CSGH China Sun Group High Tech Co (CE)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

(Mark One)

 

S

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For  the fiscal year ended May 31, 2009

£

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the transition period from ___________ to___________________________

Commission file number: 333-118259

CHINA SUN GROUP HIGH-TECH CO.

(Exact name of registrant as specified in its charter)

Delaware		54-2142880
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer identification No.)
1 Hutan Street, Zhongshan District Dalian, P.R. China		N/A
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code +86  (411) 8289-7752

 

Securities registered under Section 12(b) of the Exchange Act:

 

Title of each class		Name of each exchange on which registered
N/A		N/A

 

Securities registered pursuant to section 12(g) of the Act

 

Common Stock, par value $0.001 per share

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. £ Yes  S No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. S Yes  £   No

 

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. S Yes     £ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    £   Yes     £ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. S

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer £	Accelerated filer £
Non-accelerated filer £ (Do not check if a smaller reporting company)	Smaller reporting company S

 

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

 

£ Yes                                 S No

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

Note – If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.

 

The aggregate market value of the voting and non-voting common stock of the issuer held by non-affiliates as of August 24, 2009 was approximately $33,495,565.20 based upon the closing price of the common stock as quoted by Nasdaq OTC Bulletin Board on such date.

 

 

 

 

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

 

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. £  Yes  £  No

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

 

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

As of August 27, 2009, there were 53,422,971 issued and outstanding shares of the issuer’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g. Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.  The listed documents should be clearly described for identification purposes (e.g. annual report to security holders for fiscal years ended December 24, 1980).

 

PART I

 

Item 1.

Business

 

History

 We were incorporated in North Carolina on February 2, 2004 to engage in the business of commercial finance brokerage and consulting. Prior to the Exchange, we were engaged in the commercial finance brokerage and consulting business.

Dalian Xinyang High-Tech Development Co. Ltd (“DLXY”) was registered as a limited liability company in the People’s Republic of China on August 16, 2000 with its principal place of business in Dalian City, Liaoning Province, the People’s Republic of China. Its initial registered capital was Renminbi Yuan (“RMB”) 5,500,000 (equivalent to US$665,037), contributed by Sun Group High Technology Development Co., Ltd, a limited liability company registered in Dalian City, Liaoning Province, the People’s Republic of China, and Ms. Li Zhi, a citizen of the People’s Republic of China. Prior to April 2006, DLXY’s principal activity was acting as a research center to develop technologically feasible nanometers to be used in lithium batteries and generated no revenue. It was considered as a development stage company. In April 2006, DLXY began production and sales of cobaltosic oxide which is used as the anode of high capacity lithium ion rechargeable batteries. Sales are made primarily to battery manufacturers. Currently, all of DLXY’s operations and customers are located in the People’s Republic of China.

On July 6, 2005, $13,126,609 (RMB 100,500,000) in capital was contributed by its two existing investors and one new investor, Ms. Wang Jiao, in the forms of cash and property that included the production facilities located in Dalian City. On May 10, 2006, these three shareholders transferred all of their ownership interests in DLXY to Ms Feng Guimei, Mr. Li Gang and Mr. Kan Yang who are all citizens of the People’s Republic of China.

 On February 28, 2007, we completed the Exchange pursuant to the Plan of Exchange, by and among us, DLXY, the DLXY Shareholders, and David Koran. Under the Agreement, (1) Mr. Wang Bin received 9,500,000 shares of our common stock from Mr. Koran for $600,000 in cash, paid for by DLXY and (2) the DLXY Shareholders received (a) 30,000,000 shares of our newly issued common stock in exchange for a 70% ownership interest in DLXY and (b) a two year non-transferable option to purchase 10,000,000 shares of our common stock for an aggregate purchase price of RMB 31,800,000. As a result, we under went a change in control, whereby the DLXY Shareholders now own an aggregate of 39,500,000 shares, representing 93% of our common stock issued and outstanding.

 On August 24, 2007, DLXY was reincorporated from North Carolina to Delaware and changed its name to China Sun Group High-Tech Co. The par value of common stock of China Sun Group High-Tech Co. is $0.001 per share.

 

Business

                 DLXY is a large producer of cobaltosic oxide and lithium cobalt oxide, both anode materials for lithium ion batteries. According to the China Battery Industry Association, which conducts research of and puts forth reports on the battery industry, we have the second largest cobalt series production capacity in the People’s Republic of China. This sizable production capacity will allow DLXY to help meet the growing demand for anode materials as the demand for lithium batteries increases. Lithium batteries are becoming widely used due to its power capacity, long service life, and compatibility with carbon cathode materials, necessary for battery circuitry. The expected growth of the lithium ion battery industry affords DLXY a business opportunity for increasing revenue and growth potential. In addition, DLXY’s current operations are solely in the People’s Republic of China, which provides us with access to low-cost skilled labor, raw materials, machinery and facilities and enables us to price our products competitively in an increasingly price-sensitive market.

 

 

                 DLXY provides a comprehensive selection of cobalt products such as battery cobalt carbonate, nano-level cobaltosic oxide, and high-crystallinity ball lithium cobalt oxide. DLXY also provides substitute products including lithium iron phosphate (LiFePO 4 ) developed through our research and development efforts. DLXY’s two main products, however, are cobaltosic oxide (Co 3 O 4 ) and lithium cobalt oxide (LiCoO 2 ), which are manufactured in its production facilities that span 24,000 square meters. DLXY has 12 production lines, a research and development facility, and employee housing. Prior to February 2009, 8 of the 12 productions lines were dedicated to manufacture of cobaltosic oxide, which aggregated to a production capacity of 1,500 tons per year. The remaining 4 production lines were dedicated to manufacturing lithium cobalt oxide, which aggregated to a capacity of 1000 tons per year.  Since February 2009, when DLXY converted 1 of the 8 production lines of cobaltosic oxide into 1 production line to produce lithium iron phosphate (LiFePO 4 ) and 2 of the 4 production lines of lithium cobalt oxide into 2 production lines to produce lithium iron phosphate (LiFePO 4 ), as of May 31, 2009, the production capacity of 7 production lines of cobaltosic oxide aggregates to 1,312.5 tons per year; and the production capacity of 2 production lines of lithium iron phosphate (LiFePO 4 ) aggregates to 500 tons per year. With regards to lithium iron phosphate (LiFePO 4 ), DLXY has in total 3 production lines with aggregate production capacity of 450 tons per year.

Industry

                 The lithium ion battery market is a green energy resource. Lithium ion batteries are versatile, compact and light weight, and have high energy density and capacity, high voltage, and excellent energy retention characteristics. These attributes make lithium ion batteries suitable for use in portable devices in particular. Commercially, lithium ion batteries are used in various gadgets, such as mobile phones, PDAs, laptops, and digital cameras and other uses such as electric automobiles and solar and wind energy storage units. It is also used by governments, mainly for military use in submarines, underwater robots, unpiloted airplanes, and space satellites. As the cost/power ratio of lithium-based batteries continues to improve, it is expected that its usage will also extend into other applications.

                 With the development of other technologies, we foresee that lithium ion batteries will also be widely used in electric bicycles and scooters. The progress in the manufacturing technology of lithium ion batteries, in conjunction with the constant demand for enhanced battery performance and the falling costs of batteries cost will greatly accelerate the use of lithium ion batteries in modern mobile communications, home appliances, electric automobiles, and various government uses. According to the Battery Industry Association of China, the lithium ion battery will become one of the most important sources of chemical power in 21st century. Research and development on the lithium ion battery has been added as a third objective to the People’s Republic of China’s 11 th five-year-development project.

                 The Battery Industry Association of China forecasts that the growing demand for portable products like mobile phones and laptops, will stimulate the lithium ion battery industry in the People’s Republic of China, which is expected to grow at an annual rate of over 30% of annual output, based on units (Source: www.any17.com/newscenter/new/dianchi/2006102405483822.html).  Lithium ion batteries used in such portable products apply lithium cobalt oxide (LiCoO2) as an anode material. The China Battery Industry Association also reports that the aggregate global demand for lithium cobalt oxide is approximately 40,000 to 50,000 tons (Source: www.any17.com/newscenter/new/dianchi/2006102405483822.html). Currently, the People’s Republic of China’s lithium cobalt oxide demand is mainly supplied by overseas suppliers. The China Battery Industry Association writes that from September 2004 to late 2005, the demand for lithium cobalt oxide in China exceeded 10,000 tons, which led to a significant rise in the price of cobalt, a major component in the manufacture of lithium cobalt oxide. As a result of high demand, it is reported that the price of industrial lithium carbonate and battery lithium carbonate also increased in tandem by approximately 50% from September 2004 to late 2005.

                 Cobalt ore is for anode materials of lithium ion batteries is currently in short supply in the People’s Republic of China (Source:http://www.xiangmu.com/project/109/1943.html).  In addition, cobaltosic oxide and lithium cobalt oxide continue to develop their presence, thus, presenting DLXY with noteworthy growth potential.

 

 

 

Products

                 DLXY’s three main products, cobalt carbonate (CoCO 3 ), cobaltosic oxide (Co 3 O 4 ) and lithium cobalt oxide (LiCoO 2 ) are manufactured in its production facilities, which span 24,000 square meters. DLXY has 12 production lines, a research and development facility, and employee housing. 8 of the 12 productions lines are dedicated to manufacture of cobaltosic oxide, which aggregates to a production capacity of 1,500 tons per year. The remaining 4 production lines are dedicated to manufacturing lithium cobalt oxide, which aggregates to a capacity of 1,000 tons per year. The core technology of CoCO 3 is the pressure leaching and high-efficiency extraction. The core technology of nanometer Co 3 O 4 and LiCoO 2 is mesh belt calcination.

                 According to the Battery Industry Association of China, DLXY is the second largest non-governmental manufacturer of hi-tech cobalt salt products in Asia based on tons produced. DLXY’s products and processing capabilities include the production of cobalt ore, cobalt carbonate, nanometer-sized cobaltosic oxide and high-crystalline spherical lithium cobalt oxide which is used lithium batteries. In addition, we specialize in:

•

Hi-pressure leaching technology of raw materials,

•

Hi-performance extraction technology of soluble cobalt salts,

•

Chemical precipitation technology of soluble cobalt salts,

•

Mesh-belt metallurgical powder calcinations,

•

Multilevel selecting technology, and

•

Stable sol and gel technology.

                 DLXY provides a comprehensive selection of cobalt products such as battery anode cobaltous (cobalt) carbonate, nano-level cobalto cobaltic (cobaltosic) oxide, and high-crystallinity ball lithium cobalt oxide. DLXY also provides substitute products, including ternary anode material (which is composed of lithium cobalt oxide, lithium nickel oxide and lithium manganese oxide) developed through our research and development efforts.

                 Our series No. is 0/81626 products have awarded the “Top Ten Brand in National Battery Material” by the China Enterprise Brand Development Committee in July, 2008. Additionally, our series No. icp31508-B2306 products were awarded the title of “International Famous Brand” by the China International Quality Assessment and Research Center and China Council for the Promotion of Joint Development of Brand Enterprises in July, 2008.

 In September 2008, we announced that we had completed trial production of lithium iron phosphate and successfully met the technical requirements of application after being tested by a PRC state authority. In November 2008, the China Brand Promoting Authority accredited DLXY’s “Tong Tong” branded lithium iron phosphate with the titles “Priority Choice of Government Procurement” and “Key Promoting Product of High-Tech Industry.”  Three battery manufacturers used our lithium iron phosphate (LiFePO 4 ) to make their trial production of automotive power battery. They are Beijing Shuangsheng Sci-Tech Co., Ltd., Shangdong Shengong Battery New Technology Co., Ltd. and Hi-Power New Energy Group. From June of 2009, they have been testing the performance of the power batteries made of our lithium iron phosphate (LiFePO 4 ). At the same time, these manufacturers also invited Dalian JiaoTong University and Dalian University of Technology to test these batteries. The testing is anticipated to be finished in late September 2009. The three manufacturers have sought, on a preliminary basis, to establish long-term procurement relationships with DLXY if the testing is successful.

 In May 2009, we announced that a next generation “green” power source, lithium iron phosphate,  had been developed by DLXY for use in batteries that power eco-friendly vehicles, like electric cars, hybrids and scooters. The first batch of lithium iron phosphate energy products came out of DLXY's production line in April 2009. The product successfully completed testing by two leading enterprises in the domestic power battery production industry, Shenzhen Shanshu Power Battery Technology Co., Ltd. and Zhangzhou Youke Energy Co., Ltd. These companies are now performing natural decay testing to determine the charge quality of batteries made with DLXY's lithium iron phosphate product.

 

                 Currently, DLXY distributes its products directly to customers or through its sales agents.

 

 

Customers

 

                 Our target market includes lithium ion battery manufacturers, end product users, and lithium series product manufacturers throughout the world. Our initial focus however, is the development of a domestic market in the People’s Republic of China. Once we have gained a sizable share of the Chinese market, we will focus our attention on exporting our products internationally.

                 In the People’s Republic of China, we have six main customers of our Co 3 O 4 , which comprises the bulk of our sales for financial year 2008. . These include Hunan Shanshan Advanced Material, CITIC Guoan Mengguli Corporation, Hunan Reshine New Material Co., Ltd., Changzhou PowerGenie Materials Co., Ltd., Xiamen Tungsten Co., Ltd, Beijing Easpring Material Technology Co., Ltd, Shaanxi Applied Physical Chemical Research Institute and ALT Cobalt and Nickel Products (Dalian). Co. Ltd. These companies are all the leading battery producers at the lithium ion battery market in the People’s Republic of China. Their combined total purchase capacity is 1000T/month. Our current production capacity is 50T/month. As Co 3 O 4 has a seller’s market in the People’s Republic of China, we believe that these customers will purchase more from us as soon as we increase our production capacity. For the fiscal year ended May 31, 2008, one out of the six main customers accounted for 39% of our total revenue . However, production only began in April 2006. During 2007, we launched different marketing campaigns based on various strategies. We have added several customers such as Zhejiang Tianhong Energy Technology Co., Ltd., Zhejiang Wanma Battery Co., Ltd., Guangzhou Huaneng Battery Co., Ltd. and Shenzhen Sunristar Electronics Co., Ltd. In the international market, we have approached potential customers such as Panasonic, Sanyo, Maxell and Sumsung.

Potential of International Market

                 The major consuming countries in the global market are Japan and Korea. However, with the improvement of the People’s Republic of China’s production and technology and the market advantage, Japan’s Diacelltec, Sanyo, Sony and Panasonic have successively relocated their production bases to the People’s Republic of China, Korea’s LG, Samsung and SK have also established major procurement centers in the People’s Republic of China.

                 Korea’s Project Development & Consultation Co., Ltd. (PD&C) has entered into an agentcy agreement with us. Under this agreement, PD&C will find customers in South Korea to buy our products valued at or more than $8 million per year. The term of the agreement is for 2 years.

                 The potential customers we have approached and have showed strong interest in our products in the international market include: Tanaka, Honjo, HLST, Sanyo, Sony, Panasonic, Nihonkagakusangyo, Maxell, LG, Samsung, SK, Hanhua and Light & Future.

Competition

                 We compete mainly with other manufacturers of battery anode materials located locally in the People’s Republic of China, as well as from Japan and Korea. Based on our own studies and market analysis, our key competitors are Hunan Haina Advanced Material Co., Ltd., Gansu Jinchuan Group, Henan Guangkuotiandi Cobalt Product Co., Ltd., and Nanjing Hanrui Cobalt Product Co., Ltd.

                 We believe that we are able to leverage our low-cost advantage to compete favorably with our competitors.  The technological advances made by our research and development group have helped us reduce our costs and increase our productivity. Compared to Korean and Japanese manufacturers, we believe that we are able to source our needs for skilled labor and raw materials locally and economically. We believe that our significant production capacity should translate into greater purchasing power in the future, thereby helping us negotiate lower purchase prices for our raw materials. Furthermore, our proprietary technologies and use of a combination of manual labor and automation at the key stages of the manufacturing process enable us to enhance our production efficiency, resulting in further reduction in the cost, while ensuring high-uniformity and high-quality standards.

 

 

 

Raw Materials

                 We obtain our raw materials from only a few suppliers. However, there are an abundance of such suppliers available. For the fiscal year ended May 31, 2009, 47% of our raw materials came from one supplier, Aote Gunie Zhi Pin Co., Ltd. During the fiscal year ended May 31, 2009, DLXY purchased interests in a cobalt ore mine in the Congo, with the anticipation that such interests would provide us with an additional supply of raw material and would also enable us to sell these materials to other enterprises in this industry.

                 Currently, the export of crude ore is prohibited in Africa. Therefore, building the primary processing plant of cobalt ore in Africa can avoid the export limitation, save freight and ensure a stable supply of raw material. We plan to start the construction of such a processing plant in Congo in the second quarter of the 2010 fiscal year. We anticipate that the construction of the plant will cost approximately $2,000,000 to $3,000,000.  Once the processing plant is complete, we will benefit from reduced costs of raw materials and expect to be able to ensure a stable supply of raw material, which will provide us with a competitive advantage.

                 According to an article published by the Information Center of the Ministry of Commerce of PRC on May 13, 2007, the contribution of China-Africa trade to Africa’s economic growth reached as high as 20%. In 2006, the amount of China-Africa trade reached $55.5 billion. The People’s Republic of China is the third trading partner of Africa. By the end of 2006, the People’s Republic of China’s investments in Africa had amounted to $11.7 billion and for the first 6 months of 2007, the People’s Republic of China's direct investment to Africa was $0.48 billion. (Source: http://www.sdnews.com.cn/finance/2007/11/5/299763.html). The People’s Republic of China’s key investment fields include agricultural development, machining and manufacture, traffic, communication, water and electricity. In 2006, the People’s Republic of China’s government announced eight measures to promote the development of a China-Africa new strategic partner relationship. Africa has adopted Africa’s Plan to Develop New Partners as its whole development strategy and the People’s Republic of China has signed the bilateral agreement for the promotion and protection of investments with 26 African countries and signed tax treaties to avoid dual taxation with 8 African countries.

                 The Democratic Republic of Congo has also signed bilateral economic and trading agreements with 44 countries in the world, including the People’s Republic of China, joined 9 regional organizations including the Economic Community of Central African States, and joined in 14 international and multilateral economic and trading organizations including the International Tin Association and African, Caribbean, & Pacific Countries (ACP). The Democratic Republic of Congo entered into the General Agreement of Tariffs and Trade in 1971 and became a member of WTO in 1995. In 2002, it created a body of investment law which included a policy favorable toward foreign invested enterprise which stipulated that such enterprises with over USD 20,000 in capital can be exempted from taxes for 5 years and such enterprises with USD 1 million in capital are eligible for certain favorable policy treatments. The investment law is currently in the progress of revision.

Intellectual Property

                 We have filed for a patent on our process of manufacturing active lithium cobalt oxide from the People’s Republic of China’s Patent Bureau and are currently in the review stage of the patent-procurement process.

                 On August 20, 2004, DLXY applied for the patent of its method of processing active lithium cobalt dioxide at the State Intellectual Property Office of the People’s Republic of China. Upon the preliminary examination, the application conformed to the patent law and the implementation rules.

 

                 On April 1, 2005, the State Intellectual Property Office announced this patent application in the official journal of invention and patent according to the patent law.

 

 

                 On September 16, 2005, upon the applicant’s request for substantive examination, the State Intellectual Property Office examined the application in accordance with the patent rights. This patent application has been in the process of substantive examination.

 On July20, 2008, we finally received notification of approval from the State Intellectual Property Office for our patent application pursuant to term 54 of the Patent Law and No. 75 Announcement of Patent Bureau. The patent number and certificate will be formally granted to us on August 27, 2008.

 In November 2008, we announced that the China Brand Promoting Authority accredited DLX’s “Tong Tong” branded lithium iron phosphate with the titles “Priority Choice of Government Procurement” and “Key Promoting Product of High-Tech Industry.”

Government Regulation

                 The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution. As we conduct our manufacturing activities in the People’s Republic of China, we are subject to the requirements of these environmental laws and regulations on air emission, waste water discharge, solid wastes and noise. We plan to comply with environmental laws and regulations. We are not subject to any admonition, penalty, investigations or inquiries imposed by the environmental regulators, nor are we subject to any claims or legal proceedings to which we are named as defendant for violation of any environmental laws and regulations. We do not have any reasonable basis to believe that there is any threatened claim, action or legal proceedings against us that would have a material adverse effect on our business, financial condition or results of operations.

                 The People’s Republic of China’s intellectual property protection regime is consistent with those of other modern industrialized countries. The PRC has domestic laws for the protection of copyright, patents, trademarks and trade secrets. The PRC is also a signatory to most of the world’s major intellectual property conventions, including:

	•		Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);
	•		Paris Convention for the Protection of Industrial Property (March 19, 1985);
	•		Patent Cooperation Treaty (January 1, 1991); and
	•		The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).

                 Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of the China Patent Law and its Implementing Regulations came into effect in 2001 and 2003, respectively.

                 The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).

                 The Patent Law covers three kinds of patents, i.e., patents for inventions, utility models and designs respectively. The Chinese patent system adopts the principle of first to file. This means that, where more than one person has filed patent applications for the same invention, a patent can only be granted to the person who first filed the application. Consistent with international practice, the PRC only allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability. For a design to be patentable, it should not be identical with or similar to any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly used in the country, and should not be in conflict with any prior right of another.

 

 

 

                 PRC law provides that anyone wishing to exploit the patent of another must conclude a written licensing contract with the patent holder and pay the patent holder a fee. One rather broad exception to this, however, is that, where a party possesses the means to exploit a patent but cannot obtain a license from the patent holder on reasonable terms and in reasonable period of time, the PRC State Intellectual Property Office, or SIPO, is authorized to grant a compulsory license. A compulsory license can also be granted where a national emergency or any extraordinary state of affairs occurs or where the public interest so requires. SIPO, however, has not granted any compulsory license up to now. The patent holder may appeal such decision within three months from receiving notification by filing a suit in a People’s Court.

                 PRC law defines patent infringement as the exploitation of a patent without the authorization of the patent holder. A patent holder who believes his patent is being infringed may file a civil suit or file a complaint with a PRC local Intellectual Property Administrative Authority, which may order the infringer to stop the infringing acts. Preliminary injunction may be issued by the People’s Court upon the patentee’s or the interested parties’ request before instituting any legal proceedings or during the proceedings. Evidence preservation and property preservation measures are also available both before and during the litigation. Damages in the case of patent infringement is calculated as either the loss suffered by the patent holder arising from the infringement or the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be reasonably determined in an amount ranging from one to more times of the license fee under a contractual license. The infringing party may be also fined by Administration of Patent Management in an amount of up to three times the unlawful income earned by such infringing party. If there is no unlawful income so earned, the infringing party may be fined in an amount of up to RMB 500,000 or approximately $62,500.

Research and Development

                 We spent $102,069 and $87,607 on research and development for the fiscal years ended May 31, 2009 and 2008, respectively. These research and development (R&D) costs were not added to the purchase price of our products and thus, were not passed along to our customers.

                 As represented by the foregoing amounts, DLXY has already invested material funds into research and development efforts. We have completed construction of a R&D test and detection center, equipped with detection and test apparatus and instruments. The center is being used to conduct quality controls reviews to provide assurance regarding the quality of our products. In addition, the center conducts research and development to keep abreast of technology and the changing needs of our customers.

                 With the efforts of our R&D group, we have successfully developed the following three series of nanometer metal products:

1.

Nanometer Simple Metal Substance: Cu, Fe, Ni, Ag, Al, Zn, Co. The sizes of these substances vary between 10-100nm. Being even, spherical, high-crystallization and high-dispersion, they are mainly applied to martial, chem-industrial, pharmaceutical, and electronic industries. They can be used as efficient catalyst, antiseptic, combustion-supporting agent and electrode materials.

2.

Nanometer Compound Metal Substance: ZnO, TiO 2 , NiO, SnO, WO 3 . The sizes of these substances vary between 10-70nm; mainly applied to such industries as airplane manufacture and auto manufacture industries; have the function of sterilization, energy-saving and extend the durability of rubber.

3.

Nanometer Metal Alloy: Fe-Ni, Sn-Ag, Ti-Al. Used in plastic and lubricant oil industries; have high tensile strength, high abrasion resistance, good sturdiness, good oil-resistance and chemical-resistance.

Our R&D group has also made technological improvements to our production line by increasing the lifetime and performance of mixing bowls used during anode material production. We have developed a new material that enables the mixing bowl to achieve uniform heat conduction and increase the stability of anode materials. As a result of our new innovation, the life cycle of the bowl’s use has been extended from 30 uses per bowl to 180 uses per bowl. At the same time, the working temperature inside the bowl can be raised from 900 degrees C to 1280 degrees C, shortening the calcining time (thermal treatment process) from 6.5 hours to 5 hours.  As a result, we are able to increase production of anode materials while significant lowering our costs.

 

 

In September 2008, we announced that it had completed trial production of lithium iron phosphate and successfully met the technical requirements of application after being tested by a PRC state authority.

In March 2009, we announced that its in-house R&D, engineering and technical team had successfully completed testing on DLXY's latest energy power battery anode material, lithium iron phosphate.

In April 2009, we announced that the first samplings of DLXY's lithium iron phosphate product had been sent to Shenzhen Shanshu Power Battery Technology Co., Ltd., and Zhangzhou Youke Energy Co., Ltd., both based in Shenzhen, to conduct tests on the material's performance and battery life.

 

New Material Development

        

Our R&D team led by the General Technical Supervisor Cheng Yijing has 14 members in total. The team started the research of the new battery anode material (i.e. ternary anode material) in October 2005. The laboratory test was conducted in May 2006 to examine whether the ternary anode material conformed to industry standards. The test has proved that various technical parameters conformed to the industry standard. After about ten months, the commercial test on the ternary anode material was completed. As a result, in terms of technology, the conditions for mass production of the ternary anode material have matured.  We are currently looking for customers for this product.

 

The ternary material is composed of lithium cobalt dioxide, lithium manganate and lithium nickelate. This material has the following characteristics: high specific capacity, high safety, superior performance of cycling and rate, stability performance at low and high temperatures, charge and discharge duration, high performance price ratio, etc. The material can be applied as the main anodes of small-sized communication and power instruments, such as portable power tool, electronic apparatus, laptop, video camera, and is replacing the lithium cobalt oxide gradually. It also has a good prospect of application in electric autos and electric bicycle.

 

In April 2004, we established a strategic relationship with Northeastern University, located in the People’s Republic of China. Northeastern University is an institution which has research development capabilities that complement ours. Through our collaborative efforts, we will conduct research and development activities to improve on the currently available anode materials which are components of lithium ion batteries. Currently, we are looking into improvements on the latest lithium cobalt oxide technology and are conducting trials of new ternary materials, which are combinations of source anode materials as an alternative to the sole use of cobalt.

 

DLXY plans to continue to align itself with many industry experts and enter into agreements with various research teams at institutes and universities.

Employees

 

As of May 31, 2009, we have 258 employees, comprising 90 full-time employees and 168 part-time employees. Our full-time employees  include 41 people in marketing, 27 in manufacturing, 13 in research and development and quality control, 4 in financial and accounting, and 5 in general management..

Item 1A.

Risk Factors.

Not Applicable.

Item 1B.

Unresolved Staff Comments.

Not Applicable.

 

 

Item 2.

Properties.

               All land in the People’s Republic of China is owned by the State. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for commercial purposes, the land use rights are granted for a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations.

Corporate Headquarters

               Our corporate headquarters are located on leased premises at 1 Hutan Street, Zhongshan District, Dalian, the People’s Republic of China. These offices encompass approximately 1,987 square meters. The lease term ends on 2046. The land use agreement has a 50-year term which expires in May 2049. The annual lease payment is 50,000 RMB/year.

Operating Facility

               All of our operations are located on premises at Gan Jing Zi Hi-Tech Park, Dalian, the People’s Republic of China. This facility consists of approximately 258,240 square feet. The land use agreement has a 50-year term which expires in May 2046. In return for the use of the premises, we pay an annual property tax of $62,500. The operating facility is used as office space, manufacturing plants, research and development, and as employees’ living quarters which can house up to 320 individuals. There is also an eatery and hotel that is used by visitors to the operating facility which has an occupancy rate of up to 50 people.

               As of August 15, 2009 and May 31, 2009, we did not incur any construction costs.

Pursuant to a written agreement, DLXY has acquired the prospecting and mining rights of a cobalt mine in Congo, and plans to construct a processing plant in Congo. Construction will begin in the second quarter of the fiscal year 2010.  We anticipate that the construction of the plant will cost approximately $2,000,000 to $3,000,000.  For additional details on the purchase of the interests in the cobalt mine in Congo, see

Item 7.

Management’s Discussion and Analysis or Plan of Operation .

We believe that all our properties and equipment have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.

 

Our facilities are not covered by insurance.

Item 3.

Legal Proceedings.

Currently, we are not a party to any ongoing or pending legal proceeding.

Item 4.

Submission of Matters to a Vote of Security Holders.

None.

PART II

 

Item 5.

Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.

 

 

The Market for Our Common Stock

 

                Our shares of common stock, par value $0.001 per share, are quoted on the Nasdaq OTC Bulletin Board under the trading symbol “CSGH” where they have traded since September 2006. The following table sets forth the high and low bid prices for our common stock for the last two fiscal years as reported on the OTC Bulletin Board. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions.

		Bid
Quarter Ending		High				Low
August 31, 2008		$	1.51			$	0.90
November 30, 2008		$	1.09			$	0.26
February 28, 2009		$	0.53			$	0.20
May 31, 2009		$	0.76			$	0.19
August 31, 2007		$	1.09			$	0.26
November 30, 2007		$	2.50			$	0.26
February 29, 2008		$	0.99			$	0.51
May 31, 2008		$	1.36			$	0.30

        

On August 27, 2009, there were 679 shareholders of our common stock of record. However, we believe that there are additional beneficial owners of our common stock who own their shares in “street name.”

Dividend Policy

 

We have not paid any cash dividends since our inception and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain our earnings, if any, to provide funds for the expansion of our business. Future dividend policy will be determined periodically by the Board of Directors based upon conditions then existing, including our earnings and financial condition, capital requirements, and other relevant factors.

Equity Compensation Plans

               There were no equity compensation plans effective as of May 31, 2009.

Item 6.

Selected Financial Data.

The following tables summarize our consolidated financial data for the periods presented. You should read the following financial information together with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes to these consolidated financial statements appearing elsewhere herein. The selected consolidated statements of operations data for the three financial years ended May 31, 2009; and the selected consolidated balance sheet data as of May 31, 2009 are derived from our consolidated financial statements, which are included elsewhere herein.

			YEARS ENDED MAY 31,
			2009				2008				2007
Statement of Income:
Revenue, net			37,033,483				25,294,221				8,275,066
Cost of revenue			23,444,655				15,664,692				4,875,078
Gross profit			13,588,828				9,629,529				3,399,988

Total operating expenses			2,099,753				426,384				1,999,803
Income (loss) from operations			11,489,075				9,203,145				1,400,185
Other income			35,449				27,800				-
Income tax expense			(2,943,786	)			(2,490,819	)			(804,189	)
Net income (loss)			8,580,738				6,740,126				595,996
Other comprehensive income:
Foreign currency translation gain:			479,361				2,362,380				111,889
Comprehensive income (loss):			9,060,099				9,102,506				707,885
Basic earnings per share			0.16				0.13				0.01
Shares used in the calculation of basic earnings per share			53,422,971				53,422,971				49,478,020
Diluted earnings per share			0.16				0.13				0.01
Shares used in the calculation of diluted earnings per share			53,422,971				53,422,971				49,478,020

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of OperationsCautionary Notice Regarding Forward-Looking Statements

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

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

 

 

 

	•		the effect of political, economic, and market conditions and geopolitical events;
	•		legislative and regulatory changes that affect our business;
	•		the availability of funds and working capital;
	•		the actions and initiatives of current and potential competitors;
	•		investor sentiment; and
	•		our reputation.

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

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

Overview

                   Currently, our only operations are conducted through DLXY, which engages in the business of manufacturing and selling cobaltosic oxide products. These products are primarily manufactured, marketed, and sold in the People’s Republic of China.

                  According to the Battery Industry Association of China, DLXY is the second largest non-governmental manufacturer of hi-tech cobalt salt products in Asia based on tons produced. DLXY’s products and processing capabilities include the production of cobalt ore, cobalt carbonate, nanometer-sized cobaltosic oxide and high-crystalline spherical lithium cobalt oxide which is used lithium batteries. In April 2006, DLXY commenced production and quickly amassed sales of over $1.5 million.

Results of Operations

Comparison of Year Ended May 31, 2009 to Year Ended May 31, 2008

Revenue

                   Revenue for the year ended May 31, 2009 totaled $37,033,483 compared to $25,294,221 for the year ended May 31, 2008, an increase of $11,739,262 or 46%. The increase resulted from new sources of sales channels and sales to our new customers.

Cost of Revenue

                   Cost of revenue for the year ended May 31, 2009 totaled $23,444,655 compared to $15,664,692 for the year ended May 31, 2008, an increase of $7,779,963 or 50 %.  The increase resulted directly from increased production of our products which is in tandem with increased demand for them.

 

 

 

Gross Profit

Gross profit for the year ended May 31, 2009 was $13,588,828, an increase of $3,959,299 or 41% from $9,629,529 for the year ended May 31, 2008. The increase in gross profit was primarily due to revenue generated by increased customer demand and production, and consequently increased sales of our products.

General and Administrative Expense

 

General and administrative expense for the year ended May 31, 2009 totaled $1,423,013 compared to $1,111,777 for the year ended May 31, 2008, an increase of $311,236 or 27%. The increase resulted from the recent increase in the scale of the Company.

Recovery of allowance for doubtful accounts

Recovery of Allowance for doubtful accounts for the year ended May 31, 2009 totaled Nil compared to $806,400 for the year ended May 31, 2008, a decrease of $806,400 or 100%. The decrease resulted from recovery from the allowance for doubtful accounts as the doubtful accounts aged over 1 year were subsequently collected from a customer in July 2007. There is no such recovery for the year ended May 31, 2009.

Sales and marketing

Sales and marketing expense for the year ended May 31, 2009 totaled $574,671 compared to $ 33,400 for the year ended May 31, 2008, an increase of $541,271 or 1621%. The increase resulted from addition in sales channels.

Research and Development Expense

               Research and development expense for the year ended May 31, 2009 totaled $102,069 compared to $87,607 for the year ended May 31, 2008, an increase of $14,462 or 16 %. The increase was primarily attributable to the hiring of additional research and development personnel.

Income From Operations

               Income from operations for the year ended May 31, 2009 totaled $11,489,075 compared to income from operation of $9,203,145 for the year ended May 31, 2008, an increase of $2,285,930 or 25%.  The increase resulted primarily from the increased customer demand for our products and consequently, increased sales.

Other Income

Interest income for the year ended May 31, 2009 was $35,449, an increase of $7,649 or 28% as compared to $27,800 for the year ended May 31, 2008.   The increase resulted primarily from interest income derived from cash in our bank accounts.

Income Taxes

Provision for income tax expenses was $2,943,786 for the year ended May 31, 2009, an increase of $452,967 or 18% as compared to $2,490,819 for the year ended May 31, 2008.  The increase resulted primarily from the increase in our revenue due to increased sales.

Foreign Currency Translation Gain

The foreign currency translation gain for the year ended May 31, 2009 was $479,361, an decrease of $1,883,019 or 80% as compared to $2,362,380 for the year ended May 31, 2008.  The decreases resulted from the slowdown in revaluation of the Renminbi against the U.S. dollar. This updated Renminbi valuation of DLXY’s assets and liabilities resulted in this gain.

 

 

Net Income

Net income for the year ended May 31, 2009 was $8,580,738, an increase of $1,840,612 or 27% as compared to $6,740,126 for the year ended May 31, 2008.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalent

Our cash and cash equivalent were $3,879,114 at the beginning of the year ended May 31, 2009 and increased to $9,209,953 by the end of the year ended May 31, 2009, an increase of $5,330,839 or 137%. This net change in cash and cash equivalents represented an increase of 74% or $2,264,888 from $3,065,951 for the year ended May 31, 2008.

Net cash provided by operating activities

              During the years ended May 31, 2009 and 2008, net cash provided by (used for) operating activities was $12,751,124 and $5,151,693, respectively, an increase of $7,599,431 or 147%.  This increase was due primarily to the growth in sales revenue with the decrease in inventory by $3,121,272, the increase in value-added tax payable by $329,511 and the increase in other payable and accrued liabilities by $93,496, the increase in income tax payable by $475,318 and the increase in accounts payable by $100,064, partially offset by the decrease in customer deposits by $363,191 and the increase in account receivable by $252,398 for the year ended May 31, 2008.

Net cash used in investing activities

Net cash used for investing activities was $7,524,373 and $2,471,927, for the years ended May 31, 2009 and 2008, respectively, an increase of $5,052,446 or 204%. The increase was primarily attributable to the purchase of equipment.

Effect of exchanges rates changes on cash and cash equivalent

Effect of exchanges rate changes on cash and cash equivalent   resulted in $104,088 for the year ended May 31, 2009, a decrease of $282,097 or 73% compared to $386,185 for the year ended May 31, 2008.

Trends

Currently, many companies in the cobalt product industry are looking to directly own cobalt producing mines which will provide direct access and supply to cobalt ore, the primary raw material in the cobalt product industry. In June 2007, we acquired certain rights to a cobalt mine in Africa. This acquisition will help us avoid export limitations imposed by the Congo, reduce freight expenses, and help ensure a stable supply of cobalt ore.

We are not aware of any trends, events or uncertainties that have or are reasonably likely to have a material impact on our short-term or long-term liquidity.

Inflation

 

We believe that inflation has not had a material or significant impact on our revenue or our results of operations.

 

Material Commitments for Capital Expenditures

 

Currently, we own the prospecting and mining rights of a cobalt mine in Congo. We plan to start the construction of a processing plant in Congo in the second quarter of the 2010 fiscal year. We anticipate that the construction of the plant will cost approximately $2,000,000 to $3,000,000.

 

 

 

General

 

We believe that we currently have sufficient income generated from our operations to meet our operating and/or capital needs.

 

However, we will continue to evaluate various sources of capital to meet our growth requirements. Such sources will include debt financings, the issuance of equity securities, and entrance into other financing arrangements. There can be no assurance, however, that any of the contemplated financing arrangements described herein will be available and, if available, can be obtained on terms favorable to us.

 

Contractual Obligations and Commitments

 

We leased an office premise under a non-cancelable operating lease agreement for a period of ten years, due July 25, 2010. The annual lease payment is $7,291.

 

On June 9, 2007, our subsidiary, DLXY entered into an African Mining Project Contract of Cooperation (the “Purchase Agreement”) with Shengbao Group and South African Shengbao Mining Enterprises (“Shengbao”). Pursuant to the Purchase Agreement, DLXY is obliged to purchase the prospecting and mining rights of a cobalt ore mine for a purchase price of $2 million over a term of 15 years.  As of May 31, 2009, DLXY had the capital commitment of $2 million in the purchase of the prospecting and mining rights which was contracted for but not provided in the financial statements.

Off Balance Sheet Arrangements

 

None.

Critical accounting policies and estimates

Revenue recognition

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

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

Account receivables and allowance for doubtful accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. We extend unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’ assessment of known requirements, aging of receivables, payment history, the customers’ current credit worthiness and the economic environment. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

 

 

New Financial Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141(R), “ Business Combinations ” ("FAS 141R"), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. FAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141R becomes effective for fiscal periods beginning after December 15, 2008. This accounting standard will be applied to acquisitions occurring after May 31, 2009, and will also require the Company to expense any costs related to such acquisitions.

In December 2007, the FASB released SFAS No. 160, “ Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51 ” ("FAS 160"), which establishes accounting and reporting standards for the ownership interests in subsidiaries held by parties other than the parent and for the deconsolidation of a subsidiary. FAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interest of the parent and the interests of the non-controlling owners. FAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. FAS 160 will apply to the Company with respect to any acquisitions, that the Company complete on or after January 1, 2009, which will result in a noncontrolling interest.

In May, 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles," ("FAS 162"). FAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). FAS 162 will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board's amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." The FASB has stated that it does not expect FAS 162 will result in a change in current practice. The application of FAS 162 will have no effect on the Company's financial position, results of operations or cash flows.

Also in May 2008, the FASB issued SFAS No. 163, " Accounting for Financial Guarantee Insurance Contracts--an interpretation of FASB Statement No. 60 " ("FAS 163"). FAS 163 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. FAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. The application of FAS 163 will have no effect on the Company's financial position, results of operations or cash flows.

In June 2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, “Earnings per Share”. Under the guidance of FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and all prior-period earnings per share data presented shall be adjusted retrospectively. Early application is not permitted. The adoption of this FSP did not have a material impact on the Company’s financial condition, results of operations or cash flows.

In June 2008, the FASB ratified EITF No. 07-5, " Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock " ("EITF 07-5"). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. Although EITF 07-5 is effective for fiscal years beginning after December 15, 2008, any outstanding instrument at the date of adoption will require a retrospective application of the accounting through a cumulative effect adjustment to retained earnings upon adoption. The Company’s adoption of EITF 07-5 did not have a significant impact on the Company’s financial statements.

 

 

In May 2009, the FASB issued SFAS 165, “ Subsequent Events ” ("FAS 165") which provides guidance on events that occur after the balance sheet date but prior to the issuance of the financial statements. FAS 165 distinguishes events requiring recognition in the financial statements and those that may require disclosure in the financial statements. Furthermore, FAS 165 requires disclosure of the date through which subsequent events were evaluated. FAS 165 is effective for interim and annual periods ending after June 15, 2009.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140” ("FAS 166"). FAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. FAS 166 is effective for fiscal years beginning after November 15, 2009. The Company will adopt FAS 166 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” ("FAS 167"). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. FAS 167 is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. The Company will adopt FAS 167 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.

In June 2009, the FASB issued SFAS No. 168, “ The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles, ” (“Codification”), which supersedes all existing accounting standard documents and will become the single source of authoritative non-governmental U.S. GAAP. All other accounting literature not included in the Codification will be considered non-authoritative. The Codification was implemented on July 1, 2009 and will be effective for interim and annual periods ending after September 15, 2009. The Company expects to conform its consolidated financial statements and related notes to the new Codification for the quarter ending November 30, 2009.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Foreign Exchange Risk

While our reporting currency is the US dollar, all of our consolidated revenue, consolidated costs and expenses are denominated in RMB except for some overseas related revenues and expenses. All of our assets are denominated in RMB except for some cash and cash equivalents and accounts receivables. As a result, we are exposed to foreign exchange risk as our revenue and results of operations may be affected by fluctuations in the exchange rate between the US dollar and RMB. If the RMB depreciates against the US dollar, the value of our RMB revenue, earnings and assets as expressed in our US dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

Inflation

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling and distribution, general and administrative expenses as a percentage of net revenue if the selling prices of our products do not increase to cope with these increased costs.

 

Item 8.

Financial Statements and Supplementary Data.

                   Our financial statements for the year ended May 31, 2009 are attached hereto, beginning F-1 through F-19.

 

 

 

 

 

CHINA SUN GROUP HIGH-TECH CO.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets			F-3
Consolidated Statements of Operations And Comprehensive Income			F-4
Consolidated Statements of Cash Flows			F-5
Consolidated Statements of Stockholders’ Equity			F-6
Notes to Consolidated Financial Statements			F-7 – F-19

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

China Sun Group High-Tech Co.

We have audited the accompanying consolidated balance sheets of China Sun Group High-Tech Co. and its subsidiaries (“the Company”) as of May 31, 2009 and 2008, and the related consolidated statements of operations and comprehensive income, cash flows and stockholders’ equity for the years ended May 31, 2009 and 2008. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of May 31, 2009 and 2008, and the results of operations and cash flows for the years ended May 31, 2009 and 2008 and in conformity with accounting principles generally accepted in the United States of America.

/s/ ZYCPA Company Limited

ZYCPA Company Limited

(Formerly Zhong Yi (Hong Kong) C.P.A. Company Limited)

Certified Public Accountants

Hong Kong, China

August 28, 2009

 

 

 

 

 

CHINA SUN GROUP HIGH-TECH CO.

CONSOLIDATED BALANCE SHEETS

AS OF MAY 31, 2009 AND 2008

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

 

See accompanying notes to consolidated financial statements.

 

 

 

CHINA SUN GROUP HIGH-TECH CO.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED MAY 31, 2009 AND 2008

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

		Years ended May 31,
		2009				2008
Revenues, net		$	37,033,483			$	25,294,221
Cost of revenue (inclusive of depreciation)			23,444,655				15,664,692
Gross profit			13,588,828				9,629,529
Operating expenses:
Sales and marketing			574,671				33,400
Recovery of allowance for doubtful accounts			-				(806,400	)
Research and development			102,069				87,607
General and administrative			1,423,013				1,111,777
Total operating expenses			2,099,753				426,384
INCOME FROM OPERATIONS			11,489,075				9,203,145
Other income:
Interest income			35,449				27,800
INCOME BEFORE INCOME TAXES			11,524,524				9,230,945
Income tax expense			(2,943,786	)			(2,490,819	)
NET INCOME		$	8,580,738			$	6,740,126
Other comprehensive income:
- Foreign currency translation gain			479,361				2,362,380
COMPREHENSIVE INCOME		$	9,060,099			$	9,102,506
Net income per share – Basic and diluted		$	0.16			$	0.13
Weighted average number of shares outstanding during the year – Basic and diluted			53,422,971				53,422,971

 

See accompanying notes to consolidated financial statements.

 

 

CHINA SUN GROUP HIGH-TECH CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MAY 31, 2009 AND 2008

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

		Years ended May 31,
		2009				2008
Cash flows from operating activities:
Net income		$	8,580,738			$	6,740,126
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			666,657				423,781
Recovery of allowance for doubtful accounts			-				(806,400	)
Changes in operating assets and liabilities:
Accounts receivable, trade			(252,398	)			4,504,302
Inventories			3,121,272				(4,448,436	)
Value-added tax receivable			329,511				(661,467	)
Deposits and prepayments			(363,191	)			(69,268	)
Accounts payable, trade			100,064				75,948
Customer deposits			(343	)			(713,415	)
Income tax payable			475,318				86,788
Other payables and accrued liabilities			93,496				19,734
Net cash provided by operating activities			12,751,124				5,151,693
Cash flows from investing activities:
Payment on technical know-how			(2,206,150	)			-
Purchase of plant and equipment			(3,785,437	)			(2,471,927	)
Payment on construction in progress			(1,532,786	)			-
Net cash used in investing activities			(7,524,373	)			(2,471,927	)
Effect of exchange rate changes on cash and cash equivalents			104,088				386,185
NET CHANGE IN CASH AND CASH EQUIVALENTS			5,330,839				3,065,951
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			3,879,114				813,163
CASH AND CASH EQUIVALENTS, END OF YEAR		$	9,209,953			$	3,879,114
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes		$	2,468,468			$	2,390,636
Cash paid for interest		$	-			$	-

 

See accompanying notes to consolidated financial statements.

 

 

CHINA SUN GROUP HIGH-TECH CO.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED MAY 31, 2009 AND 2008

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

 

 

See accompanying notes to consolidated financial statements.

 

 

CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MAY 31, 2009 AND 2008

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

1.         ORGANIZATION AND BUSINESS BACKGROUND

China Sun Group High-Tech Co. (the “Company” or “CSGH”) was organized under the laws of the State of North Carolina on February 2, 2004 as a subchapter S-Corporation. On August 24, 2007, the Company was reincorporated in the State of Delaware and changed its name from “Capital Resource Funding, Inc.” to “China Sun Group High-Tech Co.”

The Company, through its operating subsidiaries in the PRC, mainly engages in the production and sales of cobaltosic oxide and lithium cobalt oxide, both anode materials used in lithium ion rechargeable batteries in the PRC. The operation activity was commenced from April 2006.

Respectively, on September 6, 2006 and May 30, 2008, CSGH entered a stock exchange transaction with Da Lian Xin Yang High-Tech Development Co., Ltd (“DLX”), whereby 40,000,000 new shares of common stock of CSGH pursuant to Regulation S under the Securities Act of 1933, as amended, were issued to the owners of DLX in exchange for 100% equity interest in DLX. The stock exchange transaction was effectively completed on February 28, 2007. DLX was incorporated as a limited liability company in the People’s Republic of China (“PRC”) on August 16, 2000 with its principal place of business in Da Lian City, Liaoning Province, the PRC. Upon the completion of this transaction, DLX became a wholly-owned subsidiary of the Company.

These two consecutive stock exchange transactions have been accounted for as a reverse acquisition and recapitalization of the Company whereby DLX is deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquiree (legal acquirer). The accompanying consolidated financial statements are in substance those of DLX, with the assets and liabilities, and revenues and expenses, of the Company being included effective from the date of stock exchange transaction. The Company is deemed to be a continuation of the business of DLX.

CSGH and its subsidiaries are hereinafter referred to as (the “Company”).

 

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying consolidated financial statements and notes.

l	Basis of presentation

These accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.

l	Use of estimates

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

l	Basis of consolidation

The consolidated financial statements include the financial statements of CSGH and its subsidiaries.

All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.

 

 

 

 

 

 

 

l	Revenue recognition

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

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

The Company is required to remit VAT collected to the tax authority, but may deduct VAT it has paid on eligible purchases. To the extent that the Company paid more than collected, the difference represents the net VAT recoverable balance at the balance sheet date. As of May 31, 2009, the Company has VAT receivable of $124,627 in the consolidated financial statements.

l	Cost of revenue

Cost of revenue primarily includes the purchase of raw materials, direct labor, depreciation and manufacturing overhead that are directly attributable to the production. Shipping and handling costs are included in cost of revenue.

l	Advertising cost

The Company expenses advertising costs as incurred in accordance with SOP 93-7 “ Reporting for Advertising Costs ”. Advertising expenses of $554,205 and $114 were incurred for the years ended May 31, 2009 and 2008, respectively.

l	Research and development costs

Research and development costs mainly related to labor cost incurred in the development of new products and manufacturing methods and are charged to expense as incurred. The Company incurred $102,069 and $87,607 for the years ended May 31, 2009 and 2008, respectively.

l	Cash and cash equivalents

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

l	Accounts receivable

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

l	Inventories

Inventories include material, labor and manufacturing overhead and are stated at lower of cost or market value, cost being determined on a weighted average method. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of May 31, 2009, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.

 

 

 

CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MAY 31, 2009 AND 2008

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

 

 

l	Technical know-how

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

l	Property, plant and equipment

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

	Depreciable life		Residual value
Building	40 years		5%
Plant and machinery	5-40 years		5%
Office equipment	5 years		5%
Motor vehicle	5 years		5%

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

l	Construction in progress

Construction in progress is stated at cost, which includes the cost of construction, acquisition of plant and equipment and other direct costs attributable to the construction. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized interest is incurred during the period of construction.

l	Valuation of long-lived assets

Long-lived assets primarily include technical know-how and property, plant and equipment. In accordance with SFAS No. 144, “ Accounting for the Impairment or Disposal of Long-Lived Assets ,” the Company periodically reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. Determining the fair value of long-lived assets includes significant judgment by management, and different judgments could yield different results. There has been no impairment as of May 31, 2009.

 

l	Comprehensive income

SFAS No. 130, “Reporting Comprehensive Income” establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during the period from non-owner sources. Accumulated comprehensive income consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.

 

 

 

l	Income taxes

The Company accounts for income tax using SFAS No. 109 “Accounting for Income Taxes,” which requires the asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred income taxes are provided for the estimated future tax effects attributable to temporary differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for the expected future tax benefits from loss carry-forwards and provisions, if any. Deferred tax assets and liabilities are measured using the enacted tax rates expected in the periods of recovery or reversal and the effect from a change in tax rates is recognized in the consolidated statement of operations and comprehensive income in the period of enactment. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.

The Company also adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. In accordance with FIN 48, the Company also adopted the policy of recognizing interest and penalties, if any, related to unrecognized tax positions as income tax expense. For the years ended May 31, 2009 and 2008, the Company did not have any interest and penalties associated with tax positions. As of May 31, 2009, the Company did not have any significant unrecognized uncertain tax positions.

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

l	Net income per share

The Company calculates net income per share in accordance with SFAS No. 128, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.

l	Foreign currencies translation

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

 

 

 

 

 

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

In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with SFAS No 52. “ Foreign Currency Translation” , using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

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

		May 31, 2009				May 31, 2008
Year end RMB: US$1 exchange rate			6.825				6.953
Average yearly RMB: US$1 exchange rate			6.858				7.351

l	Retirement plan costs

Contributions to retirement schemes (which are defined contribution plans) are charged to general and administrative expenses in the consolidated statements of operation and comprehensive income as and when the related employee service is provided.

l	Related parties

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

l	Segment reporting

SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in the financial statements. The Company operates one reportable business segment in the PRC.

l	Fair value measurement

The Company has adopted SFAS No. 157, “ Fair Value Measurements” ("FAS 157"), for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis and for all non-financial instruments accounted for at fair value on a non-recurring basis. FAS 157 establishes a new framework for measuring fair value and expands related disclosures. The Company has also adopted FASB FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly . Adoption of the FSP had an insignificant effect on the Company’s financial statements.

FAS 157 establishes a new framework for measuring fair value and expands related disclosures. Broadly, FAS 157 framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. FAS 157 establishes a three-level valuation hierarchy based upon observable and non-observable inputs. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

 

For financial assets and liabilities, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.

l	Recent accounting pronouncements

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

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141(R), “ Business Combinations ” ("FAS 141R"), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. FAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141R becomes effective for fiscal periods beginning after December 15, 2008. This accounting standard will be applied to acquisitions occurring after May 31, 2009, and will also require the Company to expense any costs related to such acquisitions.

In December 2007, the FASB released SFAS No. 160, “ Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51 ” ("FAS 160"), which establishes accounting and reporting standards for the ownership interests in subsidiaries held by parties other than the parent and for the deconsolidation of a subsidiary. FAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interest of the parent and the interests of the non-controlling owners. FAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. FAS 160 will apply to the Company with respect to any acquisitions, that the Company complete on or after January 1, 2009, which will result in a noncontrolling interest.

In May, 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles," ("FAS 162"). FAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). FAS 162 will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board's amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." The FASB has stated that it does not expect FAS 162 will result in a change in current practice. The application of FAS 162 will have no effect on the Company's financial position, results of operations or cash flows.

Also in May 2008, the FASB issued SFAS No. 163, " Accounting for Financial Guarantee Insurance Contracts--an interpretation of FASB Statement No. 60 " ("FAS 163"). FAS 163 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. FAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. The application of FAS 163 will have no effect on the Company's financial position, results of operations or cash flows.

 

 

 

In June 2008, the FASB issued FASB Staff Position ("FSP") EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, “Earnings per Share”. Under the guidance of FSP EITF 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings-per-share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and all prior-period earnings per share data presented shall be adjusted retrospectively. Early application is not permitted. The adoption of this FSP did not have a material impact on the Company’s financial condition, results of operations or cash flows.

In June 2008, the FASB ratified EITF No. 07-5, " Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock " ("EITF 07-5"). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. Although EITF 07-5 is effective for fiscal years beginning after December 15, 2008, any outstanding instrument at the date of adoption will require a retrospective application of the accounting through a cumulative effect adjustment to retained earnings upon adoption. The Company’s adoption of EITF 07-5 did not have a significant impact on the Company’s financial statements.

In May 2009, the FASB issued SFAS 165, “ Subsequent Events ” ("FAS 165") which provides guidance on events that occur after the balance sheet date but prior to the issuance of the financial statements. FAS 165 distinguishes events requiring recognition in the financial statements and those that may require disclosure in the financial statements. Furthermore, FAS 165 requires disclosure of the date through which subsequent events were evaluated. FAS 165 is effective for interim and annual periods ending after June 15, 2009.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140” ("FAS 166"). FAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. FAS 166 is effective for fiscal years beginning after November 15, 2009. The Company will adopt FAS 166 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” ("FAS 167"). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. FAS 167 is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. The Company will adopt FAS 167 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.

In June 2009, the FASB issued SFAS No. 168, “ The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles, ” (“Codification”), which supersedes all existing accounting standard documents and will become the single source of authoritative non-governmental U.S. GAAP. All other accounting literature not included in the Codification will be considered non-authoritative. The Codification was implemented on July 1, 2009 and will be effective for interim and annual periods ending after September 15, 2009. The Company expects to conform its consolidated financial statements and related notes to the new Codification for the quarter ending November 30, 2009.

 

 

 

CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED MAY 31, 2009 AND 2008

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