AI
Monday, September 14, 2009 8:11:03 AM
Form 10-K for HARTCOURT COMPANIES INC
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14-Sep-2009
Annual Report
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Management discussion and analysis contains comparisons of the results of our operations for the twelve months ended May 31, 2009, for the 12 months ended May 31, 2008.
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal year ended
May 31 (12 months)
2009 2008
Net revenues $ 2,431,955 $ -
Cost of revenues 368,167 -
Gross profit 2,063,788 -
Operating expenses:
General and administrative expenses 1,343,842 1,299,858
Depreciation and amortization 20,839 13,510
Impairment of goodwill - 682,988
Total operating expenses 1,364,681 1,996,356
Income (loss) from operations 699,107 (1,996,356 )
Other income
Foreign currency exchange gain 43,648 -
Gain on settlement of debt 182,687 -
Total other income 226,335 -
Income (loss) from operations before income tax provision
and minority interest 925,442 (1,996,356 )
Provision for income taxes (212,791 ) -
Minority interest, net of taxes (697,506 ) -
Income (loss) from continuing operations 15,145 (1,996,356 )
Discontinued operations:
Gain/(loss) from discontinued operations - 22,878
Income/(loss) from discontinued operations - 22,878
NET INCOME (LOSS) 15,145 (1,973,478 )
OTHER COMPREHENSIVE ITEM:
Foreign currency translation loss (48,226 ) (60,754 )
NET COMPREHENSIVE LOSS $ (33,081 ) $ (2,034,232 )
BASIC AND DILUTED EARNINGS/ (LOSS) PER COMMON SHARE:
Income/(loss) from continued operations basic $ 0.00 $ (0.01 )
Income from discontinued operations basic $ - $ 0.00
Income/(loss) per share basic $ 0.00 $ (0.01 )
Basic weighted average number of shares outstanding 304,501,261 205,761,854
Income (loss) from continued operations diluted $ 0.00 $ (0.01 )
Loss from discontinued operations diluted $ - $ 0.00
Income (loss) per share diluted $ 0.00 $ (0.01 )
Diluted weighted average number of shares outstanding 304,561,261 205,488,066
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The following discussion contains forward-looking statements. Forward looking statements are identified by words and phrases such as "anticipate", "intend", "expect" and words and phrases of similar import. We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements due to risks, uncertainties and assumptions that are difficult to predict, including those set forth in Item 1A above. We encourage you to read those risk factors carefully along with the other information provided in this Report and in our other filings with the SEC before deciding to invest in our stock or to maintain or change your investment. We undertake no obligation to revise or update any forward-looking statement for any reason, except as required by law.
You should read this MD&A in conjunction with the Consolidated Financial Statements and Related Notes in Item 8.
Critical Accounting Policies and Estimates
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheets. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Senior management has discussed the development and selection of these critical accounting policies and their disclosure in this Report with the Audit Committee of our Board of Directors. We believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments: revenue recognition; allowance for doubtful accounts; income taxes; stock-based compensation; asset impairment.
Revenue Recognition
In accordance with generally accepted accounting principles ("GAAP") in the United States, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collection of the resulting receivable is reasonably assured. Noted below are brief descriptions of the product or service revenues that the Company recognizes in the financial statements contained herein.
The Company recognized the revenue only when the service or products (training software) has been fully delivered or downloaded.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when we assess the realization of accounts receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts could be required. We initially record a provision for doubtful accounts based on our historical experience, and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable; (iv) our historical provision for doubtful accounts;
(v) the credit worthiness of the customer; and (vi) the economic conditions of the customer's industry as well as general economic conditions, among other factors.
Income taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS 109 prescribes the use of the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, or increase or decrease this allowance in a period, we increase or decrease our income tax provision in our statement of operations. If any of our estimates of our prior period taxable income or loss prove to be incorrect, material differences could impact the amount and timing of income tax benefits or payments for any period.
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The Company operates in several countries. As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations.
We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. The tax liabilities are reflected net of realized tax loss carry forwards. We adjust these reserves upon specific events; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the contingency has been resolved and the liabilities are no longer necessary.
Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that we provide during any given year.
Stock-Based Compensation
The Company adopted SFAS No. 123 (Revised 2004), Share Based Payment ("SFAS No. 123R"), under the modified-prospective transition method on June 1, 2006. SFAS No. 123R requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. Share-based compensation recognized under the modified-prospective transition method of SFAS No. 123R includes share-based compensation based on the grant-date fair value determined in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for all share-based payments granted prior to and not yet vested as of June 1, 2006 and share-based compensation based on the grant-date fair-value determined in accordance with SFAS No. 123R for all share-based payments granted after June 1, 2006. SFAS No. 123R eliminates the ability to account for the award of these instruments under the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and allowed under the original provisions of SFAS No. 123. Prior to the adoption of SFAS No. 123R, the Company accounted for the Company's stock option plans using the intrinsic value method in accordance with the provisions of APB Opinion No. 25 and related interpretations.
The fair value of common stock grant is estimated using the Black-Scholes option pricing model, which uses certain assumptions related to risk - free interest rates, expected volatility, expected life of the common stock options and future dividend. Compensation expense is recorded based upon the values derived from the Black-Scholes option pricing model, based on an expected forfeiture rate that is adjusted for actual expensece. If our Black-Scholes option pricing model assumptions or our actual or estemated forfeiture rate and different in the future, that could materially affect compensaion expense recorded in future periods.
Asset Impairment
We periodically evaluate the carrying value of other long-lived assets, including, but not limited to, property and equipment,intangible assets and goodwill, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Significant estimates are utilized to calculate expected future cash flows utilized in impairment analyses. We also utilize judgment to determine other factors within fair value analyses, including the applicable discount rate.
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Recently Issued Accounting Standards
In December 2007, the Financial Accounting Standards Board ("FASB") simultaneously issued SFAS No. 141R, "Business Combinations (2007 Amendment)," and SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51." Both standards update United States guidance on accounting for "noncontrolling interests," sometimes referred to as minority interests, which interests represent a portion of a subsidiary not attributable, directly or indirectly, to a parent. FASB and the International Accounting Standards Board ("IASB") have been working together to promote international convergence of accounting standards. Prior to promulgation of these new standards there were specific areas in accounting for business acquisitions in which conversion was not achieved. The objective of both standards is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in "business combinations" and consolidated financial statements by establishing accounting and reporting standards. In business combinations it is accomplished by establishing principles and requirements concerning how an "acquirer" recognizes and measures identifiable assets acquired, liabilities assumed, and noncontrolling interest in the acquiree, as well as goodwill acquired in the combination or gain from a bargain purchase; and determines information to be disclosed to enable users to evaluate the nature and effects of business combinations. In consolidated financial statements the standards require: identification of ownership interests held in subsidiaries by parties other than the parent be clearly identified, labeled and presented in consolidated financial position within equity (rather than "mezzanine" between liabilities and equity) separately from amounts attributed to the parent, with net income attributable to the parent and to the minority interest clearly identified and presented on the face of consolidated statements of income. The standards also provide guidance in situations where the parent's ownership interest in a subsidiary changes while the parent retains its controlling financial interest. The standard also provides guidance on recording a gain or loss based on fair value in situations involving deconsolidation of a subsidiary. Entities must provide sufficient disclosures that distinguish between interests of the parent and that of the noncontrolling interest.
Both standards are effective for fiscal years and interims beginning on or after December 15, 2008 (that is January 1, 2009) for entities with calendar years. Earlier adoption is prohibited. The standards shall be applied prospectively as of the beginning of the fiscal year in which initially applied, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company does not anticipate that the adoption of SFAS No. 141R and No. 160 will have an impact on the Company's overall results of operations or financial position, unless the Company makes a business acquisition in which there is a noncontrolling interest.
In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) No. 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. This FSP is effective for us beginning July 1, 2009 and the Company does not expect that FSP EITF No. 03-6-1 would have a material impact on the financial statements.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP FAS 107-1 and APB 28-1"). FSP FAS 107-1 and APB 28-1 require companies to disclose in interim financial statements the fair value of financial instruments within the scope of FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments. However, companies are not required to provide in interim periods the disclosures about the concentration of credit risk of all financial instruments that are currently required in annual financial statements. The fair-value information disclosed in the footnotes must be presented together with the related carrying amount, making it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amount relates to what is reported in the balance sheet. FSP FAS 107-1 and APB 28-1 also requires that companies disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments and a discussion of changes, if any, in the method or methods and significant assumptions during the period. The FSP shall be applied prospectively and is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 107-1 and APB 28-1 must also early adopt FSP FAS 157-4 as well as FSP FAS 115-2 and FAS 124-2. The Company will adopt the disclosure requirements of this pronouncement for the quarter ended June 30, 2009, in conjunction with the adoption of FSP FAS 157-4, FSP FAS 115-2 and FAS 124-2.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 will be effective for interim or annual period ending after June 15, 2009 and will be applied prospectively. The Company will adopt the requirements of this pronouncement for the quarter ended June 30, 2009. The Company does not anticipate the adoption of SFAS 165 will have an impact on its consolidated results of operations or consolidated financial position.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS 167"), which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company's involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009.
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Results of Operations
Our operations for the fiscal years ended May 31, 2009 and 2008 consisted of operations of Beijing Yanyuan (60% indirect ownership interest), China Arts and Science Academy (60% indirect ownership interest), Hartcourt Capital Inc. (100% ownership interest), Hartcourt China, Inc. (100% ownership interest), and Ai-Asia Inc. (100% ownership interest), and Hartcourt's investments in other entities located in Hong Kong and China.
The following discussion and analysis are based on the historical figures and information and reflect our education business. As noted above, the Company is focusing on the growing Chinese vocational training market instead.
Fiscal Year Ended May 31, 2009 Compared to Fiscal Year Ended May 31, 2008
Net Revenue:
Revenues were $2,431,955 for the twelve months ended May 31, 2009 compared to zero for the same period in 2008. The increased revenues were primarily due to revenue generated by Beijing Yanyuan and China Arts & Science Academy, two subsidiaries in which we acquired a 60% equity interest during the twelve months ended May 31, 2009. We currently derive revenues from the following sources:
? educational programs and services, which accounted for 90% of our total net revenues as of May 31, 2009; and
? books and others, which accounted for 10% of our total net revenues as of May 31, 2009.
Cost of revenue:
Cost of revenues was $368,167 for the twelve months ended May 31, 2009 compared to zero for the same period in 2008. The increased cost of revenue was primarily due to costs of revenue attributable to the operations of Beijing Yanyuan and China Arts & Science Academy, two subsidiaries in which we acquired a 60% equity interest during the year ended May 31, 2009. Cost of revenue consisted primarily of printing costs of books and other materials and relevant sales tax.
General and administrative expenses:
Our general and administrative expenses were $1,343,843 for the fiscal year ended May 31, 2009 compared to $1,299,858 for the same periods in 2008, an decrease of $43,985 or 3% compared to the fiscal year ended May 31, 2008. The increase of expenses for the fiscal year ended May 31, 2009 and year ended May 31, 2008 were primarily due to expenses increase by management.
Depreciation and amortization expenses in operating expenses:
Our depreciation and amortization expenses in operating expenses were $20,839 for the fiscal year ended May 31, 2009 compared to $13,510 for the same periods in 2008 or 54% increase. The increase was primarily due to the acquisition of Beijing Yanyuan and China Arts & Science Academy, two subsidiaries in which we acquired a 60% equity interest during the twelve months ended May 31, 2009.
Income (Loss) from Continuing Operations:
Income from continuing operations for the fiscal year ended May 31, 2009 was $699,107, compared to loss amounted to $1,996,356 for the fiscal year ended May 31, 2008. The increased income was primarily due to revenue generated by Beijing Yanyuan and China Arts & Science Academy, two subsidiaries in which we acquired a 60% equity interest during the twelve months ended May 31, 2009.
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Gain on Settlement of Debt:
During the fiscal years ended May 31, 2009 and 2008, the Company has gain on settlement of debt amount of $182,687 and $0, respectively. This amount is due to the negotiation between the Company and non related third party. The third party agreed to settle for a lesser amount as they will continue to do business with the Company.
Discontinued operations:
During the fiscal years ended May 31, 2009 and May 31, 2008, the discontinued operations represent the operating results of Shanghai Huaqing, which was determined by the management to be disposed in 2008.
Income Tax:
The Company has income tax during the fiscal years ended May 31, 2009 compared with prior year, due to the new profitable acquisitions.
Minority interest:
Minority interest represented the profit shared by the minority shareholders of Beijing Yanyuan and China Arts & Science (40%).
Liquidity and Capital Resources:
As shown in our accompanying financial statements, we had a net income of $15,145 for the fiscal year ended May 31, 2009 as compared to a net loss of $1,973,478 for the same period in 2008.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of liabilities in the normal course of business.
The Company has taken certain restructuring steps to provide the necessary capital to continue its operations. These steps included:
� Look for growth opportunities through acquisitions of profitable education businesses;
� Raise additional capital through public offerings or private placements; and
� Take measures to control costs and operating expenses.
Please refer to subsequent even (See financial statement notes 15) for most current acquisition on August 20, 2009 which will give us additional revenue on education business.
Operating activities:
During the fiscal year ended May 31, 2009, net cash provided by operating activities was $664,643, compared to net cash used in operating activities of $638,514 during the fiscal year ended May 31, 2008. The cash used in operating activities in the fiscal year ended May 31, 2009 resulted mainly from income of $15,145 , and an increase of account receivable of $758,055, and an decrease of accounts payable of $316,394, and stock option costs of $309,960, and accrued expenses and other current liabilities of $333,078. The cash used in operating activities in the fiscal year ended May 31, 2008 resulted from loss of $1,973,478 netted against, among other things, stock option costs of $151,060, provision for investment of $70,436, goodwill impairment of $682,988, and accrued expenses and other current liabilities of $432,377.
Investing activities:
Net cash used in investing activities during the fiscal year ended May 31, 2009 were $816,959 compared to net cash provided by investing activities of $524,844 for the fiscal year ended May 31, 2008. The cash used in investing activities during the fiscal year ended May 31, 2009 was mainly due to the loan receivable of $822,551 and cash received upon acquisition of $6,177. The cash provided by investment activities in the fiscal year ended May 31, 2008 was due to the cash received upon disposal of assets of $535,704 and cash decrease due to purchase of property and equipment of $10,860.
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Financing activities:
Cash provided by financing activities during the fiscal year ended May 31, 2009 was $297,719 compared to net cash provided by financing activities of $97,966 during the fiscal year ended May 31, 2008. Net cash provided by financing activities during the fiscal year ended May 31, 2009 was mainly due to proceeds of $900,000 paid by purchasers of shares of our common stock in private placements and $653,139 cash dividend paid to two subsidaries. Cash provided by financing activities during the fiscal year ended May 31, 2008 was primarily due to $38,414 of sales of common stock and proceed of $59,552 from related parties.
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14-Sep-2009
Annual Report
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Management discussion and analysis contains comparisons of the results of our operations for the twelve months ended May 31, 2009, for the 12 months ended May 31, 2008.
THE HARTCOURT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal year ended
May 31 (12 months)
2009 2008
Net revenues $ 2,431,955 $ -
Cost of revenues 368,167 -
Gross profit 2,063,788 -
Operating expenses:
General and administrative expenses 1,343,842 1,299,858
Depreciation and amortization 20,839 13,510
Impairment of goodwill - 682,988
Total operating expenses 1,364,681 1,996,356
Income (loss) from operations 699,107 (1,996,356 )
Other income
Foreign currency exchange gain 43,648 -
Gain on settlement of debt 182,687 -
Total other income 226,335 -
Income (loss) from operations before income tax provision
and minority interest 925,442 (1,996,356 )
Provision for income taxes (212,791 ) -
Minority interest, net of taxes (697,506 ) -
Income (loss) from continuing operations 15,145 (1,996,356 )
Discontinued operations:
Gain/(loss) from discontinued operations - 22,878
Income/(loss) from discontinued operations - 22,878
NET INCOME (LOSS) 15,145 (1,973,478 )
OTHER COMPREHENSIVE ITEM:
Foreign currency translation loss (48,226 ) (60,754 )
NET COMPREHENSIVE LOSS $ (33,081 ) $ (2,034,232 )
BASIC AND DILUTED EARNINGS/ (LOSS) PER COMMON SHARE:
Income/(loss) from continued operations basic $ 0.00 $ (0.01 )
Income from discontinued operations basic $ - $ 0.00
Income/(loss) per share basic $ 0.00 $ (0.01 )
Basic weighted average number of shares outstanding 304,501,261 205,761,854
Income (loss) from continued operations diluted $ 0.00 $ (0.01 )
Loss from discontinued operations diluted $ - $ 0.00
Income (loss) per share diluted $ 0.00 $ (0.01 )
Diluted weighted average number of shares outstanding 304,561,261 205,488,066
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The following discussion contains forward-looking statements. Forward looking statements are identified by words and phrases such as "anticipate", "intend", "expect" and words and phrases of similar import. We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements due to risks, uncertainties and assumptions that are difficult to predict, including those set forth in Item 1A above. We encourage you to read those risk factors carefully along with the other information provided in this Report and in our other filings with the SEC before deciding to invest in our stock or to maintain or change your investment. We undertake no obligation to revise or update any forward-looking statement for any reason, except as required by law.
You should read this MD&A in conjunction with the Consolidated Financial Statements and Related Notes in Item 8.
Critical Accounting Policies and Estimates
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheets. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Senior management has discussed the development and selection of these critical accounting policies and their disclosure in this Report with the Audit Committee of our Board of Directors. We believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments: revenue recognition; allowance for doubtful accounts; income taxes; stock-based compensation; asset impairment.
Revenue Recognition
In accordance with generally accepted accounting principles ("GAAP") in the United States, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collection of the resulting receivable is reasonably assured. Noted below are brief descriptions of the product or service revenues that the Company recognizes in the financial statements contained herein.
The Company recognized the revenue only when the service or products (training software) has been fully delivered or downloaded.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when we assess the realization of accounts receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts could be required. We initially record a provision for doubtful accounts based on our historical experience, and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable; (iv) our historical provision for doubtful accounts;
(v) the credit worthiness of the customer; and (vi) the economic conditions of the customer's industry as well as general economic conditions, among other factors.
Income taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS 109 prescribes the use of the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, or increase or decrease this allowance in a period, we increase or decrease our income tax provision in our statement of operations. If any of our estimates of our prior period taxable income or loss prove to be incorrect, material differences could impact the amount and timing of income tax benefits or payments for any period.
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The Company operates in several countries. As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations.
We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. The tax liabilities are reflected net of realized tax loss carry forwards. We adjust these reserves upon specific events; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the contingency has been resolved and the liabilities are no longer necessary.
Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that we provide during any given year.
Stock-Based Compensation
The Company adopted SFAS No. 123 (Revised 2004), Share Based Payment ("SFAS No. 123R"), under the modified-prospective transition method on June 1, 2006. SFAS No. 123R requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. Share-based compensation recognized under the modified-prospective transition method of SFAS No. 123R includes share-based compensation based on the grant-date fair value determined in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for all share-based payments granted prior to and not yet vested as of June 1, 2006 and share-based compensation based on the grant-date fair-value determined in accordance with SFAS No. 123R for all share-based payments granted after June 1, 2006. SFAS No. 123R eliminates the ability to account for the award of these instruments under the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and allowed under the original provisions of SFAS No. 123. Prior to the adoption of SFAS No. 123R, the Company accounted for the Company's stock option plans using the intrinsic value method in accordance with the provisions of APB Opinion No. 25 and related interpretations.
The fair value of common stock grant is estimated using the Black-Scholes option pricing model, which uses certain assumptions related to risk - free interest rates, expected volatility, expected life of the common stock options and future dividend. Compensation expense is recorded based upon the values derived from the Black-Scholes option pricing model, based on an expected forfeiture rate that is adjusted for actual expensece. If our Black-Scholes option pricing model assumptions or our actual or estemated forfeiture rate and different in the future, that could materially affect compensaion expense recorded in future periods.
Asset Impairment
We periodically evaluate the carrying value of other long-lived assets, including, but not limited to, property and equipment,intangible assets and goodwill, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Significant estimates are utilized to calculate expected future cash flows utilized in impairment analyses. We also utilize judgment to determine other factors within fair value analyses, including the applicable discount rate.
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Recently Issued Accounting Standards
In December 2007, the Financial Accounting Standards Board ("FASB") simultaneously issued SFAS No. 141R, "Business Combinations (2007 Amendment)," and SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51." Both standards update United States guidance on accounting for "noncontrolling interests," sometimes referred to as minority interests, which interests represent a portion of a subsidiary not attributable, directly or indirectly, to a parent. FASB and the International Accounting Standards Board ("IASB") have been working together to promote international convergence of accounting standards. Prior to promulgation of these new standards there were specific areas in accounting for business acquisitions in which conversion was not achieved. The objective of both standards is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in "business combinations" and consolidated financial statements by establishing accounting and reporting standards. In business combinations it is accomplished by establishing principles and requirements concerning how an "acquirer" recognizes and measures identifiable assets acquired, liabilities assumed, and noncontrolling interest in the acquiree, as well as goodwill acquired in the combination or gain from a bargain purchase; and determines information to be disclosed to enable users to evaluate the nature and effects of business combinations. In consolidated financial statements the standards require: identification of ownership interests held in subsidiaries by parties other than the parent be clearly identified, labeled and presented in consolidated financial position within equity (rather than "mezzanine" between liabilities and equity) separately from amounts attributed to the parent, with net income attributable to the parent and to the minority interest clearly identified and presented on the face of consolidated statements of income. The standards also provide guidance in situations where the parent's ownership interest in a subsidiary changes while the parent retains its controlling financial interest. The standard also provides guidance on recording a gain or loss based on fair value in situations involving deconsolidation of a subsidiary. Entities must provide sufficient disclosures that distinguish between interests of the parent and that of the noncontrolling interest.
Both standards are effective for fiscal years and interims beginning on or after December 15, 2008 (that is January 1, 2009) for entities with calendar years. Earlier adoption is prohibited. The standards shall be applied prospectively as of the beginning of the fiscal year in which initially applied, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company does not anticipate that the adoption of SFAS No. 141R and No. 160 will have an impact on the Company's overall results of operations or financial position, unless the Company makes a business acquisition in which there is a noncontrolling interest.
In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) No. 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities." Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. This FSP is effective for us beginning July 1, 2009 and the Company does not expect that FSP EITF No. 03-6-1 would have a material impact on the financial statements.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP FAS 107-1 and APB 28-1"). FSP FAS 107-1 and APB 28-1 require companies to disclose in interim financial statements the fair value of financial instruments within the scope of FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments. However, companies are not required to provide in interim periods the disclosures about the concentration of credit risk of all financial instruments that are currently required in annual financial statements. The fair-value information disclosed in the footnotes must be presented together with the related carrying amount, making it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amount relates to what is reported in the balance sheet. FSP FAS 107-1 and APB 28-1 also requires that companies disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments and a discussion of changes, if any, in the method or methods and significant assumptions during the period. The FSP shall be applied prospectively and is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 107-1 and APB 28-1 must also early adopt FSP FAS 157-4 as well as FSP FAS 115-2 and FAS 124-2. The Company will adopt the disclosure requirements of this pronouncement for the quarter ended June 30, 2009, in conjunction with the adoption of FSP FAS 157-4, FSP FAS 115-2 and FAS 124-2.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 will be effective for interim or annual period ending after June 15, 2009 and will be applied prospectively. The Company will adopt the requirements of this pronouncement for the quarter ended June 30, 2009. The Company does not anticipate the adoption of SFAS 165 will have an impact on its consolidated results of operations or consolidated financial position.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS 167"), which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company's involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009.
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Results of Operations
Our operations for the fiscal years ended May 31, 2009 and 2008 consisted of operations of Beijing Yanyuan (60% indirect ownership interest), China Arts and Science Academy (60% indirect ownership interest), Hartcourt Capital Inc. (100% ownership interest), Hartcourt China, Inc. (100% ownership interest), and Ai-Asia Inc. (100% ownership interest), and Hartcourt's investments in other entities located in Hong Kong and China.
The following discussion and analysis are based on the historical figures and information and reflect our education business. As noted above, the Company is focusing on the growing Chinese vocational training market instead.
Fiscal Year Ended May 31, 2009 Compared to Fiscal Year Ended May 31, 2008
Net Revenue:
Revenues were $2,431,955 for the twelve months ended May 31, 2009 compared to zero for the same period in 2008. The increased revenues were primarily due to revenue generated by Beijing Yanyuan and China Arts & Science Academy, two subsidiaries in which we acquired a 60% equity interest during the twelve months ended May 31, 2009. We currently derive revenues from the following sources:
? educational programs and services, which accounted for 90% of our total net revenues as of May 31, 2009; and
? books and others, which accounted for 10% of our total net revenues as of May 31, 2009.
Cost of revenue:
Cost of revenues was $368,167 for the twelve months ended May 31, 2009 compared to zero for the same period in 2008. The increased cost of revenue was primarily due to costs of revenue attributable to the operations of Beijing Yanyuan and China Arts & Science Academy, two subsidiaries in which we acquired a 60% equity interest during the year ended May 31, 2009. Cost of revenue consisted primarily of printing costs of books and other materials and relevant sales tax.
General and administrative expenses:
Our general and administrative expenses were $1,343,843 for the fiscal year ended May 31, 2009 compared to $1,299,858 for the same periods in 2008, an decrease of $43,985 or 3% compared to the fiscal year ended May 31, 2008. The increase of expenses for the fiscal year ended May 31, 2009 and year ended May 31, 2008 were primarily due to expenses increase by management.
Depreciation and amortization expenses in operating expenses:
Our depreciation and amortization expenses in operating expenses were $20,839 for the fiscal year ended May 31, 2009 compared to $13,510 for the same periods in 2008 or 54% increase. The increase was primarily due to the acquisition of Beijing Yanyuan and China Arts & Science Academy, two subsidiaries in which we acquired a 60% equity interest during the twelve months ended May 31, 2009.
Income (Loss) from Continuing Operations:
Income from continuing operations for the fiscal year ended May 31, 2009 was $699,107, compared to loss amounted to $1,996,356 for the fiscal year ended May 31, 2008. The increased income was primarily due to revenue generated by Beijing Yanyuan and China Arts & Science Academy, two subsidiaries in which we acquired a 60% equity interest during the twelve months ended May 31, 2009.
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Gain on Settlement of Debt:
During the fiscal years ended May 31, 2009 and 2008, the Company has gain on settlement of debt amount of $182,687 and $0, respectively. This amount is due to the negotiation between the Company and non related third party. The third party agreed to settle for a lesser amount as they will continue to do business with the Company.
Discontinued operations:
During the fiscal years ended May 31, 2009 and May 31, 2008, the discontinued operations represent the operating results of Shanghai Huaqing, which was determined by the management to be disposed in 2008.
Income Tax:
The Company has income tax during the fiscal years ended May 31, 2009 compared with prior year, due to the new profitable acquisitions.
Minority interest:
Minority interest represented the profit shared by the minority shareholders of Beijing Yanyuan and China Arts & Science (40%).
Liquidity and Capital Resources:
As shown in our accompanying financial statements, we had a net income of $15,145 for the fiscal year ended May 31, 2009 as compared to a net loss of $1,973,478 for the same period in 2008.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of liabilities in the normal course of business.
The Company has taken certain restructuring steps to provide the necessary capital to continue its operations. These steps included:
� Look for growth opportunities through acquisitions of profitable education businesses;
� Raise additional capital through public offerings or private placements; and
� Take measures to control costs and operating expenses.
Please refer to subsequent even (See financial statement notes 15) for most current acquisition on August 20, 2009 which will give us additional revenue on education business.
Operating activities:
During the fiscal year ended May 31, 2009, net cash provided by operating activities was $664,643, compared to net cash used in operating activities of $638,514 during the fiscal year ended May 31, 2008. The cash used in operating activities in the fiscal year ended May 31, 2009 resulted mainly from income of $15,145 , and an increase of account receivable of $758,055, and an decrease of accounts payable of $316,394, and stock option costs of $309,960, and accrued expenses and other current liabilities of $333,078. The cash used in operating activities in the fiscal year ended May 31, 2008 resulted from loss of $1,973,478 netted against, among other things, stock option costs of $151,060, provision for investment of $70,436, goodwill impairment of $682,988, and accrued expenses and other current liabilities of $432,377.
Investing activities:
Net cash used in investing activities during the fiscal year ended May 31, 2009 were $816,959 compared to net cash provided by investing activities of $524,844 for the fiscal year ended May 31, 2008. The cash used in investing activities during the fiscal year ended May 31, 2009 was mainly due to the loan receivable of $822,551 and cash received upon acquisition of $6,177. The cash provided by investment activities in the fiscal year ended May 31, 2008 was due to the cash received upon disposal of assets of $535,704 and cash decrease due to purchase of property and equipment of $10,860.
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Financing activities:
Cash provided by financing activities during the fiscal year ended May 31, 2009 was $297,719 compared to net cash provided by financing activities of $97,966 during the fiscal year ended May 31, 2008. Net cash provided by financing activities during the fiscal year ended May 31, 2009 was mainly due to proceeds of $900,000 paid by purchasers of shares of our common stock in private placements and $653,139 cash dividend paid to two subsidaries. Cash provided by financing activities during the fiscal year ended May 31, 2008 was primarily due to $38,414 of sales of common stock and proceed of $59,552 from related parties.
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