UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q


( Mark One)





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





For the quarterly period ended February 28, 2010





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





For the transition period from ______________ to ______________





Commission File Number: 333-118259





CHINA SUN GROUP HIGH-TECH CO.(Exact name of registrant as specified in its charter)





Delaware
54-2142880(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)








1 Hutan Street, Zhongshan District


Dalian, The People’s Republic of China


(Address of principal executive offices) (Zip Code)





011 – 86- (411) 8288 9800/ 8289 2736


(Registrant’s telephone number, including area code)





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.


þ Yes  □ No








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








Indicate by check mark 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   oNon-accelerated filer  o (Do not check if a smaller reporting company)
Smaller reporting company   þ








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








□  Yes  þ No





APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS DURING THE PRECEDING FIVE YEARS:


















Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.


□  Yes   □ No





APPLICABLE ONLY TO CORPORATE ISSUERS:





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





There are presently 53,422,971 shares of common stock, $.001 par value, issued and outstanding as of April 14, 2010.





























TABLE OF CONTENTS





PART I – FINANCIAL INFORMATION





PageItem 1.
Financial Statements.
F-1Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
3Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
8Item 4.
Controls and Procedures.
8Item 4T.
Controls and Procedures.
8





PART II – OTHER INFORMATION





Item 1.
Legal Proceedings.
8Item 1A.
Risk Factors.
8Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
8Item 3.
Defaults Upon Senior Securities.
8Item 4.
(Removed and Reserved)
8Item 5.
Other Information.
9Item 6.
Exhibits.
9











2








PART I – FINANCIAL INFORMATION





Item 1.                      Financial Statements.




















CHINA SUN GROUP HIGH-TECH CO.








INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(UNAUDITED)











PageCondensed Consolidated Balance Sheets as of February 28, 2010 and May 31, 2009

F-2Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months ended February 28, 2010 and 2009

F-3Condensed Consolidated Statements of Cash Flows for the Nine Months ended February 28, 2010 and 2009

F-4Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months ended February 28, 2010

F-5Notes to Condensed Consolidated Financial Statements

F-6 – F-16











F-1










CHINA SUN GROUP HIGH-TECH CO.


CONDENSED CONSOLIDATED BALANCE SHEETS


AS OF FEBRUARY 28, 2010 AND MAY 31, 2009


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





February 28, 2010


May 31, 2009(Unaudited)


(Audited)ASSETSCurrent assets:Cash and cash equivalents

$
12,481,120


$
9,209,953Accounts receivable, trade


2,670,876



1,580,220Inventories


1,217,252



1,657,023Value-added tax receivable


-



124,627Deposits and prepayments


681,615



439,560Total current assets


17,050,863



13,011,383Non-current assets:Technical know-how, net


2,516,809



2,608,059Property, plant and equipment, net


20,947,981



19,630,119TOTAL ASSETS

$
40,515,653


$
35,249,561LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:Accounts payable, trade

$
-


$
847,796Income tax payable


1,506,309



1,476,030Other payables and accrued liabilities


876,063



1,022,303Total liabilities


2,382,372



3,346,129Commitments and contingenciesStockholders’ equity:Convertible preferred stock, $0.001 par value; 2,000,000 shares authorized; none of shares issued and outstanding as of February 28, 2010 and May 31, 2009


-



-Common stock, $0.001 par value; 100,000,000 shares authorized; 53,422,971 shares issued and outstanding as of February 28, 2010 and May 31, 2009


53,423



53,423Additional paid-in capital


9,585,204



9,585,204Accumulated other comprehensive income


3,015,249



3,067,549Statutory reserve


2,277,248



1,387,775Retained earnings


23,202,157



17,809,481Total stockholders’ equity


38,133,281



31,903,432TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
40,515,653


$
35,249,561













See accompanying notes to condensed consolidated financial statements.










F-2






CHINA SUN GROUP HIGH-TECH CO.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2010 AND 2009


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


(Unaudited)





Three months ended February 28,


Nine months ended February 28,2010


2009


2010


2009Revenue, net

$
10,808,702


$
8,807,184


$
30,232,058


$
27,400,292Cost of revenue(inclusive of depreciation and amortization)


7,427,144



5,561,556



20,760,441



17,211,727Gross profit


3,381,558



3,245,628



9,471,617



10,188,565Operating expenses:Sales and marketing


30,057



94,586



83,195



559,881Research and development


26,328



25,536



77,501



75,823Depreciation


64,612



64,371



193,709



192,785General and administrative


311,932



296,307



700,991



978,798Total operating expenses


432,929



480,800



1,055,396



1,807,287Income from operations


2,948,629



2,764,828



8,416,221



8,381,278Other income:Interest income


9,414



6,372



26,228



24,988Income before income taxes


2,958,043



2,771,200



8,442,449



8,406,266Income tax expense


(756,920
)


(737,536
)


(2,160,300
)


(2,173,840
)NET INCOME


2,201,123



2,033,664



6,282,149



6,232,426Other comprehensive income:- Foreign currency translation (loss) gain


(41,340
)


(50,599
)


(52,300
)


364,445COMPREHENSIVE INCOME

$
2,159,783


$
1,983,065


$
6,229,849


$
6,596,871Net income per share – Basic and diluted

$
0.04


$
0.04


$
0.12


$
0.12Weighted average number of shares outstanding during the period – Basic and diluted


53,422,971



53,422,971



53,422,971



53,422,971










See accompanying notes to condensed consolidated financial statements.






F-3






CHINA SUN GROUP HIGH-TECH CO.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE NINE MONTHS ENDED FEBRUARY 28, 2010 AND 2009


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


(Unaudited)





Nine months ended February 28,2010


2009Cash flows from operating activities:Net income

$
6,282,149


$
6,232,426Adjustments to reconcile net income to net cash provided by operating activities:Depreciation of property, plant and equipment


971,821



499,419Amortization of technical know-how


86,762



-Changes in operating assets and liabilities:Accounts receivable, trade


(1,093,057
)


(1,560,900
)Inventories


436,813



3,425,615Deposits and prepayments


(242,740
)


(873,536
)Accounts payable, trade


(846,110
)


72,913Customer deposits


-



(343
)Value-added tax, net


402,760



854,534Income tax payable


32,795



547,321Other payables and accrued liabilities


(423,155
)


98,206Net cash provided by operating activities


5,608,038



9,295,655Cash flows from investing activities:Purchase of plant and equipment


(1,298,131
)


(1,065,334
)Addition of construction in progress


(1,024,771
)


-Net cash used in investing activities


(2,322,902
)


(1,065,334
)Effect of exchange rate changes on cash and cash equivalents


(13,969
)


75,968NET CHANGE IN CASH AND CASH EQUIVALENTS


3,271,167



8,306,289CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


9,209,953



3,879,114CASH AND CASH EQUIVALENTS, END OF PERIOD

$
12,481,120


$
12,185,403SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes

$
2,127,504


$
1,626,155Cash paid for interest

$
-


$
-NON-CASH INVESTING AND FINANCING ACTIVITIES:Transfer from construction in progress to property, plant and equipment

$
2,560,385


$
-










See accompanying notes to condensed consolidated financial statements.




F-4






CHINA SUN GROUP HIGH-TECH CO.


CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


FOR THE NINE MONTHS ENDED FEBRUARY 28, 2010


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


(Unaudited)





Convertible

preferred stock


Common stock


Additional

paid-in


Accumulated

other

comprehensive


Statutory


Retained


Total

stockholders’No. of share


Amount


No. of share


Amount


capital


income


reserve


earnings


equityBalance as of June 1, 2009


-



-



53,422,971


$
53,423


$
9,585,204


$
3,067,549


$
1,387,775


$
17,809,481


$
31,903,432Net income for the period


-



-



-



-



-



-



-



6,282,149



6,282,149Transfer to statutory reserve


-



-



-



-



-



-



889,473



(889,473
)


-Foreign currency translation adjustment


-



-



-



-



-



(52,300
)


-



-



(52,300
)Balance as of

February 28, 2010


-


$
-



53,422,971


$
53,423


$
9,585,204


$
3,015,249


$
2,277,248


$
23,202,157


$
38,133,281













See accompanying notes to condensed consolidated financial statements.










F-5







CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE MONTHS ENDED FEBRAUARY 28, 2010
 (Currency expressed in United States Dollars (“US$”))
 (Unaudited)














NOTE-1                      BASIS OF PRESENTATION





The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with both accounting principles generally accepted in the United States (“GAAP”) and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.





In the opinion of management, the consolidated balance sheet as of May 31, 2009 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended February 28, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year ending May 31, 2010 or for any future periods.





These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended May 31, 2009.




NOTE-2                   ORGANIZATION AND BUSINESS BACKGROUND





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





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





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








NOTE-3                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





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





l
Use of estimates





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





l
Basis of consolidation





The unaudited condensed consolidated financial statements include the financial statements of CSGH and its subsidiaries. All significant inter-company balances and transactions among CSGH and its subsidiaries have been eliminated upon consolidation.






F-6




CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE MONTHS ENDED FEBRAUARY 28, 2010
 (Currency expressed in United States Dollars (“US$”))
 (Unaudited)


l
Revenue recognition





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





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





l
Cash and cash equivalents





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





l
Accounts receivable





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





l
Inventories





Inventories include material, labor and manufacturing overhead and are stated at lower of cost or market value, cost being determined on a weighted average method. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of February 28, 2010, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.





l
Technical know-how





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





l
Property, plant and equipment





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





Depreciable life

Residual valueBuilding
40 years

5%Plant and machinery
5-40 years

5%Office equipment
5 years

5%Motor vehicle
5 years

5%








F-7


CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE MONTHS ENDED FEBRAUARY 28, 2010
 (Currency expressed in United States Dollars (“US$”))
 (Unaudited)





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





l
Valuation of long-lived assets





Long-lived assets primarily include technical know-how and property, plant and equipment. In accordance with ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets,” the Company periodically reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. Determining the fair value of long-lived assets includes significant judgment by management, and different judgments could yield different results. There has been no impairment as of February 28, 2010.





l
Comprehensive income





ASC Topic 220, “Comprehensive Income” establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during the period from non-owner sources. Accumulated comprehensive income consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.





l
Income taxes





The Company adopts the ASC Topic 740, “Income Taxes” regarding accounting for uncertainty in income taxes which prescribes the recognition threshold and measurement attributes for financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. In addition, the guidance requires the determination of whether the benefits of tax positions will be more likely than not sustained upon audit based upon the technical merits of the tax position. For tax positions that are determined to be more likely than not sustained upon audit, a company recognizes the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not determined to be more likely than not sustained upon audit, a company does not recognize any portion of the benefit in the financial statements. The guidance provides for de-recognition, classification, penalties and interest, accounting in interim periods and disclosure.





For the nine months ended February 28, 2010 and 2009, the Company did not have any interest and penalties associated with tax positions. As of February 28, 2010, the Company did not have any significant unrecognized uncertain tax positions.





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





l
Net income per share





The Company calculates net income per share in accordance with ASC Topic 260,“Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.






F-8




CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE MONTHS ENDED FEBRAUARY 28, 2010
 (Currency expressed in United States Dollars (“US$”))
 (Unaudited)


l
Foreign currencies translation





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





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





In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”,, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.





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


Nine months ended February 28,2010


2009Period-end RMB:US$1 exchange rate


6.8367



6.8488Average monthly RMB:US$1 exchange rate


6.8386



6.8581





l
Segment reporting





ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in the financial statements. The Company operates one reportable business segment in the PRC.





l
Fair value measurement





ASC Topic 820 “Fair Value Measurements and Disclosures” ("ASC 820"), establishes a new framework for measuring fair value and expands related disclosures. Broadly, ASC 820 framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820 establishes a three-level valuation hierarchy based upon observable and non-observable inputs. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.





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






F-9




CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE MONTHS ENDED FEBRAUARY 28, 2010
 (Currency expressed in United States Dollars (“US$”))
 (Unaudited)


l
Financial instruments





Cash and cash equivalents, accounts receivable, deposits and prepayments, accounts payable, income tax payable, other payables and accrued liabilities are carried at cost which approximates fair value. Any changes in fair value of assets or liabilities carried at fair value are recognized in other comprehensive income for each period.





l
Recent accounting pronouncements





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





In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force)” which amends ASC 605-25, “Revenue Recognition: Multiple-Element Arrangements.” ASU No. 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocate consideration to each unit of accounting in the arrangement. This ASU replaces all references to fair value as the measurement criteria with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual value method for determining the allocation of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded disclosures. This ASU will become effective for us for revenue arrangements entered into or materially modified on or after April 1, 2011. Earlier application is permitted with required transition disclosures based on the period of adoption. The Company is currently evaluating the application date and the impact of this standard on its consolidated financial statements.





In September 2009, the FASB issued certain amendments as codified in ASC 605-25, “Revenue Recognition; Multiple-Element Arrangements.” These amendments provide clarification on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. An entity is required to allocate revenue in an arrangement using estimated selling prices of deliverables in the absence of vendor-specific objective evidence or third-party evidence of selling price. These amendments also eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The amendments significantly expand the disclosure requirements for multiple-deliverable revenue arrangements. These provisions are to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. The Company is currently evaluating the impact of these amendments to its consolidated financial statements.





In November 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets,” which formally codifies FASB Statement No. 166, “Accounting for Transfers of Financial Assets.” ASU 2009-16 is a revision to SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transfer of financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. The provisions are effective January 1, 2010, for a calendar year-end entity, with early application not being permitted. Adoption of these provisions is not expected to have a material impact on the Company’s consolidated financial statements.








F-10




CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE MONTHS ENDED FEBRAUARY 28, 2010
 (Currency expressed in United States Dollars (“US$”))
 (Unaudited)





NOTE-4                   ACCOUNTS RECEIVABLE, NET





The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, the Company has determined that no allowance for doubtful accounts is required for the nine months ended February 28, 2010 and 2009.








NOTE-5                   TECHNICAL KNOW-HOW





In March 2009, the Company’s subsidiary, Dalian Xinyang High-Tech Development Co. Ltd (”DLXY”) entered into an agreement (the “Agreement”) with an independent third party, Mr. Wang Ka Gui to acquire the technology to develop a new product, lithium iron phosphate, which is used as anode material for the new generation of lithium ion batteries. Pursuant to the Agreement, Mr. Wang Ka Gui agreed not to re-sell or disclose to third party under the confidentiality covenant. The total purchase price of the technology was approximately $2,608,059 (equivalent to RMB17,800,000). The Company has determined that the technology has an estimated useful life of 15 years and is being amortized on a straight-line method over its useful life when its products are approved by the government agency. The approval was granted to the Company in late August 2009.





To make use of this technology, the Company has developed a production facility for the manufacturing purpose of lithium ion batteries under this technology and the development project is completed in September 2009 and will begin depreciating at the time when the assets are substantially complete and ready for their intended use.





Amortization expense for the three and nine months ended February 28, 2010 were $43,387 and $86,762 and recorded in cost of revenue.








NOTE-6                   PROPERTY, PLANT AND EQUIPMENT





Property, plant and equipment consisted of:





February 28, 2010


May 31, 2009(Unaudited)


(Audited)Building

$
6,308,373


$
6,308,373Plant and machinery


15,040,249



11,181,025Office equipment


206,302



205,467Motor vehicle


34,816



34,816Construction in progress


-



1,540,220Foreign translation difference


2,154,523



2,187,53623,744,263



21,457,437Less: accumulated depreciation


(2,668,030
)


(1,696,209
)Less: foreign translation difference


(128,252
)


(131,109
)Property, plant and equipment, net

$
20,947,981


$
19,630,119





Depreciation expenses for the three months ended February 28, 2010 and 2009 were $397,872 and $166,711, which included $333,260 and $102,340 in cost of revenue, respectively.





Depreciation expenses for the nine months ended February 28, 2010 and 2009 were $971,821 and $499,419, which included $778,112and $306,634 in cost of revenue, respectively.






F-11


CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE MONTHS ENDED FEBRAUARY 28, 2010
 (Currency expressed in United States Dollars (“US$”))
 (Unaudited)





NOTE-7                   OTHER PAYABLES AND ACCRUED LIABILITIES





Other payables and accrued liabilities consisted of:





February 28, 2010


May 31, 2009(Unaudited)


(Audited)Welfare payable

$
292,760


$
293,262Accrued operating expense


187,304



126,209Payable to equipment vendor


-



83,623Purchase price payable for technical know-how


-



391,209VAT payable


267,999



-Other payable


128,000



128,000Other payables and accrued liabilities

$
876,063


$
1,022,303








NOTE-8                   INCOME TAXES





For the nine months ended February 28, 2010 and 2009, the local (“United States of America”) and foreign components of income before income taxes were comprised of the following:





Nine months ended February 28,2010


2009Tax jurisdiction from:– Local

$
(183,008
)

$
(209,456
)– Foreign


8,625,457



8,615,722Income before income taxes

$
8,442,449


$
8,406,266





The provision for income taxes consisted of the following:





Nine months ended February 28,2010


2009Current tax:– Local

$
-


$
-– Foreign


2,160,300



2,173,840Deferred tax:– Local


-



-– Foreign


-



-Income tax expense

$
2,160,300


$
2,173,840






F-12




CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE MONTHS ENDED FEBRAUARY 28, 2010
 (Currency expressed in United States Dollars (“US$”))
 (Unaudited)


The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company operates in various countries: United States of America and the PRC that are subject to tax in the jurisdictions in which they operate, as follows:





United States of America





The Company is registered in the State of Delaware and is subject to the tax laws of the United States of America.





As of February 28, 2010, the operation in the United States of America incurred $1,145,868 of cumulative net operating losses carryforwards for federal tax purposes, which are available to offset future taxable income. The Company has provided for a full valuation allowance for any future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.





The PRC





The Company’s PRC subsidiaries are subject to the Corporate Income Tax governed by the Income Tax Law of the People’s Republic of China, at a statutory income tax rate of 25%.





The reconciliation of income tax rate to the effective income tax rate based on income before income taxes from the operation in the PRC for the periods ended February 28, 2010 and 2009 are as follows:





Nine months ended February 28,2010


2009Income before income taxes

$
8,625,457


$
8,615,722Income statutory tax rate


25
%


25
%Income taxes calculated at statutory income tax rate


2,156,364



2,153,931Non-deductible items


-



19,909Add: items not deductible to taxes- Provision and accrued expenses


1,371



-- Prior year’s adjustment


5,901



-- Amortization of technical know-how


(3,336
)Income tax expense

$
2,160,300


$
2,173,840





The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of February 28, 2010 and May 31, 2009:





February 28, 2010


May 31, 2009(Unaudited)


(Audited)Deferred tax assets:- Net operating loss carryforwards

$
389,595


$
327,372Less: valuation allowance


(389,595
)


(327,372
)Deferred tax assets

$
-


$
-





Management believes that it is more likely than not that the deferred tax assets will not be fully realizable in the future. Accordingly, the Company provided for a full valuation allowance against its deferred tax assets of $389,595 as of February 28, 2010. During the nine months ended February 28, 2010, the valuation allowance increased by $62,223, primarily relating to net operating loss carryforwards from the local tax regime.





F-13


CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE MONTHS ENDED FEBRAUARY 28, 2010
 (Currency expressed in United States Dollars (“US$”))
 (Unaudited)





NOTE-9                   CONCENTRATIONS OF RISK





The Company is exposed to the following concentrations of risk:





(a)         Major customers





For the three and nine months ended February 28, 2010 and 2009, the customer who accounts for 10% or more of revenues of the Company is presented as follows:





Three months ended February 28, 2010

February 28, 2010Revenues

Percentage

of revenues

Trade accounts receivableCustomer B

$
2,344,273

22%

$
1,000,309Customer F


1,985,111

18%


293,511Customer D


1,556,554

14%


356,055Customer E


1,484,985

14%


286,133Total:

$
7,370,923

68%

$
1,936,008Nine months ended February 28, 2010

February 28, 2010Revenues

Percentage

of revenues

Trade accounts receivableCustomer B

$
6,714,775

22%

$
1,000,309Customer F


4,835,934

16%


293,511Customer E


4,676,241

15%


286,133Customer D


4,256,748

14%


356,055Total:

$
20,483,698

67%

$
1,936,008





Three months ended February 28, 2009

February 28, 2009Revenues

Percentage

of revenues

Trade accounts receivableCustomer C

$
3,082,986

35%

$
-Customer A


2,463,444

28%


1,173,726Customer D


1,744,771

20%


1,360,853Customer E


971,763

11%


-Total:

$
8,262,964

94%

$
2,534,579








F-14




CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE MONTHS ENDED FEBRAUARY 28, 2010
 (Currency expressed in United States Dollars (“US$”))
 (Unaudited)


Nine months ended February 28, 2009

February 28, 2009Revenues

Percentage

of revenues

Trade accounts receivableCustomer B

$
8,019,713

29%

$
-Customer A


7,340,123

27%


1,173,726Customer C


5,254,839

19%


-Customer D


3,747,643

14%


1,360,853Total:

$
24,362,318

89%

$
2,534,579





For the three and nine months ended February 28, 2010 and 2009, 100% of the Company’s revenues were derived from customers located in the PRC.





(b)
Major vendors





For the three and nine months ended February 28, 2010 and 2009, the vendor who accounts for 10% or more of purchases of the Company is presented as follows:





Three months ended February 28, 2010

February 28, 2010Purchases

Percentage

of purchase

Accounts

payableVendor A

$
5,326,116

71%

$
-Vendor B


1,292,574

17%


-Total:

$
6,618,690

88%

$
-





Nine months ended February 28, 2010

February 28, 2010Purchases

Percentage

of purchase

Accounts

payableVendor A

$
8,355,051

44%

$
-Vendor C


5,285,420

28%


-Vendor B


4,310,843

23%


-Total:

$
17,951,314

95%

$
-





Three months ended February 28, 2009

February 28, 2009Purchases

Percentage

of purchase

Accounts

payableVendor B

$
1,718,556

37%

$
-Vendor C


1,643,720

35%


817,661Vendor A


1,304,606

28%


-Total:

$
4,666,882

100%

$
817,661






F-15




CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE MONTHS ENDED FEBRAUARY 28, 2010
 (Currency expressed in United States Dollars (“US$”))
 (Unaudited)





Nine months ended February 28, 2009

February 28, 2009Purchases

Percentage

of purchase

Accounts

payableVendor A

$
6,144,297

48%

$
-Vendor B


4,354,794

34%


-Vendor C


2,227,384

18%


817,661Total:

$
12,726,475

100%

$
817,661





For the three and nine months ended February 28, 2010 and 2009, 100% of the Company’s purchases were derived from vendors located in the PRC.





(c)         Credit risk





Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.





(d)         Exchange rate risk





The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates against US$, the value of the RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.





(e)         Economic and political risks





The Company's operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.





The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.








NOTE-10                      COMMITMENTS AND CONTINGENCIES





(a)         Operating lease commitment





The Company leases an office premise under a non-cancelable operating lease for a term of 10 years, due July 25, 2010. Costs incurred under this operating lease are recorded as rental expense and totaled approximately $5,484 and $5,103 for the nine months ended February 28, 2010 and 2009.





As of February 28, 2010, the Company has the future minimum rental payments of $3,047 under the operating lease agreement within the next 12 months.





(b)         Capital commitment





On June 9, 2007, the Company’s subsidiary, DLXY entered into an African Mining Project Contract of Cooperation (the “Purchase Agreement”) with Shengbao Group and South African Shengbao Mining Enterprises (“Shengbao”). Pursuant to the Purchase Agreement, DLXY is obliged to purchase the prospecting and mining rights of a cobalt ore mine for a purchase price of $2 million over a term of 15 years. As of February 28, 2010, the Company had the capital commitment of $2 million in the purchase of the prospecting and mining rights which was contracted for but not provided in the financial statements.








F-16








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





Results of Operations





Three Months Ended February 28, 2010 and February 28, 2009





Net Revenue





Net revenue for the three months ended February 28, 2010 was $10,808,702, an increase of $2,001,518 or 23% from net revenue of $8,807,184 for the comparable period in 2009. The increase resulted from the introduction of a new product, lithium iron phosphate, in October 2009, increased customer demand and hence increased sales volume.





Cost of Revenue





Cost of revenue for the three months ended February 28, 2010 was $7,427,144, an increase of $1,865,588 or 34% from $5,561,556 for the comparable period in 2009.  This increase resulted from the increase in demand for materials for the increase of sales volume and the increase in the unit prices of raw materials.





Gross Profit





Gross profit for the three months ended February 28, 2010 was $3,381,558, an increase of $135,930 or 4% from $3,245,628 for the comparable period in 2009. The increase in gross profit was primarily due to the combined effect of the increase of profit margin from the new product, lithium iron phosphate, and the increase in unit prices for the raw materials for our existing products.





Sales and Marketing Expenses





Sales and marketing expenses for the three months period ended February 28, 2010 totaled $30,057, compared to $94,586 for the three months ended February 28, 2009. This represents a decrease of $64,529 or 68% for the three months period in 2010 compared to the same period in 2009. The decrease was primarily attributable to the one-off advertising expenses during the three months period ended February 28, 2009.





General and Administrative Expenses





General and administrative expenses for the three months ended February 28, 2010 was $311,932, an increase of $15,625 or 5% from $296,307 for the comparable period in 2009. The increase was primarily attributable to the one-off repair and maintenance expense during the three months period ended February 28, 2009.





Research and Development Expenses





Research and development expenses for the three months ended February 28, 2010 were $26,328, an increase of $792 or 3% compared to $25,536 for the comparable period in 2009. The increase was primarily attributable to the increase of average wages in 2010 compared to the same period in 2009.





Depreciation Expenses





Depreciation expenses for the three months ended February 28, 2010 were $64,612, an increase of $241 or 0.37 % compared to $64,371 for the same period in 2009. There was no significant fluctuation for the depreciation expenses.





Income From Operations





Income from operations for the three months ended February 28, 2010 was $2,948,629, an increase of $183,801 or 7% compared to $2,764,828 for the same period in 2009. This increase was resulted primarily from the increase in sales volume and decrease of operating expenses in 2010 compared to the same period in 2009.





Other Income





Other income for the three months ended February 28, 2010 was $9,414, an increase of $3,042 or 48% as compared to $6,372 for the same period in 2009.The increase resulted primarily from an increase in interest income derived from the increase of average cash balances in our bank accounts during the three months period ended February 28, 2010 compared to the same period in 2009.





Income Taxes





Provision for income tax expenses was $756,920 for the three months ended February 28, 2010, an increase of $19,384 or 3% as compared to $737,536 for the same period in 2009. The increase of income tax expenses was primarily due to increase of taxable income in 2010 compared to the same period in 2009.





3





Foreign Currency Translation (Loss) Gain





The foreign currency translation loss for the three months ended February 28, 2010 was $41,340, a decrease of $9,259 or 18% as compared to $50,599 for the same period in 2009. The decrease was resulted from a slight fluctuation in exchange rate of Renminbi Yuan against the U.S. dollar.





Net Income





Net income for the three months ended February 28, 2010 was $2,201,123, an increase of $167,459 or 8% as compared to the net income of $2,033,664 for the comparable period in 2009.








Nine Months Ended February 28, 2010 and February 28, 2009





Net Revenue





Net revenue for the nine months ended February 28, 2010 was $30,232,058, an increase of $2,831,766 or 10% from net revenue of $27,400,292 for the same period in 2009. The increase was resulted from an introduction of our new product, lithium iron phosphate, in October 2009, increased customer demand and hence increased sales volume.





Cost of Revenue





Cost of revenue for the nine months ended February 28, 2010 was $20,760,441, an increase of $3,548,714 or 21 % from $17,211,727 for the same period in 2009. The increase in cost of revenue was primarily attributable to the combined effects of increase in sales volume and the increase in the unit prices of raw materials for the existing products.





Gross Profit





Gross profit for the nine months ended February 28, 2010 was $ 9,471,617, a decrease of $716,948 or 7% from $10,188,565 for the comparable period in 2009. The decrease in gross profit was primarily attributable to the significant increase in the unit prices of raw materials in 2010 compared to the same period in 2009.





Sales and Marketing Expenses





Sales and marketing expenses for the nine months ended February 28, 2010 totaled $83,195, compared to $559,881 for the same period in 2009. This represents a decrease of $476,686 or 85% for the nine months period compared to 2009. The decrease was primarily attributable to the one-off advertising and promotion expenses of $559,000 during the nine months period ended February 28, 2009.





General and Administrative Expenses





General and administrative expenses for the nine months ended February 28, 2010 were $700,991, a decrease of $277,807 or 28% from $978,798 for the same period in 2009. The decrease was primarily attributable to the one-off repair and maintenance expenses of $210,000 for the nine months period ended February 28, 2009.





Research and Development Expenses





Research and development expenses for the nine months ended February 28, 2010 were $77,501, an increase of $1,678 or 2% compared to $75,823 for the same period in 2009. The increase was primarily attributable to the increase in average wages in 2010 compared to the same period in 2009.





Depreciation Expenses





Depreciation expenses for the nine months ended February 28, 2010 were $193,709, an increase of $924 or 0.48% compared to $192,785 for the same period in 2009. There was no significant fluctuation in the depreciation expense.






4







Income from Operations





Income from operations for the nine months ended February 28, 2010 was $8,416,221 an increase of $34,943 or 0.4 % compared to $8,381,278 for the same period in 2009. There was no significant fluctuation in the income from operations.





Other Income





Other income for the nine months ended February 28, 2010 was $26,228, an increase of $1,240 or 5% as compared to $24,988 for the comparable period in 2009.  The increase resulted primarily from more interest income derived from cash in our bank accounts.   Our average bank balance was higher in 2010 for the nine months period compared to 2009.





Income Taxes





Provision for income tax expenses was $2,160,300 for the nine months ended February 28, 2010, a decrease of $13,540 or 0.6% as compared to $2,173,840 for the same period in 2009.There was no significant fluctuation in the income taxes.





Foreign Currency Translation Gain (Loss)





The foreign currency translation loss for the nine months ended February 28, 2010 was ($52,300), a decrease of $416,745 or 114% as compared to the foreign currency translation gain of $364,445 for the same period in 2009.  The decrease was resulted from the slowdown in appreciation of the Renminbi against the U.S. dollar in 2010. The minimal fluctuations of appreciation of Renminbi in 2010 resulted in a small amount of foreign currency translation loss for the nine months ended February 28, 2010.





Net Income





Net income for the nine months ended February 28, 2010 was $6,282,149, an increase of $49,723 or 0.8% as compared to $6,232,426 for the same period in 2009.





Liquidity and Capital Resources





Cash and Cash Equivalents





Our cash and cash equivalents were $9,209,953 at the beginning of the nine months ended February 28, 2010 has increased to $ 12,481,120, increased by $3,271,167 or 35% at the end of the nine months period ended February 28, 2010. This net change in cash and cash equivalents represented the combined effects of cash generated of $5,608,038 from operating activities and cash used in $2,322,902 from investing activities in 2010.





Net cash provided by operating activities





Net cash provided by our operating activities was $5,608,038 for the nine months ended February 28, 2010, a decrease of $3,687,617 or 40% as compared to the cash of $9,295,655 provided by operating activities for the same period in 2009. This decrease was primarily due to the growth in sales revenue with the increase in accounts receivable by $1,093,057, the decrease in inventories by $436,813, the increase in value-added tax payable by $402,760, and the increase in income tax payable by $32,795 and offset by the increase in deposits and prepayments by $242,740, the decrease in other payable and accrued liabilities by $423,155 and the decrease in accounts payable by $846,110 during the period.





Net cash used in investing activities





Net cash used in investing activities was $2,322,902 for the nine months ended February 28, 2010. The cash outflow was primarily due to the payments for construction of production lines and purchase of plant and equipment during the period.





Net cash used in financing activities





There was no net cash generated or used for financing activities for the nine months ended February 28, 2010.





Income Taxes





Cash paid for income tax expense was $2,127,504 for the nine months ended February 28, 2010.





Trends





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





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









5




Inflation





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





Material Commitments for Capital Expenditures





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





General





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





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





Contractual Obligations and Commitments





We leased an office premise under a non-cancelable operating lease agreement for a period of 10 years which is due on July 25, 2010. The annual lease payment is $6,698.





On June 9, 2007, our subsidiary, DLXY entered into an African Mining Project Contract of Cooperation (the “Purchase Agreement”) with Shengbao Group and South African Shengbao Mining Enterprises (“Shengbao”). Pursuant to the Purchase Agreement, DLXY is obliged to purchase the prospecting and mining rights of a cobalt ore mine for a purchase price of $2 million over a term of 15 years. As of February 28, 2010, DLXY had a capital commitment of $2 million for the purchase of the prospecting and mining rights which was contracted for but not provided in the financial statements.





Critical accounting policies and estimates





Revenue recognition





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





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








Account receivables and allowance for doubtful accounts





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








6





New Financial Accounting Pronouncements





In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140” ("FAS 166"). FAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. FAS166 is effective for fiscal years beginning after November 15, 2009. The Company will adopt FAS 166 in fiscal 2010 and is evaluating the impact it will have on the consolidated results of the Company.





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





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





In July 2009, the FASB issued SFAS No. 168, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS 168 codified all previously issued accounting pronouncements, eliminating the prior hierarchy of accounting literature, in a single source for authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168, now ASC Topic 105-10 “Generally Accepted Accounting Principles”, is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this pronouncement did not have an effect on the Company’s condensed consolidated financial statements.





In August 2009, the FASB issued an update of ASC Topic 820, “Measuring Liabilities at Fair Value”. The new guidance provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using prescribed techniques. The Company adopted the new guidance in the third quarter of 2009 and it did not materially affect the Company’s financial position and results of operations.





In September 2009, the FASB issued certain amendments as codified in ASC 605-25, “Revenue Recognition; Multiple-Element Arrangements.” These amendments provide clarification on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. An entity is required to allocate revenue in an arrangement using estimated selling prices of deliverables in the absence of vendor-specific objective evidence or third-party evidence of selling price. These amendments also eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The amendments significantly expand the disclosure requirements for multiple-deliverable revenue arrangements. These provisions are to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. The Company is currently evaluating the impact of these amendments to its consolidated financial statements.





In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force)” which amends ASC 605-25, “Revenue Recognition: Multiple-Element Arrangements.” ASU No. 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocate consideration to each unit of accounting in the arrangement. This ASU replaces all references to fair value as the measurement criteria with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual value method for determining the allocation of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded disclosures. This ASU will become effective for us for revenue arrangements entered into or materially modified on or after April 1, 2011. Earlier application is permitted with required transition disclosures based on the period of adoption. The Company is currently evaluating the application date and the impact of this standard on its condensed consolidated financial statements.




7










In November 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets,” which formally codifies FASB Statement No. 166, “Accounting for Transfers of Financial Assets.” ASU 2009-16 is a revision to SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transfer of financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. The provisions are effective January 1, 2010, for a calendar year-end entity, with early application not being permitted. Adoption of these provisions is not expected to have a material impact on the Company’s consolidated financial statements.





Item 3.                      Quantitative and Qualitative Disclosures About Market Risk.





Not applicable.





Item 4.                      Controls and Procedures.





Evaluation of our Disclosure Controls





As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.





Based upon their controls evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective at a reasonable assurance level.





Changes in Internal Control over Financial Reporting





There have been no changes in our internal controls over financial reporting during the fiscal quarter ended February 28, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





PART II – OTHER INFORMATION


Item 1.
Legal Proceedings.





We know of no material legal proceeding pending against us.





Item 1A.
Risk Factors.





Not applicable.





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





None.





Item 3.
Defaults Upon Senior Securities.





None.





Item 4.
(Removed and Reserved.)






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Item 5.
Other Information.





None.


Item 6.
Exhibits.





Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.





Exhibit No.

SEC Ref. No.

Title of Document1

31.1

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2

31.2

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.3

32.1

Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.4

32.2

Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.








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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 SUN GROUP HIGH-TECH CO.Date: April 14, 2010
By:
/s/ Bin WangName: Bin WangTitle: President, Chief Executive Officer and Chairman(Principle Executive Officer)





.Date: April 14, 2010
By:
/s/ Ming Fen LiuName: Ming Fen LiuTitle: Chief Financial Officer(Principle Executive Officer)















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