is customary to
experience variations in the cost of sales as a percentage of net sales based
on
the types of products sold.
The
cost
of goods sold for the three months ended March 31, 2005 was $25,638, which
was
approximately 32.6% of sales. The low percentage was primarily due to the
feature of our products. We provide our members with downloadable materials,
most of which have limited costs.
We
expect
to keep cost of sales as a percentage of sales at a low level as our new
services provided on our website are more popular. We are seeking for the
co-operation with the named schools which have quality guarantee on the exam
materials due to their experiences and restricted systems. If we can
successfully grow our revenues through providing download services for the
exam
materials of named schools, we can meet the expectation in future periods due
to
higher margin of these services. In addition, volume discounts will be available
if we are successful in achieving sales growth in the future, which will further
reduce our cost of sales as a percentage of sales.
Expenses.
Selling,
general and administrative expenses for the three months ended March 31, 2005
were $15,897. The expenses were primarily attributable to the salaries, the
initial set up costs and website creation.
The
Company
expects increases in expenses through the year 2005 as the Company moves towards
developing their business plan in the following aspects:
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Buildup
the infrastructure to ensure fast access and to satisfy the volume
coming
with increasing demand ;
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Boost
market shares via nation-wide advertising campaigns;
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Invest
in human resources to improve the quality of services;
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Open
branch offices in key cities.
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9
Income
Taxes
Income
taxes are provided in accordance with Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), "Accounting
for Income Taxes."
A
deferred tax asset or liability is recorded for all temporary differences
between financial and tax reporting and net operating
loss-carryforwards.
Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that, some portion or all of the deferred
tax asset will not be realized. Deferred tax assets and liabilities are adjusted
for the effect of changes in tax laws and rates on the date of enactment. We
currently do not have any deferred tax assets.
Income
/
Losses.
Net
income for the three months ended March 31, 2005 was $980, which was primarily
due to the limited cost of sales. We will attempt to grow our revenues during
2005.
Impact
of
Inflation.
We
believe
that inflation has had a negligible effect on operations since inception. We
believe that we can offset inflationary increases in the cost of operations
by
increasing sales and improving operating efficiencies.
Liquidity
and Capital Resources.
Cash
flows
provided by operations were $64,266 for the three months ended March 31, 2005.
Cash flows provided by operations were primarily attributable to our $48,779
in
depreciation of our fixed assets for the period ended March 31,
2005.
There
were no
cash flows from investing activities in the three-month period ended March
31,
2005.
Cash
flows
generated by financing activities were $2,856 for the period ended March 31,
2005. Cash flows from first quarter of 2005 were from a $7,500 shareholder
loan,
offset by the payment of $4,644 on convertible note.
Overall,
we
have funded our cash needs from inception through March 31, 2005 with a series
of equity transactions, including the loans from related parties. If we are
unable to receive additional cash from our related parties, we may need to
rely
on financing from outside sources through debt or equity transactions.
We
had cash
on hand of $156,863 and a working capital surpass of $43,343 as of March 31,
2005. We will substantially rely on the existence of revenue from our business;
however, we have no current or projected capital reserves that will sustain
our
business for the next 12 months. Currently, we have enough cash to fund our
operations for about six months. This is based on current cash flows from
projected revenues, operating and financing activities. However, if the
projected revenues fall short of needed capital we may not be able to sustain
our capital needs. We will then need to obtain additional capital through equity
or debt financing to sustain operations for an additional year. A lack of
significant revenues in 2005 will significantly affect our cash position and
move us towards a position where the raising of additional funds through equity
or debt financing will be necessary. Our current level of operations would
require capital of approximately $50,000 to sustain operations through year
2005
and approximately $50,000 per year thereafter. Modifications to our business
plans or diversify our business in different industries may require additional
capital for us to operate. For example, if we are unable to raise additional
capital in the future we may need to curtail our number of new services offers
or limit our marketing efforts to the most profitable geographical areas. This
may result in lower revenues and market share for us.
10
On
a
long-term basis, liquidity is dependent on continuation and expansion of
operations, receipt of revenues, and additional infusions of capital and debt
financing. Our current capital and revenues are insufficient to fund such
expansion. If we choose to launch such an expansion campaign, we will require
substantially more capital. The funds raised from this offering will also be
used to market our products and services as well as expand operations and
contribute to working capital. However, there can be no assurance that we will
be able to obtain additional equity or debt financing in the future, if at
all.
If we are unable to raise additional capital, our growth potential will be
adversely affected and we will have to significantly modify our plans. For
example, if we unable to raise sufficient capital to develop our business plan,
we may need to:
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Curtail
new product launches
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Forego
or postpone the cooperation with our strategic partners,
or
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Limit
our future marketing efforts to areas that we believe would be the
most
profitable.
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Demand
for
the products and services will be dependent on, among other things, market
acceptance of our on-line services and other related products. Inasmuch as
a
major portion of our activities is the receipt of revenues from the sales of
our
downloadable services, our business operations may be adversely affected by
our
competitors and prolonged recession periods.
Our
success
will be dependent upon implementing our plan of operations and the risks
associated with our business plans. We plan to strengthen our position in
educational markets in China. We also plan to expand our operations through
aggressively marketing our on-line business and Company concept.
ITEM
3. CONTROLS
AND PROCEDURES
Quarterly
Evaluation of Controls
As
of the end
of the period covered by this amendment of quarterly report on Form 10-QSB/A,
we
evaluated the effectiveness of the design and operation of (i) our disclosure
controls and procedures ("Disclosure Controls"), and (ii) our internal control
over financial reporting ("Internal Controls"). This evaluation ("Evaluation")
was performed by our President and Chief Executive Officer, Yu, Xi Qun ("CEO"),
and Wang, Chunqing, our Chief Financial Officer. In this section, we present
the
conclusions of our CEO based on and as of the date of the Evaluation, (i) with
respect to the effectiveness of our Disclosure Controls, and (ii) with respect
to any change in our Internal Controls that occurred during the most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect our Internal Controls.
11
CEO
and
CFO Certifications
Attached
to
this quarterly report, as Exhibits 31.1 and 31.2, are certain certifications
of
the CEO and CFO, which are required in accordance with the Exchange Act and
the
Commission's rules implementing such section (the "Rule 13a-14(a)/15d-14(a)
Certifications"). This section of the quarterly report contains the information
concerning the Evaluation referred to in the Rule 13a-14(a)/15d-14(a)
Certifications. This information should be read in conjunction with the Rule
13a-14(a)/15d-14(a) Certifications for a more complete understanding of the
topic presented.
Disclosure
Controls and Internal Controls
Disclosure
Controls are procedures designed with the objective of ensuring that information
required to be disclosed in our reports filed with the Commission under the
Exchange Act, such as this quarterly report, is recorded, processed, summarized
and reported within the time period specified in the Commission's rules and
forms. Disclosure Controls are also designed with the objective of ensuring
that
material information relating to the Company is made known to the CEO and the
CFO by others, particularly during the period in which the applicable report
is
being prepared. Internal Controls, on the other hand, are procedures which
are
designed with the objective of providing reasonable assurance that (i) our
transactions are properly authorized, (ii) our assets are safeguarded against
unauthorized or improper use, and (iii) our transactions are properly recorded
and reported, all to permit the preparation of complete and accurate financial
statements in conformity with accounting principals generally accepted in the
United States.
Limitations
on the Effectiveness of Controls
Our
management does not expect that our Disclosure Controls or our Internal Controls
will prevent all error and all fraud. A control system, no matter how well
developed and operated, can provide only reasonable, but not absolute assurance
that the objectives of the control system are met. Further, the design of the
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because
of
the inherent limitations in all control systems, no evaluation of controls
can
provide absolute assurance that all control issues and instances so of fraud,
if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision -making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of
two
or more people, or by management override of the control. The design of a system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed
in
achieving its stated objectives under all potential future conditions. Over
time, control may become inadequate because of changes in conditions, or because
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
12
Scope
of
the Evaluation
The
CEO and
CFO's evaluation of our Disclosure Controls and Internal Controls included
a
review of the controls' (i) objectives, (ii) design, (iii) implementation,
and
(iv) the effect of the controls on the information generated for use in this
quarterly report. In the course of the Evaluation, the CEO and CFO sought to
identify data errors, control problems, acts of fraud, and they sought to
confirm that appropriate corrective action, including process improvements,
was
being undertaken. This type of evaluation is done on a quarterly basis so that
the conclusions concerning the effectiveness of our controls can be reported
in
our quarterly reports on Form 10-QSB and annual reports on Form 10-KSB. The
overall goals of these various evaluation activities are to monitor our
Disclosure Controls and our Internal Controls, and to make modifications if
and
as necessary. Our external auditors also review Internal Controls in connection
with their audit and review activities. Our intent in this regard is that the
Disclosure Controls and the Internal Controls will be maintained as dynamic
systems that change (including improvements and corrections) as conditions
warrant.
Among
other matters, we sought in our Evaluation to determine whether there were
any
significant deficiencies or material weaknesses in our Internal Controls, which
are reasonably likely to adversely affect our ability to record, process,
summarize and report financial information, or whether we had identified any
acts of fraud, whether or not material, involving management or other employees
who have a significant role in our Internal Controls. This information was
important for both the Evaluation, generally, and because the Rule
13a-14(a)/15d-14(a) Certifications, Item 5, require that the CEO and CFO
disclose that information to our Board (audit committee), and to our independent
auditors, and to report on related matters in this section of the quarterly
report. In the professional auditing literature, "significant deficiencies"
are
referred to as "reportable conditions". These are control issues that could
have
significant adverse affect on the ability to record, process, summarize and
report financial data in the financial statements. A "material weakness" is
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce, to a relatively low level,
the risk that misstatement cause by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employee in the normal course of performing their
assigned functions. We also sought to deal with other controls matters in the
Evaluation, and in each case, if a problem was identified, we considered what
revisions, improvements and/or corrections to make in accordance with our
ongoing procedures.
Conclusions
Based
upon
the Evaluation, our disclosure controls and procedures are designed to provide
reasonable assurance of achieving our objectives. Our CEO and CFO have concluded
that our disclosure controls and procedures are effective at that reasonable
assurance level to ensure that material information relating to the Company
is
made known to management, including the CEO and CFO, particularly during the
period when our periodic reports are being prepared, and that our Internal
Controls are effective at that assurance level to provide reasonable assurance
that our financial statements are fairly presented inconformity with accounting
principals generally accepted in the United States. Additionally, there has
been
no change in our Internal Controls that occurred during our most recent fiscal
quarter that has materially affected, or is reasonably likely to affect, our
Internal Controls.
13
PART
II.
OTHER
INFORMATION
Item
1.
Legal Proceedings
None.
Item
2.
Changes in Securities
None.
Item
3.
Defaults Upon Senior Securities
None.
Item
4.
Submission of Matters to a Vote of Security Holders
None.
Item
5.
Other Information
None.
Item
6.
Exhibits and Reports on Form 8-K
(a)
Exhibits
3.
Articles of Incorporation with amendments and bylaws are incorporated by
reference to Exhibit No. 1 of Form SB-2 as amended filed April
2001.
Filed
herewith*
(b)
Reports on Form 8-K
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|
(1)
|
On
January 25, 2005, we filed a current report on Form 8-K in order
to report
the changes in our certifying
accountant.
|
| (2) |
On
April 18, 2005, we filed an amendment of current report on Form 8-K/A
in
order to publish our audited financial statements and unaudited pro
forma
financial statements reflecting a transaction closing on December
13,
2004.
|
14
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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CHINA
EDUCATION ALLIANCE, INC.
(Registrant)
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Date: October
26, 2005
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By: | /s/ Yu, Xi Qun |
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Yu, Xi Qun President
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15