Capstone Technologies Group Inc. - Quarter Report: 2012 May (Form 10-Q)

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2012

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ______________

Commission File Number: 000-54321

CHINA BILINGUAL TECHNOLOGY & EDUCATION GROUP INC.

(Exact Name of small business issuer as specified in its charter)

Nevada		68-0678185
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

No. 2 Longbao Street, Xiaodian Zone, Taiyuan City, Shanxi Province, People’s Republic of China 030031

(Address of principal executive offices) (Zip Code)

Issuer’s telephone number: 86-351-7963988

Indicate by check mark whether the issuer (1) 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. Yes x No o

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 x No o

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

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

As of July 16, 2012, the issuer had 30,069,629 outstanding shares of Common Stock.

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TABLE OF CONTENTS

		Page
	PART I
Item 1.	Unaudited Financial Statements	3
	Condensed Consolidated Balance Sheet as of May 31, 2012 (Unaudited) and August 31, 2011	3
	Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income For The Nine Months Ended May 31, 2012 and May 31, 2011	4
	Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income for the Three Months Ended May 31, 2012 and May 31, 2011	5
	Unaudited Condensed Consolidated Statements of Cash Flows For The Nine Months Ended May 31, 2012 and May 31, 2011	6
	Notes to the Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation.	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	26
Item 4.	Controls and Procedures.	26

	PART II
Item 1.	Legal Proceedings.	27
Item 1A.	Risk Factors.	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	27
Item 3.	Defaults Upon Senior Securities.	27
Item 4.	Mine Safety Disclosures.	27
Item 5.	Other Information.	27
Item 6.	Exhibits.	28
	SIGNATURES	29

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

China Bilingual Technology & Education Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	May 31, 2012			August 31, 2011
ASSETS	(unaudited)
CURRENT ASSETS:
Cash and cash equivalents		$	9,012,557		$	15,090,521
Inventory			71,574			3,489
Prepayment and other current assets			2,982,030			9,606,682
Total Current Assets			12,066,161			24,700,692

LONG-TERM ASSETS:
Property, plant and equipment, net			80,246,741			81,958,342
Land use rights, net			45,266,573			45,783,579
Deposit paid for long-term assets			-			18,778

Total Long-Term Assets			125,513,314			127,760,699

TOTAL ASSETS		$	137,579,475		$	152,461,391

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable		$	99,974		$	48,824
Short-term payable-acquisition			18,721,361			21,177,319
Due to related parties			8,139,302			7,842,522
Other payables			514,545			333,202
Refundable deposits			545,664			795,848
Prepaid school fees			18,782,157			39,498,972
Home purchase down payment			930,366			878,668
Short-term bank loan			15,770,632			15,685,044
Accrued expenses and other current liabilities			934,231			908,268

Total Current Liabilities			64,438,232			87,168,667

Long-term payable-acquisition			25,171,348			22,656,106

TOTAL LIABILITIES		$	89,609,580		$	109,824,773

STOCKHOLDERS’ EQUITY:
Common Stock, $0.001par value; 75,000,000 shares authorized; 30,014,528 issued and outstanding as of May 31, 2012 and August 31, 2011			30,015			30,015
Additional paid-in capital			67,421			67,421
Retained earnings			45,211,581			40,100,740
Accumulated other comprehensive income			2,660,878			2,438,442

TOTAL STOCKHOLDERS’ EQUITY			47,969,895			42,636,618

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	137,579,475		$	152,461,391

The accompanying notes to these consolidated financial statements are an integral part of these balance sheets.

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China Bilingual Technology & Education Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Other Comprehensive Income

(Unaudited)

	For The Nine Months Ended
	May 31, 2012			May 31, 2011

REVENUES	$	31,533,148		$	18,284,643
COST OF REVENUES		18,574,019			9,410,816
GROSS PROFIT		12,959,129			8,873,827
OPERATING EXPENSES
General and Administrative Expenses		1,658,566			1,227,436
TOTAL OPERATING EXPENSES		1,658,566			1,227,436
INCOME FROM OPERATIONS		11,300,563			7,646,391
OTHER INCOME (EXPENSE)
Interest Income		39,166			25,703
Interest Expense		(6,228,888	)		-
NET INCOME BEFORE INCOME TAXES	$	5,110,841		$	7,672,094
INCOME TAX EXPENSE		-			-
NET INCOME	$	5,110,841		$	7,672,094
Foreign currency translation, net of tax		222,436			1,535,189
COMPREHENSIVE INCOME	$	5,333,277		$	9,207,283

Earnings per Common Share:
Basic	$	0.17		$	0.26
Diluted	$	0.17		$	0.26

Weighted Average Common Shares Outstanding:
Basic		30,079,330			30,004,503
Diluted		30,079,330			30,004,503

The accompanying notes to consolidated financial statements are an integral part of these statements.

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China Bilingual Technology & Education Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Other Comprehensive Income

(Unaudited)

	For the Three Months Ended
	May 31, 2012			May 31, 2011

REVENUES	$	10,153,351		$	6,213,940
COST OF REVENUES		5,547,069			2,960,417
GROSS PROFIT		4,606,282			3,253,523
OPERATING EXPENSES
General and Administrative Expenses		528,073			526,808
TOTAL OPERATING EXPENSES		528,073			526,808
INCOME FROM OPERATIONS		4,078,209			2,726,715
OTHER INCOME (EXPENSE)
Interest Income		8,267			6,309
Interest Expense		(2,083,241	)		-
NET INCOME BEFORE INCOME TAXES	$	2,003,235		$	2,733,024
INCOME TAX EXPENSE		-			-
NET INCOME	$	2,003,235		$	2,733,024
Foreign currency translation, net of tax		(304,705)			478,568
COMPREHENSIVE INCOME	$	1,698,530		$	3,211,592

Earnings per Common Share:
Basic	$	0.07		$	0.09
Diluted	$	0.07		$	0.09

Weighted Average Common Shares Outstanding:
Basic		30,109,677			30,010,114
Diluted		30,109,677			30,010,114

The accompanying notes to consolidated financial statements are an integral part of these statements.

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China Bilingual Technology & Education Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For The Nine Months Ended
	May 31, 2012			May 31, 2011

Cash Flows From Operating Activities:
Net income	$	5,110,841		$	7,672,094
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		2,442,943			835,892
Amortization		767,122			113,512
Accretion of interest payable – acquisition		4,572,250			-
Stock-based compensation		79,861			99,000
(Increases) Decreases in Assets:
Inventories		(68,093	)		1,825
Prepayment and other current assets		6,698,595			674,894
Increases (Decreases) in Liabilities:
Accounts payable		50,903			(17,636)
Other payables		179,595			(485,742	)
Refundable deposits		(254,627)			(722,847	)
Prepaid school fees		(20,940,603	)		(12,701,222	)
Home purchase down payment		46,922			121,245
Accrued expenses and other current liabilities		(58,462)			(91,724)
Net Cash Provided By (Used In) Operating Activities		(1,372,753	)		(4,500,709	)

Cash Flows From Investing Activities:
Deposits - long term assets		-			(7,865,907	)
Fixed asset additions		(283,275	)		(315,935	)
Receipts - related parties receivables		-			3,539,714
Net Cash Provided By (Used In) Investing Activities		(283,275	)		(4,642,128	)

Cash Flows From Financing Activities: Proceeds from related party loan		253,999			-
Payments made on acquisition - payable		(4,750,346	)		-
Net Cash Provided By (Used In) Financing Activities		(4,496,347	)		-

Effect of Exchange Rate Changes on Cash		74,411			340,667

Net Increase (Decrease) in Cash and Cash Equivalents		(6,077,964	)		(8,802,170	)

Cash and Cash Equivalents, Beginning of Period		15,090,521			10,888,988

Cash and Cash Equivalents, End of Period	$	9,012,557		$	2,086,818

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	1,325,256		$	-
Cash paid for taxes	$	-		$	-

The accompanying notes to consolidated financial statements are an integral part of these statements.

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China Bilingual Technology & Education Group Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

May 31, 2012 and May 31, 2011 (Unaudited)

NOTE 1 -NATURE OF BUSINESS

Description of Business

China Bilingual Technology & Education Group Inc. (the “Company”), is an education company that owns and operates high-quality K-12 private boarding schools in the People’s Republic of China (the “PRC”). The Company established school operations in 1998 and currently operates three schools encompassing kindergarten, elementary, middle and high school levels. The Company’s schools are located in Shanxi and Sichuan Provinces and focus on fluency and cultural skills in both Chinese and English, as well as the PRC core curriculum. The Company’s sector in education is not subject to corporate income tax.

Control by Principal Shareholders

The Company’s directors, executive officers and their affiliates or related parties, own beneficially and in the aggregate, the majority of the voting power of the outstanding shares of the common stock of the Company. Accordingly, the directors, executive officers and their affiliates, if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including increasing the authorized capital stock of the Company and the dissolution, merger or sale of the Company's assets or business.

Financial Statements Presented

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

The Company was incorporated in the State of Nevada on March 31, 2009 under the name Designer Export, Inc. On June 30, 2010, the Company changed its name to China Bilingual Technology & Education Group Inc.

On June 30, 2010, the Company entered into a Share Exchange Agreement (the “Agreement”) with Kahibah Limited (“KL”), a British Virgin Islands (“BVI”) corporation and its shareholders. According to this Agreement, the Company acquired all the issued and outstanding shares of KL. The Company issued 26,100,076 shares of its common stock, after giving effect to the cancellation of 7,748,343 shares on June 30, 2010, to KL’s shareholders in exchange for 100% of the shares of KL. After the closing of the transaction, the Company had a total of 30,000,005 shares of common stock issued and outstanding, with KL’s shareholders owning 87% of the total issued and outstanding shares of the Company’s common stock, and the balance held by those who held shares of the Company’s common stock prior to the closing of the exchange. This transaction resulted in KL’s shareholders obtaining a majority voting interest in the Company. All shares are shown effective of a 2.582781 forward stock split as of July 14, 2010.

The acquisition of KL and the operations of its subsidiaries were accounted for as a reverse merger, whereby KL is the continuing entity for financial reporting purposes and is deemed, for accounting purposes, to be the acquirer of the Company. In accordance with the applicable accounting guidance for accounting for the business combination as a reverse merger, KL is deemed to have undergone a recapitalization, whereby KL is deemed to have issued common stock to the Company’s common equity holders. Accordingly, although the Company, as KL’s parent company, was deemed to have legally acquired KL, in accordance with the applicable accounting guidance for accounting for the transaction as a reverse merger and re-capitalization, KL is the surviving entity for accounting purposes and its assets and liabilities are recorded at their historical carrying amounts with no goodwill or other intangible assets recorded as a result of the accounting merger with the Company.

As part of the acquisition, the Company changed its name to China Bilingual Technology & Education Group Inc. Share and per share amounts stated have been retroactively adjusted to reflect the acquisition. The accompanying financial statements present the historical financial condition, results of operations and cash flows of KL and its operating subsidiaries prior to the recapitalization.

The historical consolidated financial statements of the Company are those of KL, and of the consolidated entities. The consolidated financial statements of the Company presented for the nine-month and three-month periods ended May 31, 2012 and May 31, 2011 included the financial statements of China Bilingual, KL, KL’s subsidiary Taiyuan Taiji Industry Development co., Ltd. (“Taiyuan Taiji”), a wholly-foreign owned enterprise (“WFOE”) under the laws of the Peoples Republic of China (“PRC”), which owns 95% of the registered capital of Shanxi Taiji Industry Development Co., Ltd. (“Shanxi Taiji”), an equity joint venture company organized under the laws of the PRC. Shanxi Taiji owns all of the registered capital of Shanxi Modern Bilingual School (“Shanxi North Campus”) and Sichuan Guang’an Experimental High School (“Sichuan Guang’an School”), both private non-enterprise entities incorporated under the laws of the PRC, collectively the “Subsidiaries.”

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Since the ownership of KL and its Subsidiaries was substantially the same, the merger with each was accounted for as a transfer of equity interests between entities under common control, whereby the acquirer recognized the assets and liabilities of each Subsidiary transferred at their carrying amounts. The reorganization was treated similar to the pooling of interest method with carry over basis. Accordingly, the financial statements for KL and its Subsidiaries have been combined for all periods presented, similar to a pooling of interest. The reorganization of entities under common control was retrospectively applied to the financial statements of all prior periods when the financial statements are issued for a period that includes the date the transaction occurred. Intercompany transactions and balances are eliminated in consolidations.

On August 31, 2011, the Company entered into an Equity Transfer Agreement and purchased all of the outstanding equity of Shanxi Rising Education Investment Company Limited (the “Investment Company”) from the equity holders (the “Sellers”) for a total purchase consideration of RMB 690,000,000 (approximately $108,226,806). The net present value of the total fair value consideration transferred equals RMB 616,023,000 (approximately $96,623,480), of which RMB 336,563,000 (approximately $52,790,055) has been paid. Under the terms of the Equity Transfer Agreement the balance of the purchase price is to be paid over three years in three scheduled payments as follows:

RMB 153,437,000 (or RMB 135, 016,000, approximately $21,177,399, net of discount) to be paid by August 31, 2012,

RMB 100,000,000 (or RMB 76, 947, 000, approximately $12, 069,171, net of discount) by August 31, 2013, and

RMB 100,000,000 (or RMB 67,497,000, approximately $10,586,935, net of discount) by August 31, 2014.

The net present value of the payments is discounted at the Company’s current financing interest rate of 14%.

The Investment Company, a limited liability company established under the laws of the PRC, is an education company that owns and operates a K-12 private boarding school in Jinzhong City, Shanxi Province of the PRC, encompassing kindergarten, primary and secondary education. The Investment Company was established in 2001 and it has share capital of RMB 70,000,000. It is the parent company of Shanxi Rising School (the "Rising School"), founded in 2002, which currently serves approximately 5,869 students from its location in Shanxi Province, PRC. The Rising School is now known by the Company as the “Shanxi South School.”

The acquisition of the Investment Company has been accounted for as a business combination under Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). The total purchase consideration of RMB 690,000,000 has been allocated to the net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of August 31, 2011.

Prior to closing the Equity Transfer Agreement, the Company became involved in the operations of the Shanxi South School in the spring of 2011. With the consent of the Investment Company, the Company assisted in the operations, accounting and promotion of the school to attract more and better students for the 2011-2012 school year. Some of these responsibilities included collecting prepaid tuition, room & board and other school fees (“School Fees”) in advance of the school year, which combined with better operations, higher tuition rates and an increase in enrollment led to an increase in deferred revenue at the start of the 2011 – 2012 school year, which corresponds to the fiscal year from September 1, 2011 to August 31, 2012. The Company’s involvement at the Shanxi South School was under the direction of Investment Company management until it assumed control of the Investment Company on August 31, 2011, in accordance with the Equity Transfer Agreement.

For the purpose of preparing the consolidated financial statements, the total purchase price is allocated to the Company’s net tangible assets acquired and liabilities assumed as of August 31, 2011. The adjustments record the purchase price allocation entries as of August 31, 2011, including allocation of fair values of the associated tangible assets, intangible assets and acquired liabilities, to eliminate the Company's historical equity balances and to record the estimated use of cash to fund the cash portion of the acquisition. The adjustments also include certain decreases in intercompany balances eliminated in consolidation. Accordingly, the fair value of assets acquired and liabilities assumed may be materially impacted by the results of the Company’s on-going operations after the date of the Equity Transfer Agreement.

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Principles of Consolidation

The condensed consolidated financial statements include the accounts of China Bilingual Technology & Education Group Inc. and the following subsidiaries:

Subsidiaries	State and Countries Registered In	% Ownership
Kahibah Limited	British Virgin Island		100	%
Taiyuan Taiji Industry Development Co., Ltd.	People’s Republic of China		100	%
Shanxi Taiji Industrial Development Co., Ltd.(i)	People’s Republic of China		95	%
Shanxi Modern Bilingual School (ii)	People’s Republic of China		100	%
Sichuan Guang’an Experimental High School (iii)	People’s Republic of China		100	%
Shanxi Rising Education Investment Company Ltd. (iv)	People’s Republic of China		100	%
Shanxi Rising School (v)	People’s Republic of China		100	%

(i) Shanxi Taiji Industrial Development Co., Ltd. was incorporated as a limited liability company on July 25, 1997 under PRC law. It is currently 95% owned by Taiyuan Taiji and 5% owned by Ms. Ren Baiv. On November 25, 2009, KL entered into a share exchange agreement to sell the remaining 5% ownership to Ms. Ren Baiv. Ms. Ren Baiv is the sister of Mr. Ren Zhiqing, the Company’s Chief Executive Officer. At December 31, 2010, Ms. Ren Baiv paid 1 million Renminbi (“RMB”) as part of the capital contribution. The 5% ownership is held by Ms. Ren Baiv on behalf of the Taiyuan Taiji in accordance with local Chinese regulations, therefore no non-controlling interest is recognized. Shanxi Taiji is an equity joint venture under the laws of the PRC. The Shanxi North Campus, Modern Bilingual School and Sichuan Guang’an Experimental High School (the “Schools”) hold the requisite governmental licenses to provide private educational services within their province in China. Each province sets its own licensing criteria and duration following the general guidelines established by the national government for education standards.

(ii) Shanxi Modern Bilingual School (the “Shanxi North School”) was established in 1998 by Shanxi Taiji. It operates as a private K-12 boarding school on a 38 acre campus in Taiyuan City, Shanxi Province. The Shanxi School holds a three year provincial license to be renewed May, 2013.

(iii) Sichuan Guang’an Experimental High School (the “Sichuan Guang’an School”) was established in 2002 by Shanxi Taiji. It operates as a private K-12 boarding school on a 23 acre campus in Guang’an, Sichuan Province. The Sichuan Guang'an School holds a four year provincial license to be renewed May 2015.

(iv) Shanxi Rising Education Investment Company Ltd. (the “Investment Company”) was established in 2001 to own and operate private boarding schools in the PRC. The Investment Company has share capital of RMB 70,000,000. It is the parent company of one school, the Shanxi Rising School, which was acquired by the Company on August 31, 2011. The Investment Company has no operations other than its ownership of the Shanxi Rising School.

(v) Shanxi Rising School (the “Shanxi South School”) was established in 2002 by the Investment Company as a private boarding school encompassing kindergarten, primary and secondary education located in the Shanxi Province of the PRC. The school has been assimilated in the operation of the Company and re-branded as the Shanxi South School operating as a private K-12 boarding school on an 82 acre campus comprised of over 2.3 million square feet of facilities, including 18 dormitories with capacity for 10,000 students, academic classrooms, gymnasium, theatre, natatorium, cafeteria and other administrative and academic buildings. The Shanxi South School holds a four year provincial license to be renewed April 2015.

All significant intercompany accounts and transactions have been eliminated in consolidation.

Management’s Representation of Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the SEC. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the audited financial statements at August 31, 2011 as filed in the Company Form 10-K filed with the SEC on November 29, 2011.

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NOTE 2 – USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Measurement, estimates and assumptions are used for, but not limited to, the selection of the useful lives of property and equipment, impairment of long-lived assets, fair values and revenue recognition. Management makes these estimates using the best information available at the time the estimates are made; however, actual results, when ultimately realized, could differ from those estimates. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to US GAAP and have been consistently applied in the preparation of the consolidated financial statements.

In June 2009, the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification (“ASC”) 105-10 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of ASB ASC 105-10 establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied in preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“US GAAP”). The adoption of this standard had no impact on the Company’s consolidated financial statements.

(a)	Fair Value of Financial Instruments

The Company applies the provisions of accounting guidance, FASB ASC Topic 820 that requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of May 31, 2012, the fair value of cash and cash equivalents, other receivables, accounts payable, short term bank loans, and other payables approximated carrying value due to the short maturity of the instruments, quoted market prices or interest rates which fluctuate with market rates except for related party debt or receivables for which it is not practicable to estimate fair value.

Fair Value Measurements

Effective April 1, 2009, the FASB ASC Topic 825, “Financial Instruments,” requires disclosures about fair value of financial instruments in quarterly reports as well as in annual reports.

The FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.

Various inputs are considered when determining the fair value of the Company’s financial instruments. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below:

Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risks, etc.).

Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair market value of financial instruments).

The Company’s adoption of FASB ASC Topic 820 did not have a material impact on the Company’s consolidated financial statements.

The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a nonrecurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. The Company had no financial assets and/or liabilities carried at fair value on a recurring basis at May 31, 2012.

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The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.

(b) Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. There are no restrictions to cash at May 31, 2012. A substantial amount of the Company’s cash is held in bank accounts in the PRC and is not protected by the Federal Deposit Insurance Corporation (“FDIC”) insurance or any other similar insurance. Given the current economic environment and the financial conditions of the banking industry there is a risk that deposits may not be readily available. Cash held in the PRC amounted to $9,010,350 and $15,088,156 at May 31, 2012 and August 31, 2011, respectively. The PRC places limitations on expatriating cash out of the country, which may limit the Company’s ability to pay dividends. As of May 31, 2012 and August 31, 2011, the Company had $2,207 and $2,365, respectively, in deposits in a federally insured United States (“US”) bank. The Company has not experienced any losses with regard to its bank accounts and believes it is not exposed to any risk of loss on its cash in bank accounts.

The Company’s long-lived assets and other assets (consisting of property and equipment and purchased land use rights) are reviewed for impairment in accordance with the guidance of the FASB ASC Topic 360-10, “Property, Plant, and Equipment,” and FASB ASC Topic 205, “Presentation of Financial Statements.” The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through May 31, 2012, the Company had not experienced impairment losses on its long-lived assets. However, there can be no assurances that demand for the Company’s services will continue, which could result in an impairment of long-lived assets in the future.

(d) Income taxes

On March 16, 2007, the PRC National People’s Congress passed the PRC Enterprise Income Tax Law (“New EIT Law”) which became effective on January 1, 2008. Pursuant to the New EIT Law, a unified enterprise income tax rate of 25% and unified tax deduction standards will be applied consistently to both domestic-invested enterprises and foreign-invested enterprises.

Shanxi Taiji, Taiyuan Taiji and the Investment Company are taxed pursuant to the New EIT Law with a unified enterprise income tax rate of 25%. Shanxi Taiji, Taiyuan Taiji and the Investment Company did not pay any income taxes during the three months ended May 31, 2012 due to net losses experienced in the past reporting periods. The three entities may apply the past periods’ net operating losses to futures years’ profits in order to reduce tax liability. Since Shanxi Taiji, Taiyuan Taiji and Investment Company have minimal business operations, the three entities are unlikely to have profits in future periods. As a result, all deferred tax assets and liabilities are deminimus, and management would have a 100% valuation allowance for all deferred tax assets.

The Company has three subsidiaries registered as private schools (the “school-subsidiaries”), which are not subject to income taxes determined in accordance with the Law for Promoting Private Education (2003) and school-subsidiaries registered as private schools not requiring reasonable returns (similar to a not-for-profit entity) are treated as public schools and are generally not subject to enterprise income taxes. Therefore, the school-subsidiaries are tax exempt, including Shanxi North Campus, Shanxi South Campus and Sichuan Guangan School.

Kahibah Limited is exempt from income tax on all sources of income pursuant to the tax law in the British Virgin Islands. However, pursuant and subsequent to the reverse merger, the parent company in the U.S. may be subject to income tax in future years.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities. The components of the deferred tax assets and liabilities are individually classified as current or non-current based on their characteristics. Deferred tax assets and liabilities are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A provision has not been made at May 31, 2012, and 2011 for U.S. or additional foreign withholding taxes of undistributed earnings of foreign subsidiaries because it is the present intention of management to reinvest the undistributed earnings indefinitely in foreign operations. Generally, such earnings become subject to U.S. tax upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.

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The Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the government. However, the Company cannot reasonably quantify political risk factors and thus must depend on guidance issued by current government officials.

Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of May 31, 2012 and August 31, 2011 are not material to its results of operations, financial condition or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of May 31, 2012 and August 31, 2011, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on the current PRC tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next twelve months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows as of May 31, 2012 and August 31, 2011.

(e) Revenue Recognition and Prepaid School Fees

Revenues consist primarily of tuition, room & board and other fees (the "School Fees") derived from providing meals and housing for students living on campus. Revenues from School Fees are recognized pro-rata (on a straight-line basis) over the relevant period attended by the student of the applicable grade or program. The school year typically runs September 1 through August 31 and prepaid School Fees are recognized over the twelve-month period. If a student withdraws from a course or program within three months after the school year starts, the paid but unearned portion of the student’s School Fees is 67% refunded. If a student withdraws after the first three months in a school year, no School Fees will be refunded. As a result, the Company has recorded prepaid School Fees as a current liability on the consolidated balance sheet in the event a student withdraws from school and the Company has to return a portion of the prepaid School Fees. In past years there were minimal students who withdrew from a course or program before the end of a school year.

The Company normally receives prepaid School Fees from students at their initial admission or before the start of the school year on September 1. As of August 31, 2011, all students are required to fully prepay school fees at the beginning of the school year by September 1, 2011 for the 2011-2012 school year. In prior periods this policy was not fully enforced. Some students will benefit from a discount of fees if they prepay School Fees for two to three years of school term. Prepaid School Fees is the portion of payments received but not earned and is reflected as a current liability under prepaid tuition in the accompanying consolidated balance sheets as such amounts are expected to be earned, but may be refundable within the next year.

Below is a schedule of prepaid School Fees as of May 31, 2012 expected to be recognized into revenue over twelve-month periods for school years ended August 31 (corresponds to the school year – September 1 through August 31) and thereafter as follows:

Period Ended (School Year Ended August 31)	As of May 31
2012	$	9,226,677
2013		8,323,341
Thereafter		1,232,139
Total	$	18,782,157

(f) Foreign Currency Translation

The Company’s principal country of operations is the PRC. The financial position and results of operations of the Company are determined using the local currency (“Renminbi or RMB”) as the functional currency. The results of operations denominated in foreign currency are translated at the average rate of exchange during the reporting period.

Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rates prevailing at the balance sheet date. The results of operations are translated from Renminbi to US Dollar at the weighted average rate of exchange during the reporting period. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency (“US Dollars”) are dealt with as a component of accumulated other comprehensive income.

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Translation adjustments net of tax totaled $222,436 and $1,535,189, for the nine months ended May 31, 2012 and May 31, 2011, respectively. Translation adjustments net of tax totaled $ (304,705) and $478,568, for the three months ended May 31, 2012 and May 31, 2011, respectively.

As of May 31, 2012 and May 31, 2011, the exchange rate to the U.S. Dollar was RMB 6.3409 and RMB 6.4865, respectively. The average exchange rate for the nine months ended May 31, 2012 and May 31, 2011 was RMB 6.3384 and RMB 6.6096, respectively. The average exchange rate for the three months ended May 31, 2012 and May 31, 2011 was RMB 6.3172 and RMB 6.5303, respectively.

The Company operates in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the USD and RMB.

(g) Comprehensive Income

The Company reports comprehensive income in accordance with FASB ASC Topic 220, “Comprehensive Income,” which established standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements.

Total comprehensive income is defined as all changes in stockholders' equity during a period, other than those resulting from investments by and distributions to stockholders (i.e., issuance of equity securities and dividends). Generally, for the Company, total comprehensive income equals net income plus or minus adjustments for currency translation. Total comprehensive income represents the activity for a period net of related tax and was $5,333,277 and $9,207,283, for the nine months ended May 31, 2012 and May 31, 2011, respectively. Total comprehensive income was $1,698,530 and $3,211,592, for the three months ended May 31, 2012 and May 31, 2011, respectively.

While total comprehensive income is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income as of the balance sheet date. For the Company, AOCI is primarily the cumulative balance related to the currency adjustments and increased comprehensive income and equaled $2,660,878 and $2,438,442, as of May 31, 2012 and August 31, 2011, respectively.

(h) Concentrations, Risks, and Uncertainties

All of the Company’s operations are located in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the US and PRC, and by the general state of the economy in the PRC. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the US. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. There can be no assurance that the Company will be able to successfully continue to provide the services offered and failure to do so would have a material adverse effect on the Company’s financial position, results of operations and cash flows. Also, the success of the Company’s operations is subject to numerous contingencies, some of which are beyond management’s control. These contingencies include general economic conditions, teacher salaries, competition, governmental and political conditions, and changes in regulations. Because the Company is dependent on trade in the PRC, the Company is subject to various additional political, economic and other uncertainties. Among other risks, the Company’s operations will be subject to risk of restrictions on transfer of funds, domestic and international customs, changing taxation policies, anti-inflationary measures, foreign exchange restrictions, and political and governmental regulations.

(i) Advertising

The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the nine-month and three-month periods ended May 31, 2012 and May 31, 2011 were not significant.

(j) Research and Development

The Company expenses the cost of research and development as incurred. Research and development costs for the nine-month and three-month periods ended May 31, 2012 and May 31, 2011, were not significant.

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(k) Basic and diluted earnings per share

Earnings per share is calculated in accordance with the ASC Topic 260, “Earnings Per Share.” Basic earnings per share is calculated dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the assumption that all dilutive convertible shares, stock options, warrants and other equity awards were converted or exercised during the period. Dilution is computed by applying the treasury stock method. Under this method, warrants and options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.

Basic and diluted earnings per share were $0.17 and $0.26 per share and $0.17 and $0.26 per share, respectively for the nine months ended May 31, 2012 and May 31, 2011.

Basic and diluted earnings per share were $0.07 and $0.09 per share and $0.07 and $0.09 per share, respectively for the three months ended May 31, 2012 and May 31, 2011.

(l) Statement of Cash Flows

In accordance with ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

(m) Reclassification

Certain reclassifications have been made to the consolidated financial statements as of August 31, 2011 and for the nine- month and three-month periods ended May 31, 2011 in order to conform to the condensed consolidated financial statement presentation as of May 31, 2012. These reclassifications had no effect on net income as previously reported.

(n) Accounting Pronouncements

Accounting Standards Update (“ASU”) ASU No. 2010-09 (ASC Topic 855), which amends Subsequent Events Recognition and Disclosures, ASU No. 2009-16 (ASC Topic 860), which amends Accounting for Transfer of Financial Assets, ASU No. 2009-05 (ASC Topic 820), which amends Fair Value Measurements and Disclosures - Overall, ASU No. 2009-08, Earnings per Share, ASU No. 2009-12(ASC Topic 820), Investments in Certain Entities That Calculate Net Asset Value per Share, and various other ASU’s No. 2009-2 through ASU No. 2011-11 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.

Other accounting standards have been issued or proposed by the FASB or other standard-setting bodies that do not require adoption until a future date and are not expected to have a material impact on the Company’s financial statements.

NOTE 4 – INVENTORY

Inventories are stated at the lower of cost, determined on a weighted average basis, or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business. The Company’s inventories are typically school supplies used in the normal course of business. When inventories are consumed, their carrying amounts are expensed in the year used. Write-downs for declines in net realizable value or for losses of inventories are recognized as an expense in the year of impairment or loss occurs. Inventories consisted of the following:

	May 31, 2012			August 31, 2011
Course materials	$	66,088		$	-
Low consumable items		8,262			6,485
Low consumable tools	$	74,350		$	6,485
Less: Inventory provision*		(2,776	)		(2,996	)
Total	$	71,574		$	3,489

* The inventory provision is an inventory allowance for aged or obsolete inventory items.

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NOTE 5 - PREPAYMENT AND OTHER CURRENT ASSETS

Prepayment and other current assets consisted of the following:

	May 31, 2012		August 31, 2011
Cash – individual bank accounts	$	2,189,373	$	8,734,422
Advances to suppliers		489,319		737,741
Other prepaid		59,928		66,710
Other receivables		243,410		67,809
Total	$	2,982,030	$	9,606,682

Cash – individual bank accounts, is for funds advanced to employees for the purchase of school and boarding related materials for the day-to-day operations of the school. Advances to suppliers are primarily advances, travel, and the other related expenses. The other prepaid and other receivables are primarily for certain operating requirements of the school.

NOTE 6 – LAND USE RIGHTS, NET

Land use rights, net consisted of the following:

	May 31, 2012			August 31, 2011
Cost of land use rights	$	46,949,511		$	46,694,725
Less: Accumulated amortization		(1,682,938	)		(911,146	)
Land use rights, net	$	45,226,573		$	45,783,579

Amortization expense for the nine-month and three-month periods ended May 31, 2012 and May 31, 2011 was $767,122 and $113,512, and $256,566 and $38,297, respectively.

Amortization expense for the next five years and thereafter is as follows:

2012	$	256,566
2013		1,026,264
2014		1,026,264
2015		1,026,264
2016		1,026,264
Thereafter		40,864,951
Total	$	45,226,573

NOTE 7 - PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following:

	May 31, 2012			August 31, 2011
Buildings	$	80,705,326		$	80,267,336
Transportation equipment		1,013,476			1,007,976
Furniture & education equipment		8,086,865			7,761,350
Kitchen equipment		938,822			933,728
Computer & software		838,549			833,999
Total cost	$	91,583,038		$	90,804,389

Less: Accumulated depreciation		(11,336,297	)		(8,846,047	)

Property and equipment, net	$	80,246,741		$	81,958,342

Depreciation expense for the nine-month and three-month periods ended May 31, 2012 and May 31, 2011 was $2,442,943 and $835,892, and $897,476 and $284,603, respectively.

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Property and equipment are located at the Company’s three school locations in Shanxi and Sichuan Provinces in the PRC and are recorded at cost less accumulated depreciation. Depreciation and amortization are calculated using the straight-line method over the expected useful life of the asset, after the asset is placed in service. Major repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. Maintenance and repairs are generally expensed as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.

The estimated useful lives for each major category of fixed assets are as follows:

Description		Useful Lives
Buildings		40 years
Transportation Equipment		10 years
Kitchen Equipment		5 years
Furniture, Education Equipment, Computers		3 years

NOTE 8 – DUE FROM/TO RELATED PARTIES

Due To Related Parties consisted of the following:

	May 31, 2012		August 31, 2011
Ren Zhiqing	$	8,139,302	$	7,842,522
Total	$	8,139,302	$	7,842,522

Ren Zhiqing is the president and a director of the Company, as well as the majority controlling shareholder of the Company. The amounts due to Ren Zhiqing as of May 31, 2012 and August 31, 2011 represent loans to the Company, which are unsecured, interest-free and payable to Ren Zhiqing. The amount due to Ren Zhiqing as of May 31, 2012 represents a loan to the Company primarily used for paying the equity holders of the Investment Company as part of the Equity Transfer Agreement dated August 31, 2011.

NOTE 9 - OTHER PAYABLE

Other payables included traveling and the related expenses incurred by employees on behalf of the Company. These amounts are unsecured, non-interest bearing and generally are short term in nature.

NOTE 10 – REFUNDABLE DEPOSITS

Students living on campus are required to pay a deposit of approximately RMB 60,000 at their initial admissions or before the start of the school year in September. If a student has any damages to the school housing, the repair and maintenance expense will be deducted directly from his or her student deposit. Any remaining balance in student deposits is fully refunded upon graduation or if students leave the school for any reasons. For the nine and three month periods ended May 31, 2012 and May 31, 2011, there were minimal damages to the school housing and no student deposit was deducted to pay for the repair and maintenance expense. As of May 31, 2012 and August 31, 2011, refundable deposits were $545,664 and $795,848, respectively.

NOTE 11 – PREPAID SCHOOL FEES

School fees are fully prepaid in advance of the school year, which typically runs from September 1 through August 31. Revenues from school fees are recognized pro-rata (on a straight-line basis) over the twelve month period beginning on September 1. As a result the Company has recorded prepaid school fees as a current liability until the revenue is recognized over the course of the school year. In past years, the number of students to withdraw during the school year was minimal.

Period Ended (School Year Ended August 31)	As of May 31
2012	$	9,226,677
2013		8,323,341
Thereafter		1,232,139
Total	$	18,782,157

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NOTE 12 – HOME PURCHASE DOWN PAYMENT

According to the Company’s Employee Welfare Policy, the Company may sign a home purchase agreement with teachers which would allow teachers to purchase home property at a discounted market rate. Pursuant to the home purchase agreement between the Company and teachers, teachers were given the right to purchase a home property upon their 8th year of service. There were two payment options:

(1) one-time full payment of the home purchase price based on the signed agreement; or (2) RMB 20,000 down payment with remaining balance to be paid in 8 equal annual installments until their 8th year of service. Those teachers who selected option (2) would be charged an interest of 7% if they do not make payment on time during the 8 year period. If teachers resign or leave the school for any reasons, they will be entitled to a refund based on the terms of the home purchase agreement. There were minimal refunds for the nine month and three month periods ended May 31, 2012 and May 31, 2011. For accounting purposes, cash received from teachers through payment options (1) and (2) and late interest payments are recorded as deposits at the time of receipt. The Company recognizes profit when the sale is consummated.

The Company records the home purchase transactions in accordance to the deposit method pursuant to FASB ASC Topic 360-20, Real Estate Sales. Under the deposit method, the seller does not recognize any profit, does not record notes receivable, and continues to report in its financial statements the property which has been assumed by the buyer. Cash received from the buyer, including the initial investment and subsequent collections of principal and interest, is reported as a deposit. Interest collected that is subject to refund and is included in the deposit account before a sale is consummated is accounted for as part of buyer’s initial investment at the time the sale is consummated. There were no apartments sold for the nine-month and three-month periods ended May 31, 2012 and May 31, 2011, and as such the Company recognized no income from selling apartments. As of May 31, 2012 and August 31, 2011, home deposits were $930,366 and $878,668, respectively.

NOTE 13 – SHORT-TERM BANK LOAN

The Company’s subsidiary Shanxi Taiji borrowed RMB 100,000,000 (approximately $15,770,632) from a Shanxi Province based bank finance company under a one-year term from August 16, 2011 due August 15, 2012 at a 14.0% interest rate, interest-only payable quarterly.

NOTE 14 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:

	May 31, 2012		August 31, 2011
Accrued payroll	$	327,231	$	624,351
Individual tax withholding		10,557		6,184
Other accrued expenses		596,443		277,733
Total	$	934,231	$	908,268

NOTE 15 – EMPLOYEE RETIREMENT BENEFITS AND POST RETIREMENT BENEFITS

According to the Shanxi and Sichuan Provincial regulations on state pension program, both employees and employers have to contribute toward pensions. The pension contributions range from 2% to 8% that was contributed by individuals (employees) and the Company is required to make contributions to the state retirement plan based on 20% of the employees’ monthly basic salaries. Employees in the PRC are entitled to retirement benefits calculated with reference to their basic salaries on retirement and their length of service in accordance with a government managed benefits plan. The PRC government is responsible for the benefit liability to these retired employees.

During the nine months ended May 31, 2012 and May 31, 2011, the Company contributed $270,497 and $151,239 in pension contributions, respectively.

NOTE 16 – STOCK BASED COMPENSATION

The Chief Financial Officer is entitled to receive $6,000 per month in cash compensation for his services, as well as a stock award of $6,000 per month in shares of the Company’s restricted common stock, which vest on a quarterly basis. During the three months ended May 31, 2012, the Chief Financial Officer earned and was vested in 23,377 shares of restricted common stock as part of his consideration. As of May 31, 2012, the Company has accrued 73,258 shares of restricted common stock to be issued to its Chief Financial Officer.

Two of the Company’s independent directors are entitled to each receive $9,000 annually in cash compensation for their services, as well as a stock award of $9,000 annually in shares of the Company’s restricted common stock, which vests on a quarterly basis. During the three months ended May 31, 2012, the two independent directors collectively earned and were vested in 5,844 shares of restricted common stock as part of their consideration. As of May 31, 2012, the Company has accrued 16,926 shares of restricted common stock to be issued to two of its independent directors.

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The financial controller is entitled to receive RMB 20,000 (approximately USD $3,138) per month in cash compensation for her services, as well as a stock award of 5,000 shares of the Company’s restricted common stock, which vest on a quarterly basis. During the three months ended May 31, 2012, the financial controller earned and was vested in 5,000 shares of restricted common stock as part of her consideration. As of May 31, 2012, the Company has accrued 33,333 shares of restricted common stock to be issued to its financial controller.

The above-mentioned securities were not registered under the Securities Act of 1933. The issuance of these shares was exempt from registration, in part pursuant to Regulation S and Regulation D under the Securities Act of 1933 and in part pursuant to Section 4(2) of the Securities Act of 1933.

NOTE 17 – TAXES

Enterprise Income Tax (“EIT”)

Effective January 1, 2007, the Company adopted ASC 740-10, “Accounting for Uncertainty in Income Taxes” (formerly “FIN 48”, an interpretation of FASB statement No. 109), Accounting for Income Taxes. The interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.

Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of May 31, 2012 and August 31, 2011, the Company does not have a liability for unrecognized tax benefits.

The Company’s estimated income tax savings for the nine months ended May 31, 2012 and May 31, 2011 are summarized as follows:

	For The Nine Months Ended
	May 31, 2012		May 31, 2011
Tax savings	$	1,277,710	$	1,918,023

Had the Company’s tax exemption not been in the place for the nine months ended May 31, 2012 and May 31, 2011, the Company estimates the following pro-forma financial statement impact:

	For The Nine Months Ended
	May 31, 2012			May 31, 2011
Net income before tax provision, as reported	$	5,110,841		$	7,672,094
Less tax provision exempted		(1,277,710	)		(1,918,023	)
Pro-forma net income	$	3,833,131		$	5,754,071

The Company’s estimated income tax savings for the three months ended May 31, 2012 and May 31, 2011 are summarized as follows:

	For the Three Months Ended
	May 31, 2012		May 31, 2011
Tax savings	$	500,809	$	683,256

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Had the Company’s tax exemption not been in the place for the three months ended May 31, 2012 and May 31, 2011, the Company estimates the following pro-forma financial statement impact:

	For the Three Months Ended
	May 31, 2012			May 31, 2011
Net income before tax provision, as reported	$	2,003,235		$	2,733,024
Less tax provision exempted		(500,809	)		(683,256	)
Pro-forma net income	$	1,502,426		$	2,049,768

The Company’s operating subsidiaries are tax exempt, since primary and secondary education is not subject to income tax in the PRC provinces in which it currently operates. As such, the Company and its subsidiaries have no deferred tax asset or liability. The Company does not anticipate any change in the current PRC regulations regarding the tax exemption for its education sector.

NOTE 18 – EARNING PER SHARE

FASB ASC Topic 260, “Earnings Per Share,” requires a reconciliation of the numerator and denominator of the basic earnings per share (EPS) computations.

The Company only has common stock and no convertible instruments outstanding at May 31, 2012:

1.	30,014,528 common shares issued and outstanding.

2.	123,517 common shares accrued and to be issued for earned stock based compensation.

3.	30,138,045 total common shares outstanding for the calculation of the weighted average common shares.

Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings 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 shares had been issued and if the additional common shares were dilutive. There were no potentially dilutive securities for the three month or nine month periods ended May 31, 2012 and May 31, 2011. If the Company had dilutive securities it would have computed dilution by applying the treasury stock method. Under this method, warrants and options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

The following table sets forth the computation of basic and diluted net income per share:

	For The Nine Months Ended
	May 31, 2012		May 31, 2011
Net income	$	5,110,841	$	7,672,094
Basic weighted average outstanding shares of common stock		30,079,330		30,004,503
Diluted weighted average common stock and stock equivalents		30,079,330		30,004,503
Earnings per share:
Basic	$	0.17	$	0.26
Diluted	$	0.17	$	0.26

	For the Three Months Ended
	May 31, 2012		May 31, 2011
Net income	$	2,003,235	$	2,733,024
Basic weighted average outstanding shares of common stock		30,109,677		30,010,114
Diluted weighted average common stock and stock equivalents		30,109,677		30,010,114
Earnings per share:
Basic	$	0.07	$	0.09
Diluted	$	0.07	$	0.09

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NOTE 19 – BUSINESS COMBINATION - EQUITY TRANSFER AGREEMENT

On August 31, 2011, the Company completed the acquisition of the equity interests in Shanxi Rising Education Investment Company, Limited (the “Investment Company”) from its equity holders (the “Sellers”) for a total purchase consideration of RMB 690,000,000 (approximately $108,226,806) under the terms of the Equity Transfer Agreement, (the “Acquisition”). The Acquisition has been accounted for as a business combination under Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”). The total purchase consideration of RMB 690,000,000 has been discounted to its net present value and allocated to the net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of August 31, 2011. As of the balance sheet date, August 31, 2011, the exchange rate to the US Dollar was RMB 6.3755.

Description of Acquisition

On August 31, 2011, the Company’s entered into an Equity Transfer Agreement and purchased all of the outstanding equity of the Investment Company from the Sellers for a total purchase consideration of RMB 690,000,000. The net present value of the total fair value consideration transferred equals RMB 616,023,000 (approximately $96,623,480), of which RMB 336,563,000 (approximately $52,790,055) has been paid. Under the terms of the Equity Transfer Agreement the balance of the purchase price is to be paid over three years in three scheduled payments as follows:

RMB 153,437,000 (or RMB 135,016,000, approximately $21,177,319, net of discount) to be paid by August 31, 2012,

RMB 100,000,000 (or RMB 76,947,000, approximately $12,069,171, net of discount) by August 31, 2013, and

RMB 100,000,000 (or RMB 67,497,000, approximately $10,586,935, net of discount) by August 31, 2014.

The net present value of the payments is discounted at the Company’s current financing interest rate of 14%.

The Investment Company is an education company that owns and operates a K-12 private boarding school in the PRC, encompassing kindergarten, primary and secondary education. The Investment Company was established in 2001 and it has share capital of RMB 70,000,000. It is the parent company of Shanxi Rising School (the "Rising School"), founded 2002, which currently serves approximately 5,869 students from its location in Shanxi Province, PRC. The Rising School is now known by the Company as the “Shanxi South School.”

During the nine-month and three-month periods ended May 31, 2012, the Company recorded $4,572,250 and $0, respectively, toward the accretion of the implied interest in the long-term and short-term portion of the payable - acquisition resulting from the fair value discount recorded as interest expense based on payment plan to the seller. The net present value of the payments is discounted at the Company’s current financing interest rate of 14%.

Unaudited Pro Forma Results

Unaudited pro forma results of operations after giving effect to certain adjustments resulting from the acquisitions of the Investment Company, as described above, were as follows for the nine month and three month periods ended May 31, 2011 as if the business combination had occurred at the beginning of each period presented.

	For The Nine Months Ended May 31, 2011*
(in thousands)	(Unaudited)
Sales	$	24,462
Net Income	$	9,504
Earnings per share, basic and diluted	$	0.32

	For the Three Months Ended May 31, 2011*
(in thousands)	(Unaudited)
Sales	$	8,154
Net income	$	3,168
Earnings per share, basic and diluted	$	0.11

*The pro forma data is provided for informational purposes only and does not purport to be indicative of the results which would have actually been obtained if the combination had been effectuated at the beginning of each period presented, or of those results which may be obtained in the future. The pro forma data for the nine month and three month periods ended May 31, 2011 does not account for the additional interest charges associated with the acquisition of the third school.

NOTE 20 – SUBSEQUENT EVENTS

Management has evaluated subsequent events from May 31, 2012 and has concluded no events need to be reported during this period.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this document. The following discussion contains forward-looking statements. The words or phrases “would be,” “will allow,” “expect to”, “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” or similar expressions are intended to identify forward-looking statements. Such statements include, among others, those statements concerning our expected financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including, among others: (a) those risks and uncertainties related to general economic conditions in the PRC, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to successfully manage and exploit existing and potential market opportunities; (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; and (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under “Liquidity and Capital Resources”. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or any other circumstances after the date of such statement unless required by law. For additional information regarding these risks and uncertainties, see “Risk Factors” in our filings with the SEC. Our consolidated financial statements have been prepared in accordance with U.S. GAAP. In addition, our consolidated financial statements and the financial data included in this document have been prepared as if our current corporate structure had been in place throughout the relevant periods.

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide information that is supplemental to, and should be read together with, the Company’s consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q. Information in this Item 7 is intended to assist the reader in obtaining an understanding of the consolidated financial statements, the changes in certain key items in those financial statements from year to year, the primary factors that accounted for those changes, and any known trends or uncertainties that the Company is aware of that may have a material effect on the Company’s future performance, as well as how certain accounting principles affect the consolidated financial statements. MD&A includes the following sections:

●	Highlights and Executive Summary

●	Results of Operations - an analysis of the Company’s consolidated results of operations, for the period presented in the consolidated financial statements

●	Liquidity and Capital Resources - an analysis of the effect of the Company’s operating, financing and investing activities on the Company’s liquidity and capital resources

●	Off-Balance Sheet Arrangements - a discussion of such commitments and arrangements

●	Critical Accounting Policies and Estimates - a discussion of accounting policies that require significant judgments and estimates

Highlights and Executive Summary

China Bilingual Technology & Education Group Inc. (the “Company”, “we”, “us” or “our”) is an education company that owns and operates high-quality K-12 private boarding schools in the People’s Republic of China (the “PRC”). The Company established school operations in 1998 and currently operates three schools encompassing kindergarten, elementary, middle and high school levels with approximately 13,881 students and 1,876 faculty and staff. The Company’s schools are located in Shanxi and Sichuan Provinces and provide students with an innovative and high-quality education with a focus on fluency and cultural skills in both Chinese and English, as well as a strong core curriculum. The schools regularly rank among the top schools in their respective regions for college entrance exam scores and national college entrance rates. The Company’s schools have earned excellent teaching reputations and are recognized for the success of their students and strong faculty. As the PRC experiences rapid industrialization and economic growth, the government is focused on education as a means to increase worker productivity and raise the standard of living. Parents in the PRC’s new middle and upper classes are sending their children to receive private school education to give them an advantage in the PRC’s increasingly competitive workforce. The Company’s sector in education is not subject to corporate income tax, and the Company anticipates its growth will come from both organic growth through increased enrollment and expansion of its business model and teaching methods into new schools, which may be acquired by the Company.

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Results of Operations

For the Three Months Ended May 31, 2012 Compared to the Three Months Ended May 31, 2011

Revenues

For the three months ended May 31, 2012, we had total revenues of $10,153,351, an increase of $3,939,411 or 63.4% as compared to total revenues of $6,213,940 for the three months ended May 31, 2011. The revenue growth was primarily attributable to the acquisition of our third school campus – the Shanxi South School, which led to an increase in enrollment of 4,681 students at May 31, 2012 for the current 2011- 2012 school year from approximately 9,200 students to 13,881 students. We also increased our average full-fare tuition by $226 or 7.2% to $3,352 per student for the 2011 – 2012 school year from $3,126 per student for the 2010 – 2011 school year. The Company recognizes prepaid school fees (including tuition, room & board and other school fees, herein after "School Fees") evenly over the twelve month period corresponding to the school year, which typically runs from September 1 to August 31.

Cost of Revenue

For the three months ended May 31, 2012, our cost of revenue was $5,547,069 (54.6% of revenues), as compared to cost of revenue of $2,960,417 (47.6% of revenues) for the three months ended May 31, 2011, representing an increase of $2,586,652 or 87.4%. The increase in cost of revenue was primarily the result of increase in costs in connection with the acquisition of our third campus and the increase in enrollment of 4,681 students. Teacher and staff salaries increased $1,621,159 or 51.6% to $3,139,751 for the three months ended May 31, 2012 from $1,518,592 for the three months ended May 31, 2011. Depreciation and amortization expense allocated to cost of revenue increased $728,825 or 225.7% to $1,051,724 for the three months ended May 31, 2012 from $322,899 for the same period in 2011. As a percentage of revenues, the cost of revenue for the three months ended May 31, 2012 decreased to 54.6% from 58.9% for the nine months ended May 31, 2012 as the Company enrolled more students to better absorb costs in connection with the third school acquisition and did not have as much one-time costs as the start of the school year as in the first fiscal quarter ended November 30, 2011.

With the addition of our third campus, we have allocated students in our middle school from our Shanxi North School to our new Shanxi South School. The current capacity at our three school campuses is set forth below:

School Campus	Enrollment	Capacity	% Current Capacity
Shanxi North School	5,062 students	6,000 students		84.4	%
Shanxi South School	5,869 students	10,000 students		58.7	%
Sichuan Guang’an School	2,950 students	4,000 students		73.8	%
TOTAL	13,881 students	20,000 students		69.4	%

We continue to maintain our strict enrollment standards to preserve our strong academic reputation. Based on our historical admission rates, we only enroll one student out of approximately every five applicants. We continue to seek quality applicants to maximize our enrollment, which lowers our cost of revenues as a percentage of revenues as our overhead costs are primarily fixed. We intend to maintain our current balance between enrollment and admission standards as we go forward in accepting new students. We expect to achieve an enrollment of 95% of our capacity within three academic years at our current schools.

General and Administrative Expenses

General and administrative expenses increased $1,265 or 0.2% to $528,073 for the three months ended May 31, 2012 from $526,808 for the same period of 2011. The Company only experienced a slight increase in general and administrative expenses, as the administration absorbed the third school primarily through good cost control measures and personnel management to efficiently handle the additional administrative overhead associated with the new school.

Interest Expense

Interest expense increased to $2,083,241 for the three months ended May 31, 2012 from $0 for the same period of 2011. The increase in interest was a result of the financing for the acquisition of our third school, comprising $554,043 in interest on a bank loan of RMB 100,000,000 (approximately $15,872,260) obtained by the Company in August 2011 and $1,529,198 on the accretion of the implied interest in the long-term and short-term portion of the payable - acquisition resulting from the fair value discount recorded as interest expense based on the payment plan to the seller. The net present value of the imputed payments is discounted at the Company’s current financing interest rate of 14%.

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)

EBITDA increased $2,184,594 or 71.5% to $5,240,518 for the three months ended May 31, 2012 from $3,055,924 for the same period of 2011. The increase was primarily attributable to the increase in revenues as a result of the increase in total enrollment of 4,681 students for the three months ended May 31, 2012 over the same period of 2011.

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Net Income

As a result of the factors described above, we had net income attributable to shareholders in the amount of $2,003,235 for the three months ended May 31, 2012, as compared to $2,733,024 for the three months ended May 31, 2011. The decrease of $729,789 or 26.7% between the periods resulted primarily from the increase in interest, depreciation and amortization, primarily associated with the acquisition of the third facility, which totaled $3,237,283 for the three months ended May 31, 2012.

Basic and diluted earnings per share decreased $0.02 to $0.07 per share for the three months ended May 31, 2012 from $0.09 per share for the three months ended May 31, 2011 due to the decrease in net income.

Comprehensive Income

The functional currency of the Company is Chinese Renminbi (“RMB”), but we report our results in U.S. Dollars. The conversion of our accounts from RMB to U.S. Dollars results in translation adjustments. As a result, we achieved a currency translation adjustment loss of $304,705 during the three months ended May 31, 2012, a decrease of $783,273 or 163.7% as compared to a gain of $478,568 during the three months ended May 31, 2011. Our comprehensive income was $1,698,530 for the three months ended May 31, 2012, a decrease of $1,513,062 or 47.1% as compared to $3,211,592 for the three months ended May 31, 2011.

For the Nine Months Ended May 31, 2012 Compared to the Nine Months Ended May 31, 2011

Revenues

For the nine months ended May 31, 2012, we had total revenues of $31,533,148, an increase of $13,248,505 or 72.5% as compared to total revenues of $18,284,643 for the nine months ended May 31, 2011. The revenue growth was primarily attributable to the acquisition of our third school campus – the Shanxi South School, which led to an increase in enrollment of 4,681 students for the current 2011- 2012 school year from approximately 9,200 students to 13,881 students. We also increased our average full-fare tuition by $226 or 7.2% to $3,352 per student for the 2011 – 2012 school year from $3,126 per student for the 2010 – 2011 school year.

Cost of Revenue

For the nine months ended May 31, 2012, our cost of revenue was $18,574,019 (58.9% of revenues), as compared to cost of revenue of $9,410,816 (51.5% of revenues) for the nine months ended May 31, 2011, representing an increase of $9,163,203 or 97.4%. The increase in cost of revenue was primarily the result of an increase in costs in connection with the acquisition of our third campus and the increase in enrollment of 4,681 students. Teacher and staff salaries increased $5,048,137 or 143.3% to $8,571,149 for the nine months ended May 31, 2012 from $3,523,012 for the nine months ended May 31, 2011. Depreciation and amortization expense allocated to cost of revenue increased $1,930,063 or 224.8% to $2,788,568 for the nine months ended May 31, 2012 from $858,504 for the same period in 2011.

General and Administrative Expenses

General and administrative expenses increased $431,130 or 35.1% to $1,658,566 for the nine months ended May 31, 2012 from $1,227,436 for the same period of 2011. The increase in general and administrative expenses was primarily attributable to additional administrative overhead associated with the new school, as well as increase in the costs of operating as a public company, including legal, accounting and investor relations fees.

Interest Expense

Interest expense increased to $6,228,888 for the nine months ended May 31, 2012 from $0 for the same period of 2011. The increase in interest expense was a result of the financing for the acquisition of our third school, comprising $1,656,638 in interest on a bank loan of RMB 100,000,000 (approximately $15,872,260) obtained by the Company in August 2011 and $4,572,250 on the accretion of the implied interest in the long-term and short-term portion of the payable - acquisition resulting from the fair value discount recorded as interest expense based on the payment plan to the seller. The net present value of the imputed payments is discounted at the Company’s current financing interest rate of 14%.

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)

EBITDA increased $5,928,296 or 68.8% to $14,549,794 for the nine months ended May 31, 2012 from $8,621,498 for the same period of 2011. The increase was primarily attributable to the increase in revenues as a result of the increase in total enrollment of 4,681 students for the nine months ended May 31, 2012.

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Net Income

As a result of the factors described above, we had net income attributable to shareholders in the amount of $5,110,841 for the nine months ended May 31, 2012, as compared to $7,672,094 for the nine months ended May 31, 2011. The decrease of $2,561,253 or 33.4% between the periods resulted primarily from the increase in interest expense, depreciation and amortization associated with the acquisition of our third school. Interest, depreciation and amortization, primarily associated with the acqusition of the third school, was $9,438,953.

Basic and diluted earnings per share (“EPS”) decreased $0.09 to $0.17 per share for the nine months ended May 31, 2012 from $0.26 per share for the nine months ended May 31, 2011 due to the decrease in net income.

Comprehensive Income

The functional currency of the Company is Chinese Renminbi (“RMB”), but we report our results in U.S. Dollars. The conversion of our accounts from RMB to U.S. Dollars results in translation adjustments. As a result, we achieved a currency translation adjustment gain of $222,436 during the nine months ended May 31, 2012, a decrease of $1,312,753 or 85.5% as compared to a gain of $1,535,189 during the nine months ended May 31, 2011. Our comprehensive income was $5,333,277 for the nine months ended May 31, 2012, a decrease of $3,874,006 or 42.1% as compared to $9,207,283 for the nine months ended May 31, 2011.

Liquidity and Capital Resources

As of May 31, 2012, our cash and cash equivalents were $9,012,557. Our principal source of cash is prepaid School Fees from students who attend our schools. The Company collects full tuition in advance of the school year and therefore has no accounts receivable. We also use our prepayment and other current assets balance of $2,982,030 to finance school related activities as advances or prepayment for the purchase of school and boarding related materials for the day-to-day operations of the schools. Based on our current operating plan, we believe that our existing resources, including cash flow generated from operations as well as available bank loans, will be sufficient to meet our working capital requirement for our current operations and any prepaid tuition obligations. Our bank loan has a one year term, typical of loans in the PRC, but may be renewed based on the credit worthiness of the Company. The Company also has $8,139,302 in related party debt from its Chairman, which is non-interest bearing and may be renewed beyond the current term. The Company’s short-term payable – acquisition installment payment of $18,721,361 for the acquisition of the Shanxi South Campus is due on August 31, 2012. The Company anticipates that it will have collected substantially all of its prepaid tuition for the 2012 – 2013 school year at that time and based on its profit margin will be able to use a substantial portion of those proceeds to retire this debt. The Company is also considering alternative longer-term outside financing of debt or equity based on the asset strength of its balance sheet. In order to fully implement our business plan and continue our growth, however, we will require additional capital either from our shareholders or from outside sources, although there is no assurance that we will be able to obtain additional capital at suitable terms if and when it is needed.

Cash Flows from Operating Activities

Cash used in operating activities decreased $3,127,956 or 69.5% to $1,372,753 for the nine months ended May 31, 2012 compared to $4,500,709 used in operating activities for the nine months ended May 31, 2011. The decrease was primarily attributable to the decrease in prepayments and operating advance and the addition of non-cash items, including depreciation, amortization and the accretion of the interest expense for the short-term and long-term acqusition notes associated with the acquisition of the new school. The largest use of cash from operating activities was the increase in prepaid school fees from the collection of school fees for the next academic school year 2012-2013, which are paid in advance of the upcoming academic year beginning September 1, 2012. The Company recognizes current academic year prepaid school fees evenly over the twelve-month academic year, which began September 1, 2011.

Cash Flows from Investing Activities

Cash used in investing activities decreased $4,358,853 or 93.9% to $283,275 for the nine months ended May 31, 2012 as compared to $4,642,128 used in the nine months ended May 31, 2011. The decrease in cash used in investing activities resulted primarily from the decrease in the deposit associated with the acquisition of the Shanxi South Campus.

Cash Flow from Financing Activities

Cash used in financing activities increased $4,496,347 for the nine months ended May 31, 2012 as compared to $0 used in the nine months ended May 31, 2011. The increase in cash used in financing activities resulted from the repayment of loans associated with the acquisition of the Shanxi South School.

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The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities during the periods indicated:

	Nine Months Ended May 31,
	2012			2011

Cash at beginning of period	$	15,090,521		$	10,888,988
Net cash used in operating activities		(1,372,753	)		(4,500,709	)
Net cash used in investing activities		(283,275	)		(4,642,128	)
Net cash used in financing activities		(4,496,347	)		-
Effect of exchange rate changes on cash		74,411			340,667
Cash at end of period	$	9,012,557		$	2,086,818

Plan of Operations

As described herein, the Company completed the Equity Transfer Agreement dated August 31, 2011 for the acquisition of the Shanxi South School, formerly known as the Shanxi Rising School. We expect to continue to expand our enrollment base utilizing the excess capacity at our existing schools in addition to marketing and expanding enrollment at the Shanxi South School. Our strategy is to leverage our strong academic reputation to develop additional business. We are also actively seeking opportunities to expand our business that we consider accretive to earnings. We intend to grow our business model through the acquisition of existing schools to increase our total enrollment. In order to fully implement our business plan and continue our growth, however, we will require additional capital either from our shareholders or from outside sources, although there is no assurance that we will be able to obtain additional capital at suitable terms if and when it is needed.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships that are currently material or reasonably likely to be material to our financial position or results of operations.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s results of operations and liquidity and capital resources are based on the Company’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP. In connection with the preparation of consolidated financial statements, the Company is required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. The assumptions, estimates and judgments included within these estimates are based on historical experience, current trends and other factors the Company believes to be relevant at the time the consolidated financial statements were prepared. On a regular basis, the accounting policies, assumptions, estimates and judgments are reviewed to ensure that the consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from the assumptions and estimates, and such differences could be material.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions are used for, but are not limited to: (1) asset impairments (2) revenue recognition. Future events and their effects cannot be predicted with certainty, and accordingly, accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. The Company evaluates and updates these assumptions and estimates on an ongoing basis and may employ outside experts to assist with these evaluations. Actual results could differ from the estimates that have been used.

Significant accounting policies are discussed in Note 3, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements. The Company believes the following accounting policies are the most critical to aid in fully understanding and evaluating the Company’s reported financial results, as they require management to make difficult, subjective or complex judgments, and to make estimates about the effect of matters that are inherently uncertain.

Impairment analysis for long-lived assets and intangible assets

The Company’s long-lived assets and other assets (consisting of property and equipment and purchased intangible assets) are reviewed for impairment in accordance with the guidance of the FASB Topic ASC 360, “Property, Plant, and Equipment”, and FASB ASC Topic 205 “Presentation of Financial Statements”. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through May 31, 2012, the Company had not experienced impairment losses on its long-lived assets.

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Revenue Recognition

In accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin (“SAB”) Topic 13, Revenue Recognition, the Company recognizes revenues when it is realized or realizable and earned. The Company records revenues when the following four fundamental criteria under SAB 104 are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the customer is fixed or determinable, and (iv) collection of the resulting receivable is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as prepaid tuition.

Revenues consist primarily of tuition and fees derived from providing meals and housing for students living on campus. Revenues from tuition and fees are recognized pro-rata (on a straight-line basis) over the relevant period attended by the student of the applicable grade or program. The school year runs September 1 through August 31 and prepaid tuition is recognized over the twelve-month period. If a student withdraws from a course or program within three months after the school year starts, the paid but unearned portion of the student’s tuition is 67% refunded. If a student withdraws after the first three months in a school year, no tuition will be refunded. As a result, the Company has recorded prepaid tuition as a current liability on the consolidated balance sheet in the event a student withdraws from school and the Company has to return a portion of the prepaid tuition. In past years there were minimal students who withdrew from a course or program before the end of a school year.

The Company normally receives prepaid tuition and fees from students at their initial admission or before the start of the school year on September 1. Some students will benefit from a discount of fees if they prepay tuition for two to three years of school term. Prepaid tuition is the portion of payments received but not earned and is reflected as a current liability in the accompanying consolidated balance sheets as such amounts are expected to be earned, but may be refundable within the next year.

Management has discussed the development and selection of these critical accounting policies with the Board of Directors and the Board has reviewed the disclosures presented above relating to them.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required for smaller reporting companies.

Item 4. Controls and Procedures.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of May 31, 2012, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer, Ren Zhiqing, and Chief Financial Officer, Michael Toups, of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods specified for each report and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the three months ended May 31, 2012, we have taken additional measures to strengthen our financial controls, which have included hiring additional accounting staff with greater expertise and allocating financial and human resources to strengthen our internal control structure. We also plan to contract with an outside consulting firm to assist the Company in our Sarbanes Oxley (“SOX”) compliance and internal controls. The Company has internally begun the processes toward SOX compliance, including mapping, testing, analysis and assessment. The Company has hired an internal person to work directly with the external consultants regarding internal controls. This person’s experience included eight years of audit and business advisory work with a “Big 4” accounting firm, as well as an affiliate of an international accounting and consulting firm. With the addition of the Shanxi South School, the Company will also be hiring additional accounting and administrative support personnel to work with our accounting staff on our month-end, quarter-end and year-end closings and procedures. We are in the process of bringing all three schools onto the same accounting platform and procedures.

The Company's efforts are designed to address our internal controls for financial reporting and to strengthen our overall control environment. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that disclosure controls or internal controls over financial reporting will prevent all errors, even as the aforementioned remediation measures are implemented and further improved to address all deficiencies. The design of any system of controls is based in part upon certain assumptions about likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

Item 1A. Risk Factors.

Not required for smaller reporting companies.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On June 20, 2012, the Company issued 55,101 shares of its restricted common stock that had previously accrued for services to the Company, including 29,191 shares to its Chief Financial Officer, Michael Toups, 20,000 shares to its financial controller, Jiangyan Sun and 2,955 shares each to two of its independent directors, Dora Dong and Jun Zhang .

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

Exhibit No.		Description
3.1		Articles of Incorporation (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 24, 2009).
3.2		By-Laws (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 24, 2009).
10.1		Agreement and Plan of Merger dated June 30, 2010 (filed with 8-K filed on July 2, 2010 and incorporated herein by reference)
10.2		Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations dated June 30, 2010. (filed with 8-K filed on July 2, 2010 and incorporated herein by reference)
10.3		Consulting Agreement between China Bilingual Technology & Education Group Inc. and Michael Toups, dated September 16, 2011 (filed with 8-K filed on October 27, 2011 and incorporated herein by reference)
10.4		Equity Transfer Agreement, dated August 31, 2011, by and between the Company and all the equity holders of Shanxi Rising Education Investment Co., Ltd.(filed with Current Report on Form 8-K on September 9, 2011 and incorporated herein by reference)
10.5		Loan Agreement, dated August 16, 2011, by and between Shanxi Taiji and Shanxi Trust Co., Ltd. (Filed with the Company’s Annual Report on Form 10-K on November 29, 2011 and incorporated herein by reference.)
31.1		Section 302 Certification of Principal Executive Officer*
31.2		Section 302 Certification of Principal Financial Officer*
32.1		Section 906 Certification of Principal Executive Officer**
32.2		Section 906 Certification of Principal Financial Officer**

101.INS		XBRL Instance Document *
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase*
101.DEF		XBRL Taxonomy Extension Definition Linkbase*
101.LAB		XBRL Taxonomy Extension Labels Linkbase*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase*

*Filed herewith.

**Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA BILINGUAL TECHNOLOGY & EDUCATION GROUP INC.

Date: July 16, 2012	By:	/s/ Ren Zhiqing
		Ren Zhiqing
		Chairman and Chief Executive Officer (Principal Executive Officer)


Date: July 16, 2012	By:	/s/ Michael Toups
		Michael Toups
		Chief Financial Officer (Principal Financial and Accounting Officer)