KID CASTLE EDUCATIONAL CORP - Quarter Report: 2009 June (Form 10-Q)

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

o QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2009

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-39629

KID CASTLE EDUCATIONAL CORPORATION

(Exact name of Registrant as specified in its charter)

Florida	59-2549529
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

8th Floor, No. 98 Min Chuan Road, Hsien Tien

Taipei, Taiwan ROC

(Address of principal executive offices)

011-886-2-2218 5996

(Registrant’s telephone number, including area code)

NONE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o 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 the 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	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

As of June 30, 2009, there were 30,000,000 shares of the Registrant’s common stock outstanding.

FORM 10-Q

KID CASTLE EDUCATIONAL CORPORATION

TABLE OF CONTENTS

			Page
PART I	FINANCIAL INFORMATION
	Item 1.	Condensed Consolidated Financial Statements	2
		a) Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008	2
		b) Condensed Consolidated Statements of Operations for the three months ended June 30, 2009 and June 30, 2008 (unaudited)	4
		c) Condensed Consolidated Statements of Operations for the six months ended June 30, 2009 and June 30, 2008 (unaudited)	5
		d) Condensed Consolidated Statements of Stockholders’ Equity (unaudited)	6
		e) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and June 30, 2008 (unaudited)	7
		f) Notes to Condensed Consolidated Financial Statements	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
	Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION		27
	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.	Submission of Matters to a Vote of Security Holders	27
	Item 5.	Other Information	27
	Item 6.	Exhibits and Reports on Form 8-K	27
SIGNATURES			28

- 1 -

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Kid Castle Educational Corporation

Condensed Consolidated Balance Sheets

(Expressed in US Dollars)

	(Unaudited) June 30, 2009		December 31, 2008

ASSETS
Current assets
Cash and bank balances	$	1,960,059	$	1,985,818
Bank fixed deposits - pledged (Note 11)		8,054		2,847
Notes and accounts receivable, net (Note 5)		2,435,673		2,171,768
Inventories, net (Note 6)		1,748,728		1,933,153
Other receivables (Note 7)		949,276		396,003
Prepayments and other current assets (Note 8)		605,549		475,617
Pledged notes receivable (Note 11)		417,212		416,238
Deferred income tax assets		46,227		45,617
Total current assets		8,170,778		7,427,061
Deferred income tax assets		50,054		49,528
Prepayment of long-term investments		1,305,645	-
Long-term investments (Note 9)		91,112		68,336
Property and equipment, net		2,791,892		2,775,663
Intangible assets, net of amortization (Note 10)		267,537		371,056
Long-term notes receivable		671,223		356,901
Pledged notes receivable (Note 11)		220,484		283,469
Other assets		266,878		255,288
Total assets	$	13,835,603	$	11,587,302
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Bank borrowings - short-term and maturing within one year (Note 11)	$	1,282,044	$	242,879
Notes and accounts payable		1,237,967		1,017,552
Accrued expenses		1,339,198		1,617,717
Other payables		418,616		270,458
Deposits received		73,067		751,151
Receipts in advance (Note 12)		2,706,214		2,305,980
Income tax payable		85,334		39,115
Total current liabilities		7,142,440		6,244,852
Bank borrowings maturing after one year (Note 11)		394,851		1,583,968
Receipts in advance (Note 12)		1,304,398		1,001,801
Deposits received		1,534,021		839,295
Deferred liability		41,820		41,775
Accrued pension liabilities (Note 13)		449,045		446,038
Other liabilities (Note 9)		20,488	-
Total liabilities		10,887,063		10,157,729

- 2 -

Kid Castle Educational Corporation

Condensed Consolidated Balance Sheets – Continued

(Expressed in US Dollars)

	(Unaudited) June 30, 2009			December 31, 2008

Commitments and contingencies (Note 15)

Minority interest		227,720			216,754

Shareholders’ equity
Common stock, no par share:
60,000,000 shares authorized; 30,000,000 issued and outstanding at June 30, 2009; 25,000,000 issued and outstanding at December 31, 2008		9,492,138			8,592,138
Additional paid-in capital		194,021			194,021
Legal reserve		65,320			65,320
Accumulated deficit		(5,730,155	)		(6,340,449	)
Accumulated other comprehensive loss		(1,026,075	)		(1,026,713	)
Net loss not recognized as pension cost		(274,429	)		(271,498	)
Total shareholders’ equity		2,720,820			1,212,819
Total liabilities and shareholders’ equity	$	13,835,603		$	11,587,302

See accompanying Notes to Condensed Consolidated Financial Statements.

- 3 -

Kid Castle Educational Corporation

Condensed Consolidated Statements of Operations (Unaudited)

(Expressed in US Dollars)

	Three months ended June 30,
	2009			2008

Operating Revenue
Sales of goods	$	1,387,757		$	1,590,509
Franchising income		551,557			584,614
Other operating revenue		775,609			489,939
Total net operating revenue		2,714,923			2,665,062
Operating costs
Cost of goods sold		(683,466	)		(714,218	)
Cost of franchising		(93,448	)		(88,487	)
Other operating costs		(517,806	)		(629,212	)
Total operating costs		(1,294,720	)		(1,431,917	)
Gross profit		1,420,203			1,233,145
Advertising costs		(1,584	)		(1,567	)
Other operating expenses		(1,461,200	)		(1,508,823	)
Loss from operations		(42,581	)		(277,245	)
Interest expense, net		(10,668	)		(25,643	)
Share of income (loss) of investments		(5,960	)		31,856
Other non-operating income (loss), net		(25,633	)		28,690
Loss before income taxes		(84,842	)		(242,342	)
Provision for taxes		(37,452	)		(22,468	)
Loss after income taxes		(122,294	)		(264,810	)
Minority interest income		8,430			36
Net loss	$	(113,864	)	$	(264,774	)
Loss per share - basic and diluted	$	(0.005	)	$	(0.01	)
Weighted-average shares used to compute earnings per share - basic and diluted		25,416,667			25,000,000

See accompanying Notes to Condensed Consolidated Financial Statements.

- 4 -

Kid Castle Educational Corporation

Condensed Consolidated Statements of Operations (Unaudited)

(Expressed in US Dollars)

	Six months ended June 30,
	2009			2008

Operating Revenue
Sales of goods	$	3,751,441		$	3,954,618
Franchising income		1,071,926			1,140,843
Other operating revenue		1,336,577			969,125
Total net operating revenue		6,159,944			6,064,586
Operating costs
Cost of goods sold		(1,606,796	)		(1,721,454	)
Cost of franchising		(159,959	)		(186,796	)
Other operating costs		(969,796	)		(699,169	)
Total operating costs		(2,736,551	)		(2,607,419	)
Gross profit		3,423,393			3,457,167
Advertising costs		(22,437	)		(23,080	)
Other operating expenses		(2,692,074	)		(3,022,494	)
Income from operations		708,882			411,593
Interest expense, net		(26,489	)		(48,744	)
Share of income of investments		2,213			29,787
Other non-operating income (loss), net		49,271			160,848
Income before income taxes		733,877			553,484
Provision for taxes		(112,857	)		(59,365	)
Income after income taxes		621,020			494,119
Minority interest income		(10,726	)		(28,666	)
Net income	$	610,294		$	465,453
Earnings per share - basic and diluted	$	0.024		$	0.019
Weighted-average shares used to compute earnings per share - basic and diluted		25,416,667			25,000,000

See accompanying Notes to Condensed Consolidated Financial Statements.

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Kid Castle Educational Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(Expressed in US Dollars)

	Common Stock
	Number of shares		Amount		Additional paid-in capital		Legal reserve		Accumulated deficit			Accumulated other comprehensive loss			Net loss not recognized as pension cost			Total

Balance, December 31, 2007		25,000,000	$	8,592,138	$	194,021	$	65,320	$	(7,179,418	)	$	(932,027	)	$	(220,032	)	$	520,002
Net income for 2008										838,969									838,969
Cumulative translation adjustment													(94,686	)					(94,686	)
Comprehensive income																			744,283
Net loss not recognized as pension cost															$	(51,466	)	$	(51,466	)
Balance, December 31, 2008		25,000,000	$	8,592,138	$	194,021	$	65,320	$	(6,340,449	)	$	(1,026,713	)	$	(271,498	)	$	1,212,819

Issuance of common stock for cash		5,000,000		900,000															900,000
Net income for the six months ended June 30, 2009 (Unaudited)										610,294									610,294
Cumulative translation adjustment (Unaudited)													638						638
Comprehensive income (Unaudited)																			610,392
Net income not recognized as pension cost															$	(2,931	)	$	(2,931	)

Balance, June 30, 2009 (Unaudited)		30,000,000	$	9,492,138	$	194,021	$	65,320	$	(5,730,155	)	$	(1,026,075	)	$	(274,429	)	$	2,720,820

See accompanying Notes to Condensed Consolidated Financial Statements.

- 6 -

Kid Castle Educational Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Expressed in US Dollars)

	Six months ended June 30,
	2009			2008
Cash flows from operating activities
Net income	$	610,294		$	465,453
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property and equipment		196,127			112,392
Impairment of goodwill		44,936			11,386
Amortization of intangible assets		80,495			87,179
Allowance for sales returns		21,206			15,460
Allowance for doubtful debts		65,112			42,341
Reversal of allowance for loss on inventory obsolescence and slow-moving items		(4,773	)		(27,657	)
Loss on disposal of PP&E	-				728
Minority interests		10,726			28,666
Share of gain of investments		(2,213	)		(29,787	)
(Increase)/decrease in:
Notes and accounts receivable		(603,073	)		(521,104	)
Inventories		205,388			175,657
Other receivables		(390,000	)		(231,287	)
Prepayments and other current assets		(121,954	)		(150,623	)
Deferred income tax assets		(107	)		(3,527	)
Other assets		(8,631	)		(51,511	)
Increase/(decrease) in:
Notes and accounts payable		204,656			704,574
Accrued expenses		(288,133	)		156,927
Other payables		141,714			(276,747	)
Receipts in advance		416,040			556,481
Income taxes payable		44,753			(22,270	)
Deferred liability		(396	)		18
Deposits received		(516	)		16,921
Accrued pension liabilities		(1,767	)		673
Other liabilities		20,020		-

Net cash provided by operating activities		639,904			1,060,343

Cash flows from investing activities
Purchase of property and equipment		(182,708	)		(131,431	)
Proceeds from disposal of property and equipment	-				2,241
Prepayment of long-term investments		(1,047,480	)		(26,535	)
Bank fixed deposits-pledged		(5,059	)		353,178
Pledged notes receivable		67,979			(4,551	)

Net cash provided by (used in) investing activities		(1,167,268	)		192,902

- 7 -

Kid Castle Educational Corporation

Condensed Consolidated Statements of Cash Flows – Continued

(Unaudited)

(Expressed in US Dollars)

	Six months ended June 30,
	2009			2008

Cash flows from financing activities
Proceeds from bank borrowings	$	1,056,004		$	108,569
Proceeds from loan from related parties					100,049
Repayment of bank borrowings		(1,221,809	)		(1,069,693	)
Repayment of loan from stockholders and transactions of related parties		(178,677	)		(42,196	)
Issuance of common stock for cash		900,000		-


Net cash provided by (used in) financing activities		555,518			(903,271	)

Net increase in cash and cash equivalents		28,154			349,974

Effect of exchange rate changes on cash and cash equivalents		(53,913	)		(31,544	)

Cash and cash equivalents at beginning of period		1,985,818			1,238,212

Cash and cash equivalents at end of period	$	1,960,059		$	1,556,642

See accompanying Notes to Condensed Consolidated Financial Statements.

- 8 -

Kid Castle Educational Corporation

Notes to Condensed Consolidated Financial Statements

(Expressed in US Dollars)

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

Kid Castle Internet Technologies Limited (“KCIT”) was incorporated on December 17, 1999 under the provisions of the Company Law of the Republic of China (“ROC”) as a limited liability company. KCIT is engaged in the business of children’s education focusing on the English language. The business comprises publication, sales and distribution of related books, magazines, audio and videotapes and compact disc, franchising and sales of merchandises complementary to the business. KCIT commenced operations in April 2000 when it acquired the above business from Kid Castle Enterprises Limited which was formerly owned by Mr. Kuo-An Wang and Mr. Yu-En Chiu. Kid Castle Enterprises Limited ceased operations on December 25, 2003.

On March 9, 2001, KCIT formed a wholly-owned subsidiary, Premier Holding Investment Property Limited incorporated in the British Virgin Islands, which held the entire common stock of Higoal Developments Limited (“Higoal”) incorporated in the Cayman Islands on March 8, 2001. On September 10, 2001, Higoal established a wholly owned subsidiary, Kid Castle Educational Software Development Company Limited (“KCES”) in the People’s Republic of China (the “PRC”). The existing operations of Higoal are principally located in Taiwan and are being expanded in the PRC. In June 2002, after KCIT undertook a series of group restructurings, KCIT became the direct owner of the outstanding shares of Higoal. Premier Holding Investment Property Limited was then liquidated in June 2003.

On September 18, 2002, Higoal issued 11,880,000 shares of common stock to the stockholders of KCIT in exchange for 100% of the outstanding common stock of KCIT. As a result of this reorganization, KCIT became a wholly owned subsidiary of Higoal. On October 1, 2002, Kid Castle Educational Corporation (the “Company”), formerly King Ball International Technology Limited Corporation, entered into an exchange agreement with Higoal whereby the Company issued to the stockholders of Higoal 11,880,000 shares of common stock of the Company in exchange for 100% of the issued and fully paid up capital of Higoal.

As a result of the share exchange, the former stockholders of Higoal hold a majority of the Company’s outstanding capital stock. Generally accepted accounting principles require in certain circumstances that a company whose stockholders retain the majority voting interest in the combined business to be treated as the acquirer for financial reporting purposes. Accordingly, the acquisition has been accounted for as a “reverse acquisition” whereby Higoal is deemed to have purchased the Company. However, the Company remains the legal entity and the registrant for Securities and Exchange Commission (“SEC”) reporting purposes.

In July 2003, KCES entered into an agreement with 21st Century Publishing House to incorporate Jiangxi 21st Century Kid Castle Culture Media Co., Ltd (“Culture Media”). It was agreed that KCES and 21st Century Publishing House would each own 50% of Culture Media and that each party would contribute Renminbi (“RMB”) 1 million for its ownership interest. On July 2, 2004, KCES acquired an additional 40% ownership interest in Culture Media from 21st Century Publishing House. KCES now owns 90% of Culture Media.

On December 27, 2006, KCES established a wholly-owned subsidiary, Shanghai Kid Castle Educational Info Constitution Company Limited (“KCEI”) in the PRC, with registered total capital of RMB1,200,000, in order to operate schools controlled by us in the PRC. As of June 30, 2009, KCEI had total registered capital of RMB3,500,000.

The Company, Higoal and its subsidiaries are collectively referred to as the “Group”. The operations of the Group are principally located in Taiwan and the PRC.

- 9 -

NOTE 2 - BASIS OF PRESENTATION

The accompanying financial data as of June 30, 2009 and for the six months ended June 30, 2009 and 2008 have been prepared by the Group, without audit, pursuant to the rules and regulations of the SEC using generally accepted accounting principles in the United States. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Group believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Group’s audited annual financial statements for the year ended December 31, 2008.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.

Since inception, the Group incurred operating losses during most of its reporting periods until 2007 when it became profitable, and has remained so through the present. Our accumulated deficit has improved since Messrs. Pai and Yang have assumed their respective management roles, and as of June 30, 2009, our accumulated deficit was $5,730,155. Although we have an accumulated deficit, we have positive cash flow from operations. Barring significant, unforeseen development in PRC, we believe we can decrease our reliance on loans from shareholders and banks to meet our funding requirements in the future. Despite our expectation to decrease reliance on loans, we may be required to seek additional financing to meet our future funding requirements and no assurances can be given that bank loans or loans from shareholders will be available in the future. If we are unable to secure sufficient financing, our liquidity position would be adversely affected, and we may need to seek a more expensive source of funding to finance our operations.

NOTE 3 - SUMMARY OF IMPORTANT ACCOUNTING POLICIES

REVENUE RECOGNITION

Sales of books, magazines, audio and video tapes, compact disc and other merchandises are recognized as revenue on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed. Provision is made for expected future sales returns and allowances when revenue is recognized.

Franchise fees are the annual licensing fees for franchisees to use the Group’s brand name and consulting services. Franchising income is recognized on a straight-line basis over the terms of the relevant franchise agreements.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

An allowance for doubtful accounts is provided based on the evaluation of collectibility and on aging analysis of notes and accounts receivables.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost includes all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition, and is calculated using the weighted average method. Market value is determined by reference to the sales proceeds of items sold in the ordinary course of business after the balance sheet date or to management estimates based on prevailing market conditions.

- 10 -

PROPERTY AND EQUIPMENT AND DEPRECIATION

Property and equipment are stated at cost. Depreciation is computed using the straight-line method to allocate the cost of depreciable assets over the estimated useful lives of the assets as follows:

		Estimated useful life (in years)
Land		Indefinite
Buildings		50
Furniture and fixtures		3-10
Transportation equipment		2.5-5
Miscellaneous equipment		5-10

Maintenance, repairs and minor renewals are charged directly to the statement of operations as incurred. When assets are disposed of, the related cost and accumulated depreciation thereon are removed from the financial statements and any resulting gain or loss is included in the statement of operations.

LONG-LIVED ASSETS

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Group does not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Group measures fair value based on quoted market prices or based on discounted estimates of future cash flows.

INCOME TAXES

We account for income taxes using the asset and liability approach. Under this approach, deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when such amounts are realized or settled. We must assess the likelihood that a protion or all of the deferred tax assets will not be realized. In doing so, judgments and estimates must be made regarding the projection of future taxable income. If necessary, a valuation allowance is established to reduce the deferred tax assets to the amount that is more likely than not to be realized.

In computing the income tax provision, estimates and assumptions must be made regarding the deductibility of certain expenses. It is possible that these estimates and assumptions may be disallowed as part of an examination by the various taxing authorities that we are subject to, resulting in additional income tax expense in future periods. In addition, we maintain a reserve related to uncertain tax position. These uncertain tax positions are evaluated each reporting period to determine the level of reserve that is appropriate.

INTANGIBLE ASSETS

Franchises and copyrights are stated at cost and amortized on the straight-line method over their estimated useful lives of 10 years, the goodwill is tested for impairment on a recurring basis.

COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Comprehensive income (loss) is disclosed in the condensed consolidated statement of stockholders’ equity.

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NET EARNINGS (LOSS) PER COMMON SHARE

The Group computes net earnings (loss) per share in accordance with SFAS No. 128, “Earnings per Share”. Under the provisions of SFAS No. 128, basic net earnings (loss) per share is computed by dividing the net earnings (loss) available to common shareholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net earnings (loss) per share gives effect to common stock equivalents. For the six months ended June 30, 2009 and 2008, the Group did not have any potential common stock shares.

RECLASSIFICATION

The presentation of certain prior information has been reclassified to conform to current presentation.

NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS

In April 2009, the FASB released FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identify Transactions That Are Not Orderly.” This position provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased as well as identifying circumstances that indicate a transaction is not orderly. Effective for our interim financial statements as fo June 30, 2009, the implementation of this guidance did not have a material impact on our Consolidated Financial Statements.

In May 2009, the FASB released SFAS No. 165, “Subsequent Events,” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. Effective for our interim financial statements as of June 30, 2009, we reviewed events occurring through the filing date of this document. See Note 16 for our subsequent events disclosure.

In June 2009, the FASB released SFAS No. 167, “Amendments to FASB Interpretation No. 46(R), “ which addresses the effects on certain provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” as a result of the elimination of the qualifying special-purpose entity concept in SFAS No. 166, “Accounting for Transfers of Financial Assets.” It addresses concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about a company’s involvement in a variable interest entity. This statement requires us to perform an analysis to determine whether any of our variable interests give us a controlling financial interest in a variable interest entity. In addition, this statement requires ongoing assessments of whether we are the primary beneficiary of a variable interest entity. SFAS No. 167 is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009. We are in the process of evaluating the impact of this new guidance on our Consolidated Financial Statements.

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NOTE 5 - NOTES AND ACCOUNTS RECEIVABLE

	June 30, 2009			December 31, 2008
	(Unaudited)

Notes and accounts receivable
- Third parties	$	2,822,623		$	2,492,199
- Related parties		207,718			183,597

Total		3,030,341			2,675,796
Allowance for doubtful accounts and sales returns		(594,668	)		(504,028	)

Notes and accounts receivable, net	$	2,435,673		$	2,171,768

NOTE 6 - INVENTORIES

	June 30, 2009			December 31, 2008
	(Unaudited)

Work in process	$	156,130		$	109,163
Finished goods and other merchandises		1,897,145			2,130,116

		2,053,275			2,239,279
Less: Allowance for obsolete inventories and decline of market value		(304,547	)		(306,126	)

	$	1,748,728		$	1,933,153

NOTE 7 - OTHER RECEIVABLES

	June 30, 2009		December 31, 2008
	(Unaudited)
Other receivables - third parties:
Advances to staff	$	131,063	$	90,521
Other receivables		211,682		304,416

Sub-total		342,745		394,937
Other receivables - related parties (Note (i))		606,531		1,066
	$	949,276	$	396,003

Note:

(i)

In July 2009, the Group obtained the PRC government’s approval to co-found Kid Castle Xinxuhui Preschool with Shanghai Xinxuhui Co., Ltd. in the PRC. In 2009, Kid Castle Xinxuhui’s total registered capital was RMB 2,000,000. KCEI and Shanghai Xinxuhui Co., Ltd. own, respectively, 70% and 30% of Kid Castle Xinxuhui Preschool.

As of June 30, the balance due from related parties was $606,531, comprised of $594,507 due from Kid Castle Xinxuhui Preschool (“Xinxuhui Preshcool”), $325 due from English Center and $11,699 due from Tianjin Consulting. The amount due from Xinxuhui Preschool to KCEI is to repay KCEI for refurbishment and equipment purchases for Xinxuhui Preschool.

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NOTE 8 - PREPAYMENTS AND OTHER CURRENT ASSETS

	June 30, 2009			December 31, 2008
	(Unaudited)

Prepayments		$	580,387		$	467,414
Temporary payments			75			62
Others			25,087			8,141

		$	605,549		$	475,617

NOTE 9- INTEREST IN ASSOCIATES

	June 30, 2009			December 31, 2008
	(Unaudited)

21st Century Kid Castle Language and Education Center (“Education Center”) (Note (i))
Investment cost	$	109,748		$	109,628
Share of loss		(18,636	)		(42,696	)

	$	91,112		$	66,932

Tianjin Kid Castle Educational Investment Consulting Co., Ltd. (“Tianjin Consulting”) (Note (ii))
Investment cost	$	102,431		$	102,319
Share of loss		(122,919	)		(100,915	)

(Note(ii)(A))	$	(20,488	)	$	1,404

Total	$	91,112		$	68,336

Note:

(i)

In October 2003, the Group obtained the PRC government’s approval to co-found Education Center with 21st Century Publishing House in the PRC. In 2004, Education Center’s total registered capital was RMB 1,500,000, with KCES and 21st Century Publishing House each owning 50%. We have determined that the Group has significant influence and should therefore account for its investment using the equity method.

For the six months ended June 30, 2009 and 2008, the Group recognized investment income from Education Center of $24,101 and $40,665, respectively, accounted for using the equity method.

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(ii)

On April 1, 2004, the Group signed a joint venture agreement with Tianjin Foreign Enterprises & Experts Service Corp., in Tianjin City, PRC. Pursuant to the joint venture agreement, the Group and Tianjin Foreign Enterprises & Experts Service Corp. each owns a 50% interest in Tianjin Kid Castle Educational Investment Consulting Co., Ltd. We have determined that the Group has significant influence and should therefore account for its investment using the equity method.

(A)

As of June 30, 2009, the Group’s share of Tianjin Consulting’s $122,919 loss exceeded the Groups’ investment cost of $102,431. The $20,488 difference has been reclassified as Other liabilities.

For the six months ended June 30, 2009 and 2008, the Group recognized an investment loss of $21,888 and $10,878, respectively, in Tianjin Consulting, accounted for using the equity method.

NOTE 10 - INTANGIBLE ASSETS

	June 30, 2009			December 31, 2008
	(Unaudited)

Gross carrying amount
Franchise	$	1,037,535		$	1,026,455
Copyrights		609,905			603,391
Goodwill		235,296			235,039

		1,882,736			1,864,885
Less: Accumulated amortization
Franchise		(959,721	)		(898,148	)
Copyrights		(564,162	)		(527,967	)
		(1,523,883	)		(1,426,115	)

Less: impairment of goodwill		(91,316	)		(67,714	)

		(91,316	)		(67,714	)

Net	$	267,537		$	371,056

Amortization charged to operations was $80,495 and $87,179 for the six months ended June 30, 2009 and 2008, respectively, and the impairment of goodwill charged to operations was $23,524 and $11,386 for the six months ended June 30, 2009 and 2008, respectively.

The estimated aggregate amortization expenses for each of the succeeding fiscal years are as follows:

2010	$	41,186

	$	41,186

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NOTE 11 - BANK BORROWINGS

	June 30, 2009		December 31, 2008
	(Unaudited)

Bank term loans (Note (i))	$	441,838	$	514,471
Mid-term secured bank loan (Note (ii))		1,235,057		1,312,376

		1,676,895		1,826,847
Less: Balances maturing within one year included in current liabilities
Bank term loans		46,987		76,946
Mid-term secured bank loan		1,235,057		165,933

		1,282,044		242,879

Bank borrowings maturing after one year	$	394,851	$	1,583,968

Note:

(i)

This line item represents bank loans that have been secured by a pledge of post-dated checks amounting to $670,908 and $755,824 that we have received from franchisees and the Group’s bank deposits of $8,010 and $2,839 as of June 30, 2009 and December 31, 2008, respectively, for the purpose of financing operations. The repayment dates of the loans coincided with the maturity dates of the corresponding pledged post-dated checks, which were extended on October 18, 2008 and will be due on September 30, 2009. The weighted average interest rates were 5.4% and 5.86% per annum as of June 30, 2009 and 2008, respectively.

For the six months ended June 30, 2009 and 2008, interest expense charged to operations in respect of bank loans was $11,972 and $17,672, respectively.

(ii)

In November 28, 2007, KCIT obtained a new bank loan of $1,542,401. The loan is secured by the Group’s land and buildings and is personally guaranteed by two directors of the Group. It bears interest at the lending bank’s basic fixed deposit rate plus 1.45% per annum. Of the principal, $370,176 is repayable in 24 equal monthly installments. A final balloon payment of $1,172,225 is due on November 28, 2009. The applicable interest rate is approximately 3.76% per annum.

For the six months ended June 30, 2009 and 2008, interest expense charged to operations amounted to $15,747 and $28,787, respectively.

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NOTE 12 - RECEIPTS IN ADVANCE

The balance comprises:

	June 30, 2009		December 31, 2008
	(Unaudited)

Current liabilities:
Sales deposits received (Note (i))	$	541,589	$	277,823
Franchising income received (Note (ii))		1,438,381		1,480,947
Subscription fees received (Note (iii))		633,230		471,088
Related party	-			414
Others		93,014		75,708

		2,706,214		2,305,980

Long-term liabilities:
Franchising income received (Note (ii))		1,304,398		1,001,801

	$	4,010,612	$	3,307,781

Note:

(i)	The balance represents receipts in advance from customers for goods sold.

(ii)	The balance mainly represents franchising income received in advance which is attributable to the periods after the respective period end dates.

(iii)

The balance represents subscription fees received in advance for subscription of magazines published by the Group.

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NOTE 13 - RETIREMENT PLANS

The Group maintains tax-qualified defined contribution and benefit retirement plans for its employees in accordance with the ROC Labor Standard Law. As a result, the Group currently maintains two different retirement plans with contribution and benefit calculation formulas. On July 1, 2005, the Bureau of National Health Insurance issued new labor retirement pension regulations in Taiwan. The Group has a new defined contribution retirement plan (the “New Plan”) covering all regular employees of KCIT. KCIT contributes monthly an amount equal to 6% of employee base salaries and wages to the Bureau of National Health Insurance. The Group still maintains the benefit retirement plan (the “Old Plan”) which commenced in September 2003, and only applies to the regular employees of KCIT who were employed prior to June 2005. KCIT contributes monthly an amount equal to 2% of employee total salaries and wages to an independent retirement trust fund deposited with the Central Trust of China in accordance with the ROC Labor Standards Law in Taiwan. The retirement fund is not included in the Group’s financial statements. Net periodic pension cost is based on annual actuarial valuations which use the projected unit credit cost method of calculation and is charged to the consolidated statement of operations on a systematic basis over the average remaining service lives of current employees. Under the Old Plan, the employees are entitled to receive retirement benefits upon retirement in the manner stipulated by the ROC Labor Standard Law in Taiwan. The benefits under the Old Plan are based on various factors such as years of service and final base salary preceding retirement.

The net periodic pension cost is as follows:

	Six months ended June 30,
	2009			2008
	(Unaudited)
Service cost	$	-		$	-
Interest cost		7,944			6,456
Expected return on assets		(3,180	)		(1,046	)
Amortization of unrecognized loss		4,928			1,616

Net periodic pension cost	$	9,692		$	7,026

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NOTE 14 - GEOGRAPHICAL SEGMENTS

The Group is principally engaged in the business of child education teaching materials and related services focusing on English language in Taiwan and the PRC. Accordingly, the Group has two reportable geographic segments: Taiwan and the PRC. The Group evaluates the performance of each geographic segment based on its net income or loss. The Group also accounts for inter-segment sales as if the sales were made to third parties. Information concerning operations in these geographical segments is as follows:

	Taiwan				PRC				Total				Corporate						Eliminations				Consolidated
	Six months ended June 30, 2009		Six months ended June 30, 2008		Six months ended June 30, 2009		Six months ended June 30, 2008		Six months ended June 30, 2009		Six months ended June 30, 2008		Six months ended June 30, 2009			Six months ended June 30, 2008			Six months ended June 30, 2009		Six months ended June 30, 2008		Six months ended June 30, 2009		Six months ended June 30, 2008

Revenue
External revenue	$	2,770,247	$	3,116,020	$	3,389,697	$	2,948,566	$	6,159,944	$	6,064,586	$	—		$	—		$	—	$	—	$	6,159,944	$	6,064,586
Inter-segment revenue		—		—		—		—		—		—		—			—			—		—		—		—

	$	2,770,247	$	3,116,020	$	3,389,697	$	2,948,566	$	6,159,944	$	6,064,586	$	—		$	—		$	—	$	—	$	6,159,944	$	6,064,586

Profit from Operations	$	185,175	$	297,645	$	553,291	$	186,397	$	738,466	$	484,042	$	(29,584	)	$	(72,449	)	$	—	$	—	$	708,882	$	411,593

Capital expenditures	$	120,464	$	60,609	$	82,423	$	71,209	$	202,887	$	131,818	$	—		$	—		$	—	$	—	$	202,887	$	131,818

		June 30, 2009				December 31, 2008				June 30, 2009				December 31, 2008				June 30, 2009				December 31, 2008				June 30, 2009				December 31, 2008				June 30, 2009				December 31, 2008				June 30, 2009				December 31, 2008
Total assets		$	7,301,861			$	7,770,317			$	5,942,048			$	4,459,044			$	13,243,909			$	12,229,361			$	904,928			$	2,950			$	(313,234	)		$	(434,919	)		$	13,835,603			$	11,797,392

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NOTE 15 - COMMITMENT AND CONTINGENCIES

A. Lease Commitment

As of June 30, 2009, the Company’s future minimum lease payments under a non-cancelable operating lease expiring in excess of one year are as follows:

Years ending December 31,
2010	$	406,570
2011		378,128
2012		748,982
2013		546,174
Years 2014 to 2027		2,579,447

	$	4,659,301

B. Going concern

The accompanying financial statements have been prepared assuming the Group will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

NOTE 16 – SUBSEQUENT EVENTS

In July 2009, the Group established a wholly-owned school, Shanghai Putuo District Kid Castle Yin Cyun Language and Education Center in the PRC, with registered total capital of RMB 500,000.

As of June 30, 2009, the Group has prepaid amounts of $389,558 and $638,059 invested in Chengdu Preschool and Nanchang Preschool, respectively, for refurbishment and equipment purchases.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

This report contains certain forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, and information relating to us that are based on the beliefs and assumptions made by our management as well as information currently available to the management. When used in this document, the words “anticipate,” “believe,” “estimate,” “expect” and similar expressions, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. Certain of these risks and uncertainties are discussed under the caption “Factors That May Affect Our Future Results And Financial Condition” contained herein and other factors disclosed in our filings with the SEC including, but not limited to our Annual Report on Form 10-K for the year ended December 31, 2008. We do not intend to update these forward-looking statements.

OVERVIEW

We are a leading provider in the PRC and Taiwan of English-language instruction and educational services to children for whom Chinese is the primary language. Our focus is on children between two and twelve years old. In 2008 we taught or provided educational materials for approximately 1,460,000 students at over 7,550 locations through our franchise and cooperative school operations.

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We commenced operations in 1986 as an English-language school, and since then we have expanded our franchise operations to provide bilingual kindergarten instruction, computer training, and tutorial services. In September 1999, we began offering a variety of multimedia, including educational videos, textbooks, workbooks, and educational software, authored by us as fully functional, stand-alone products or as supplements to our classroom-based and Internet-based instruction.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, equity investments, income taxes, financing operations, pensions, commitments and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition. We recognize sales of teaching materials and educational tools and equipment as revenue when title of the product and risk of ownership are transferred to the customer, which occurs at the time of delivery, or when the goods arrive at the customer designated location, depending on the associated shipping terms. Additionally, we deliver products sold by our distributors directly to the distributors’ customers and as such the delivered goods are recognized as revenue in a similar way as sales to our direct customers. We estimate sales returns and discounts based on historical experience and record them as reductions to revenues. If market conditions were to decline, we may take actions to increase sales discounts, possibly resulting in an incremental reduction of revenue at the time when revenues are recognized.

Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Allowance for Obsolete Inventories and Lower of Cost or Market. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about inventory aging, future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Investment Impairments. We hold equity interests in companies having operations in areas within our strategic focus. We record an investment impairment charge when we believe an investment has experienced a decline in value that is not temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Fixed Assets and Depreciation. Our fixed assets are stated at cost. Major improvements and betterments to existing facilities and equipment are capitalized. Expenditures for maintenance and repairs that do not extend the life of the applicable asset are charged to expense as incurred. Buildings are depreciated over a 50-year term. Fixtures and equipment are depreciated using the straight-line method over their estimated useful lives, which range from two-and-a-half years to ten years.

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Impairment of Long-Lived Assets. We review our fixed assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset over its remaining useful life. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The estimate of fair value is generally based on quoted market prices or on the best available information, including prices for similar assets and the results of using other valuation techniques.

As of June 30, 2009, the balance of our amortizable intangible assets was $123,557, including franchise-related intangible assets of $77,814 and copyrights of $45,743. The amortizable intangible assets are amortized on a straight-line basis over estimated useful lives of 10 years, and the balance of goodwill was $143,980, which is tested for impairment on a recurring basis. In determining the useful lives and recoverability of the intangibles, assumptions must be made regarding estimated future cash flows and other factors to determine the fair value of the assets, which may not represent the true fair value. If these estimates or their related assumptions change in the future, there may be significant impact on our results of operations in the period of the change incurred.

Income Taxes. We account for income taxes under the asset and liability method. 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 bases, and tax loss carry-forwards. 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 tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are subject to valuation allowances based upon management’s estimates of realizability. Actual results may differ significantly from management’s estimate.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2009 compared to Three Months Ended June 30, 2008

Total Net Operating Revenue. Total net operating revenue consists of sales of goods, franchising income and other operating revenue. Total net operating revenues increased by $49,861, or 2%, to $2,714,923 for the three months ended June 30, 2009 from $2,665,062 for the three months ended June 30, 2008, including the increase in other operating revenue of $285,670, the decrease in the sales of goods of $202,752 and franchising income of $33,057.

Sales of goods. The decrease in sales of goods, from $1,509,509 for the three months ended June 30, 2008 to $1,387,757 for the three months ended June 30, 2009 (a 13% decrease), was mainly due to the decrease in sales in our Taiwan operations.

Franchising income. The decrease in franchising income, from $584,614 for the three months ended June 30, 2008 to $551,557 for the three months ended June 30, 2009 (a 6% decrease), was mainly due to the decrease in franchising income in Taiwan operations.

Other operating revenue. Our other operating revenues represent revenues from other activities and services such as training of teachers, arranging for personal English language tutors, organizing field trips and educational fairs, fees for designing the school layout of our franchised schools, and tuition from school controlled by us. Other operating revenue increased by $285,670, to $775,609 for the three months ended June 30, 2009 from $489,939 for the three months ended June 30, 2008. The increase was mainly due to operate schools controlled by us in the PRC.

Gross Profit. Gross profit increased by $187,058, or 15%, to $1,420,203 for the three months ended June 30, 2009, from $1,233,145 for the three months ended June 30, 2008. The increase was mainly due to increase in other operating revenue from PRC operations.

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Total Operating Expenses. Total operating expenses decreased by $47,606, or 3%, to $1,462,784 for the three months ended June 30, 2009 from $1,510,390 for the three months ended June 30, 2008. The decrease was principally due to decreases in expenditures to fund daily operations in the PRC.

Other Operating Expenses. Other operating expenses increased by $47,623, or 3%, to $1,461,200 for the three months ended June 30, 2009 from $1,508,823 for the three months ended June 30, 2008, principally due to decreases in daily expenditures in operations in the PRC.

Interest Expenses, Net. Net interest expenses decreased by $14,975, or 58%, to $10,668 for the three months ended June 30, 2009 from $25,643 for the three months ended June 30, 2008, primarily due to the decrease of the borrowings during the three months ended June 30, 2009 compared to the three months ended June 30, 2008.

Provision for Taxes. Provision for taxes for the three months ended June 30, 2009 and 2008 were $37,452 and $22,468, respectively. These provisions for income taxes relate to income taxes resulting from our operations in Taiwan.

Six Months Ended June 30, 2009 compared to Six Months Ended June 30, 2008

Total Net Operating Revenue. Total net operating revenue consists of sales of goods, franchising income and other operating revenue. Total net operating revenue increased by $95,358, or 2%, to $6,159,944 for the six months ended June 30, 2009 from $6,064,586 for the six months ended June 30, 2008. This was mainly due to the increase in other operating revenues of $367,452, decrease in sales of goods of $203,177 and decrease in franchising income of $68,917.

Sales of goods. Sales of goods decreased by $203,177, from $3,954,618 for the six months ended June 30, 2008 to $3,751,441 for the six months ended June 30, 2009. The decrease was mainly due to the decrease in sales our Taiwan operations.

Franchising income. The 6% decrease in franchising income, from $1,140,843 for the six months ended June 30, 2008 to $1,071,926, for the six months ended June 30, 2009, was mainly due to the decrease in franchising income in our Taiwan operations.

Other operating revenue. Our other operating revenues represent revenues from other activities and services such as training of teachers, arranging for personal English language tutors, organizing field trips and educational fairs, fees for designing the school layout of our franchised schools, and school tuition. Other operating revenue increased by $367,452, or 38%, to $1,336,577 for the six months ended June 30, 2009, from $969,125 for the six months ended June 30, 2008. The increase was mainly due to revenue from schools controlled by us in the PRC.

Gross Profit. Gross profit decreased by $33,774, or 1%, to $3,423,393 for the six months ended June 30, 2009, from $3,457,167 for the six months ended June 30, 2008. The decrease in Gross Profit was mainly due to the increase in the operating costs of schools controlled by us in the PRC.

Total Operating Expenses. Total operating expenses decreased by $331,063 to $2,714,511 for the six months ended June 30, 2009, from $3,045,574 for the six months ended June 30, 2008, an 11% decrease. The decrease in total operating expenses was mainly due to decreases in expenditures to fund daily operations.

Other Operating Expenses. Other operating expenses decreased by $330,420, or 11%, to $2,692,074 for the six months ended June 30, 2009, from $3,022,494 for the six months ended June 30, 2008. The decrease in operating expenses was mainly due to decreases in expenditures to fund daily operations.

Interest Expense, Net. Net interest expenses decreased by $22,255, or 46%, to $26,489 for the six months ended June 30, 2009 from $48,744 for the six months ended June 30, 2008. The decrease in net interest expenses was mainly due to the decrease of interest rates during the six months ended June 30, 2009, compared to the six months ended June 30, 2008. (See Note 11 to our Condensed Consolidated Financial Statements for more information.)

Other Non-operating Income, Net. Net other non-operating income decreased by $111,577, or 69%, to $49,271 for the six months ended June 30, 2009, from $160,848 for the six months ended June 30, 2008. The decrease in net other non-operating income was mainly due to the difference in exchange rates between the two periods.

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Provision for Taxes. Provision for taxes for the six months ended June 30, 2009 and 2008 were $112,857 and $59,365, respectively. These provisions for income taxes relate to income taxes resulting from our operations in Taiwan.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2009, our principal sources of liquidity included cash and bank balances of $1,960,059, (including the $900,000 capital injection contributed by Mr. Yang on June 17, 2009) which decreased $25,759 from the balance of $1,985,818 at December 31, 2008. The decrease was mainly due to the increase in the net cash used in the prepayment of long term investments of $1,305,645, comprised of the following investments: $204,863 for Xinxuhui Preschool, $73,165 for Shanghai Putuo District Kid Castle Yin Cyun Language and Education Center, $389,558 for Chengdu Preschool, and $638,059 for Nanchang Preschool. In June 2009, the Company issued 5,000,000 shares of common stock to our Chief Executive Officer and largest shareholder, Min-Tan Yang, for $900,000. The primary purpose of the capital injection was to finance the Company’s privatization plan, announced by the Company’s Report on Form 8-K filed with the Commission on June 18, 2009. The privatization plan is pending review by the Commission of the Company’s preliminary Schedule 13E-3 and preliminary Information Statement on Schedule 14C, each filed with the Commission on June 18, 2009.

We have assertively expanded our business in the PRC. Our operations in the PRC turned profitable in 2006, and the Group turned profitable in the first quarter of 2007. We anticipate continued expansion of the demand for learning materials and an increase in the number of franchise schools. Furthermore, we foresee better utilization of capital and funds as we identify and implement alternatives for restructuring and refinancing. In order to increase its profit margin, the Group has operated direct-owned schools since 2007. Due to the rapid expansion of our operations in the PRC, the Group foresees additional need for funds in the near future to facilitate its expansion plans during 2009. As discussed in Note 11 to our Condensed Consolidated Financial Statements, the majority of the Group’s existing loans are guaranteed by two directors of the Group who have expressed their willingness to continue to support the Group until other sources of funds have been obtained. Moreover, management believes that, with the support of the directors and continuous PRC sales, the Company would have sufficient funds for its operations, but may need new a bank facility to fulfill its business plan to expand its operations in the future.

Net cash provided by operating activities was $639,904 and $1,060,343 during the six months ended June 30, 2009 and 2008, respectively. The $420,439 decrease was primarily due to (i) an increase of notes and accounts payable in the amount of 204,656 during the six months ended June 30, 2009, compared to an increase of notes and accounts payable in the amount of $704,574 during the six months ended June 30, 2008, and (ii) a decrease of accrued expenses in the amount of $288,133 during the six months ended June 30, 2009, compared to an increase of accrued expenses in the amount of $156,927 during the six months ended June 30, 2008, a net cash decrease of $445,060.

Net cash used in investing activities was $1,167,268 during the six months ended June 30, 2009, and net cash provided by investing activities was $192,902 during the six months ended June 30, 2008. The $1,360,170 difference was primarily attributable to increase in cash used in prepayment of long-term investments of $1,047,480 during the six months ended June 30, 2009, compared to cash used in the prepayment of long-term investments of $26,535 during the six months ended June 30, 2008, for a net negative difference in cash of $1,020,945.

Net cash provided by financing activities was $555,518 during the six months ended June 30, 2009, and net cash used in financing activities was $903,271 during the six months ended June 30, 2008. The $1,458,789 difference was primarily attributable to issuance of common stock for cash of $900,000.

Off-Balance Sheet Arrangements

As of June 30, 2009, we did not engage in any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K promulgated by the SEC under the Securities Exchange Act of 1934.

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Bank Borrowing

We currently utilize bank loans as one of our financing sources. As of June 30, 2009 and 2008, the balances of bank borrowings, including current and non-current portions, were $1,676,895 and $2,184,911, respectively.

Pension Benefit

As of July 1, 2005, the Group maintains two different retirement plans, according to the ROC Labor Standard Law, a non-contributory and funded defined contribution retirement plan (the “New Plan”) covering all regular employees of KCIT, our subsidiary in Taiwan, and the benefit retirement plan (the “Old Plan”) which commenced in September 2003, and only applies to the regular employees of KCIT who were employed prior to June 2005, as described in Note14 to our Condensed Consolidated Financial Statements. The benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter, are $0 and $16,735, respectively. We also make defined contributions to a retirement benefits plan for our employees in the PRC in accordance with local regulations. The contributions made by us for the six months ended June 30, 2009 and 2008 amounted to $39,963, and $28,547, respectively.

New Accounting Pronouncements

See Note 4 to the Consolidated Financial Statements

Non-GAAP Financial Measures

None.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, including from changes in certain foreign currency exchange rates and interest rates. All of these market risks arise in the normal course of business, as we do not engage in speculative trading activities. We have not entered into derivative or hedging transactions to manage risk in connection with such fluctuations.

The following analysis provides quantitative information regarding our exposure to foreign currency exchange risk and interest rate risk.

Interest rate exposure

We are exposed to fluctuating interest rates related to variable rate bank borrowings. In analyzing the effect of interest rate fluctuations based on the average balances of our outstanding bank borrowings for fiscal year 2009, we have projected that, if interest rates were to increase by one percent, the result would be an annual increase in our interest expense of $16,228. This analysis does not take into consideration the effect of changes in the level of overall economic activity on interest rate fluctuations.

Foreign currency exposure

We have operations in both Taiwan and the PRC. The functional currency of Higoal and its subsidiary, KCIT, is NT Dollars and the financial records are maintained and the financial statements are prepared for these entities in NT Dollars. The functional currency of KCES and its consolidated investee, Culture Media and KCEI is RMB and the financial records are maintained and the financial statements are prepared for these entities in RMB. In the normal course of business, these operations are not exposed to fluctuations in currency values. We do not generally enter into derivative financial instruments in the normal course of business, nor do we use such instruments for speculative purposes. The translation from the applicable local currency assets and liabilities to the U.S. Dollar is performed using exchange rates in effect at the balance sheet date except for shareholders’ equity, which is translated at historical exchange rates. Revenue and expense accounts are translated using average exchange rates during the period. Gains and losses resulting from such translations are recorded as a cumulative translation adjustment, a separate component of shareholders’ equity.

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ITEM 4. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Pursuant to Exchange Act Rule 13a-15(b) our management has performed an evaluation of the effectiveness of our disclosure controls and procedures. The term disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management has concluded, based on deficiencies noted by our auditors in past reviews, and other issues noted by management in its evaluation, that as of June 30, 2009 our disclosure controls and procedures were ineffective. Several quarters ago we began taking measures to improve our disclosure controls and procedures. We initiated the installment of a new Enterprise Resource Planning (“ERP”) system and engaged an outside accounting firm to advise the Company with respect to setting up internal auditing and other controls and procedures. The ERP system, when fully operational, will enable the centralization of all information required to be disclosed pursuant to the Exchange Act to be digitally recorded, processed, summarized and reported in a timely and secured manner. During the final phase of ERP system integration, certain difficulties have been encountered that have prevented the ERP system to be satisfactorily declared effective and independently operational by management. One cause of the delay was that the company hired to assist with our implementation of the new ERP system unexpectedly ceased its operation in September 2008. We are currently searching for the right consulting company to assist us with integration of the RRP system as well as provide on-going monitoring, guidance and supervisory support. Management anticipates that the new system will become fully operational in the fourth fiscal quarter 2010. The old system used by the Company will then be phased out.

The Company recognizes that the disclosure controls and procedures were inadequate; it is assertively attending to the inadequacy and believes that implementation of ERP will significantly strengthen the Company’s disclosure controls and procedures.

The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and 31.2, respectively, to this Form 10-Q.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During the last quarter, we have continued the efforts to implement the integration of a comprehensive ERP system that, when fully operational, will enhance our internal controls over financial reporting. The ERP system has been fully installed and the system has been running in parallel with the old system since 2007. The system is expected to be fully operational in the fourth fiscal quarter 2010. The ERP system will perform the following functions:

Maintain detailed records and produce comprehensive financial statements on a periodic basis allowing management to review and detect irregular financial activities;

Place different check-points on the progression of ordinary monetary activities of the business; and

Delineate individual and/departmental responsibilities and effectively separate respective departmental transactions so as to prevent occurrence of intentional misappropriation of funds.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We have no material pending legal proceedings.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment and new risk facts emerge from time to time. Management cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor, or combination of factors, may impact our business. There have not been any material changes during the quarter ended June 30, 2009 from the risk factors disclosed in the above-mentioned Form 10-K for the year ended December 31, 2008.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On June 17, 2009, pursuant to a Stock Subscription Agreement dated the same date, we sold 5,000,000 newly issued shares of our common stock to our Chief Executive Officer, Min-Tan Yang. The stock was sold for $0.18 per share for an aggregate purchase price of $900,000. Mr. Yang paid for the stock in cash. The stock was issued without registration under the Securities Act of 1933 in reliance on the exemption under Section 4(2) of the Securities Act. The Stock Subscription Agreement is attached as an exhibit to the Company’s report on Form 8-K, filed with the Commission on June 18, 2009.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On June 17, 2009, in accordance with the relevant sections of the Florida Business Corporations Act and our articles of incorporation, two senior members of our management who collectively own 67% of our common stock, acting in their capacity as shareholders, approved amendments to our articles of incorporation that will effect a 5,000 for 1 reverse stock split of our common stock, followed immediately by a 1 for 5,000 forward stock split (the “Transaction”). The vote was taken by written consent in conjunction with the Company’s proposed privatization plan described more fully in the Company’s preliminary Schedule 13E-3 and preliminary Information Statement on Schedule 14C, each filed with the Commission on June 18, 2009, and each of which is pending review by the Commission.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

A.		Exhibits
31.1		Rule 13a-14(a) Certification of Principal Executive Officer
31.2		Rule 13a-14(a) Certification of Principal Financial Officer
32.1		Section 1350 Certification of Principal Executive Officer and Principal Financial Officer

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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.

Dated: August 13, 2009

	By:	/s/ Suang-Yi Pai
		SUANG-YI PAI
		CHIEF FINANCIAL OFFICER

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