UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q








(Mark One)


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





For the Quarterly Period Ended February 28, 2011





or





 ̈
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 116015


(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).o  Yeso 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). o  Yes  þ No





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 55, 722,971 shares of common stock, $0.001 par value, issued and outstanding as of April 8, 2011.








TABLE OF CONTENTS




PART I – FINANCIAL INFORMATION




PageItem 1.
Financial Statements.
1Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
15Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
19Item 4.
Controls and Procedures.
19





PART II – OTHER INFORMATION





Item 1.
Legal Proceedings.
20Item 1A.
Risk Factors.
20Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
20Item 3.
Defaults Upon Senior Securities.
20Item 4.
(Removed and Reserved)
20Item 5.
Other Information.
20Item 6.
Exhibits.
20Signatures
21








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, 2011(Unaudited) and May 31, 2010(Audited)

2Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended February 28, 2011 and 2010

3Condensed Consolidated Statements of Cash Flows for the Nine Months Ended February 28, 2011 and 2010

4Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months ended February 28, 2011

5Notes to Condensed Consolidated Financial Statements

6-14






1
  CHINA SUN GROUP HIGH-TECH CO.
 CONDENSED CONSOLIDATED BALANCE SHEETS
 AS OF FEBRUARY 28, 2011 AND MAY 31, 2010
 (Currency expressed in United States Dollars (“US$”), except for number of shares)
 
 February 28, 2011


May 31, 2010(Unaudited)


(Audited)ASSETSCurrent assets:Cash and cash equivalents

$
25,400,563


$
18,017,266Accounts receivable, trade


3,026,827



2,793,038Inventories


550,154



1,218,336Deposits and prepayments


666,395



3,049Total current assets


29,643,939



22,031,689Non-current assets:Technical know-how, net


2,433,541



2,475,298Property, plant and equipment, net


20,150,743



20,567,954TOTAL ASSETS

$
52,228,223


$
45,074,941LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:Accounts payable, trade

$
170,135


$
2,127,244Customer deposits


191,078



--Income tax payable


635,336



1,488,619Other payables and accrued liabilities


959,839



984,189Total liabilities


1,956,388



4,600,052Commitments and contingenciesStockholders’ equity:Convertible preferred stock, $0.001 par value; 20,000,000 shares authorized; none issued and outstanding, respectively


-



-Common stock, $0.001 par value; 100,000,000 shares authorized; 55,722,971 shares and 53,422,971 shares issued and outstanding as of February 28, 2011 and May 31, 2010, respectively


55,723



53,423Additional paid-in capital


11,647,029



9,585,204Accumulated other comprehensive income


4,745,751



3,043,344Statutory reserve


3,335,588



2,277,365Retained earnings


30,487,744



25,515,553Total stockholders’ equity


50,271,835



40,474,889TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
52,228,223


$
45,074,941
 
 See accompanying notes to condensed consolidated financial statements.
  2
  CHINA SUN GROUP HIGH-TECH CO.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2011 AND 2010
 (Currency expressed in United States Dollars (“US$”), except for number of shares)
 (Unaudited)
 
 Three months ended

February 28,


Nine months ended

February 28,2011


2010


2011


2010Revenues, net

$
13,359,930


$
10,808,702


$
37,753,217


$
30,232,058Cost of revenue (inclusive of depreciation and amortization)


8,753,182



7,427,144



25,367,854



20,760,441Gross profit


4,606,748



3,381,558



12,385,363



9,471,617Operating expenses:Sales and marketing


47,493



30,057



116,266



83,195Research and development


33,838



26,328



87,285



77,501General and administrative


858,580



376,544



3,454,394



894,700Total operating expenses


939,911



432,929



3,657,945



1,055,396INCOME FROM OPERATIONS


3,666,837



2,948,629



8,727,418



8,416,221Other income:Subsidy income


291



-



44,722



-Interest income


14,240



9,414



38,091



26,228INCOME BEFORE INCOME TAXES


3,681,368



2,958,043



8,810,231



8,442,449Income tax expense


(1,021,688
)


(756,920
)


(2,779,817
)


(2,160,300
)NET INCOME

$
2,659,680


$
2,201,123


$
6,030,414


$
6,282,149Other comprehensive income (loss):- Foreign currency translation gain (loss)


650,847



(41,340
)


1,702,407



(52,300
)COMPREHENSIVE INCOME

$
3,310,527


$
2,159,783


$
7,732,821


$
6,229,849Net income per share – Basic and diluted

$
0.05


$
0.04


$
0.11


$
0.12Weighted average common stock outstanding – Basic and diluted


55,639,638



53,422,971



54,693,341



53,422,971
 
 See accompanying notes to condensed consolidated financial statements.
 3
  CHINA SUN GROUP HIGH-TECH CO.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE NINE MONTHS ENDED FEBRUARY 28, 2011 AND 2010
 (Currency expressed in United States Dollars (“US$”))
 (Unaudited)
 
 Nine months ended

February 28,2011


2010Cash flows from operating activities:Net income

$
6,030,414


$
6,282,149Adjustments to reconcile net income to net cash provided by operating activities:Depreciation of property, plant and equipment


1,223,915



971,821Amortization of technical know-how


132,679



86,762Shares issued for services, non-cash


2,064,125



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


(125,965
)


(1,093,057
)Inventories


586,798



436,813Value-added tax, net


-



402,760Deposits and prepayments


(536,805
)


(242,740
)Accounts payable, trade


(1,999,474
)


(846,110
)Customer deposits


187,520



--Income tax payable


(892,542
)


32,795Other payables and accrued liabilities


(54,348
)


(423,155
)Net cash provided by operating activities


6,616,317



5,608,038Cash flows from investing activities:Purchase of plant and equipment


(52,513
)


(1,298,131
)Addition of construction in progress


-



(1,024,771
)Net cash used in investing activities


(52,513
)


(2,322,902
)Effect of exchange rate changes on cash and cash equivalents


819,493



(13,969
)NET CHANGE IN CASH AND CASH EQUIVALENTS


7,383,297



3,271,167CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


18,017,266



9,209,953CASH AND CASH EQUIVALENTS, END OF PERIOD

$
25,400,563


$
12,481,120SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes

$
3,742,036


$
2,127,504Cash 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.
  4
  CHINA SUN GROUP HIGH-TECH CO.
 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 FOR THE NINE MONTHS ENDED FEBRUARY 28, 2011
 (Currency expressed in United States Dollars (“US$”), except for number of shares)
 (Unaudited)
 
 Convertible preferred stock


Common stockNo. of shares


Amount


No. of shares


Amount


Additional

paid-in

capital


Accumulated

other

comprehensive

income


Statutory

reserve


Retained

earnings


Total

stockholders’

equityBalance as of June 1, 2010


--



--



53,422,971


$
53,423


$
9,585,204


$
3,043,344


$
2,277,365


$
25,515,553


$
40,474,889Stock-based compensation


--



--



2,300,000



2,300



2,061,825



--



--



--



2,064,125Net income for the period


--



--



--



--



--



--



--



6,030,414



6,030,414Appropriationsto statutoryreserve


--



--



--



--



--



--



1,058,223



(1,058,223
)


--Foreign currency translation adjustment


--



--



--



--



--



1,702,407



--



--



1,702,407Balance as of February 28, 2011


--


$
--



55,722,971


$
55,723


$
11,647,029


$
4,745,751


$
3,335,588


$
30,487,744


$
50,271,835
 
 See accompanying notes to condensed consolidated financial statements.
  5
 CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE NINE MONTHS ENDED FEBRUARY 28, 2011
 (Currency expressed in United States Dollars (“US$”), except for number of shares)
 (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 GAAP 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, 2010 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, 2011 are not necessarily indicative of the results to be expected for the entire fiscal year ending May 31, 2011 or for any future periods.
  These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended May 31, 2010.
  NOTE-2                      ORGANIZATION AND BUSINESS BACKGROUND
  China Sun Group High-Tech Co. 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 sale of cobaltosic oxide and lithium iron phosphate, both anode materials used in lithium ion rechargeable batteries.
  CSGH and its subsidiaries are hereinafter referred to as (the “Company” or "CSGH").
  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.
  ●
Use of estimates
 
 In preparing these condensed 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.
 ●
Basis of consolidation
 The condensed consolidated financial statements include the financial statements of CSGH and its subsidiaries. All significant inter-company balances and transactions within the CSGH have been eliminated upon consolidation.
 ●
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.
 
 The Company maintains cash and cash equivalent balances at a financial institution in the PRC, which are insured by China Citic Bank. The Company has cash concentration risk of $25,396,408 as of February 28, 2011.
 ●
Accounts receivable
 Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’ assessment of known requirements, aging of receivables, payment history, the customers’ current credit worthiness and the economic environment.
 ●
Inventories
 Inventories include material, labor and manufacturing overhead and are stated at lower of cost or market value, cost being determined on a weighted average method. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of February 28, 2011, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.
 6
 CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE NINE MONTHS ENDED FEBRUARY 28, 2011
 (Currency expressed in United States Dollars (“US$”), except for number of shares)
 (Unaudited)
 ●
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.
 
 Amortization expense for the three months ended February 28, 2011 and 2010 were $44,803 and $43,375, which was recorded in cost of revenue.
 
 Amortization expense for the nine months ended February 28, 2011 and 2010 were $132,679 and $86,762, which was recorded in cost of revenue.
 ●
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 vehicles
5 years

5%
 
 Expenditure for repairs and maintenance is expensed as incurred. When assets have been 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.
 
 Depreciation expense for the three months ended February 28, 2011 and 2010 were $413,766 and $397,872, which included $277,271 and $333,262 in cost of revenue, respectively.
 
 Depreciation expense for the nine months ended February 28, 2011 and 2010 were $1,223,915 and $971,821, which included $1,020,584 and $778,112 in cost of revenue, respectively.
 ●
Valuation of long-lived assets
 Long-lived assets primarily include technical know-how and property, plant and equipment. In accordance with Accounting Standards Codification (“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 charge for the periods presented.
 ●
Customer deposits
 The Company generally receives deposit payments from new customers in the normal course of business. Customer deposits are unsecured and interest-free, which are recognized in revenue when delivery has been received by the customers.
 ●
Revenue recognition
 In accordance with the ASC Topic 605,“Revenue Recognition”, the Company recognizes revenue when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.
 
 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.
 ●
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.
 7
 CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE NINE MONTHS ENDED FEBRUARY 28, 2011
 (Currency expressed in United States Dollars (“US$”), except for number of shares)
 (Unaudited)
  ●
Income taxes
 The provision for income taxes is determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this 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 basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any 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.
 
 ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in the financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
 
 For the nine months ended February 28, 2011 and 2010, the Company did not have any interest and penalties associated with tax positions. As of February 28, 2011, the Company did not have any significant unrecognized uncertain tax positions.
 
 The Company conducts substantially all of its 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 authority.
 ●
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.
 ●
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 the 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 the functional currency, 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:
 
 February 28, 2011


February 28, 2010Period-end RMB:US$1 exchange rate


6.5830



6.8367Average period RMB:US$1 exchange rate


6.7079



6.8386
 ●
Related parties
 Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
 ●
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. For the nine months ended February 28, 2011, the Company operated in one reportable business segment in the PRC.
 ●
Stock based compensation
 For non-employee stock based compensation, the Company adopts ASC Topic 505-50,“Equity-Based Payments to Non-Employees,” stock based compensation related to non-employees is accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable.
 8
 CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE NINE MONTHS ENDED FEBRUARY 28, 2011
 (Currency expressed in United States Dollars (“US$”), except for number of shares)
 (Unaudited)
  ●
Fair value of financial instruments
 Cash and cash equivalents, accounts receivable, deposits and prepayments, accounts payable, customer deposits, income tax payable, other payables and accrued liabilities are carried at cost which approximated fair value. Any changes in fair value of assets or liabilities carried at fair value are recognized in other comprehensive income for each period.
 
 The Company also follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures”("ASC 820-10"), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
 
 ·
Level 1: Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;
 
 ·
Level 2: Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. Black-Scholes Option-Pricing model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs; and
 
 ·
Level 3: Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.
 
 Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
  ●
Recent accounting pronouncements
 The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does 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 Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2009-13, “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force.” In the absence of vendor-specific objective evidence (VSOE) or other third party evidence (TPE) of the selling price for the deliverables in a multiple-element arrangement, this ASU requires companies to use an estimated selling price (ESP) for the individual deliverables. Companies are to apply the relative-selling price model for allocating an arrangement’s total consideration to its individual elements. Under this model, the ESP is used for both the delivered and undelivered elements that do not have VSOE or TPE of the selling price. The FASB also issued ASU No. 2009-14, “Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements,” which excludes the software from the scope of software revenue guidance if the software contained in the tangible product is essential to the tangible product’s functionality. Both ASUs are effective for fiscal year beginning in 2012, with earlier application permitted. The Company does not expect the adoption of this new accounting guidance to have a material impact on its consolidated financial statements.
 
 In July 2010, the FASB issued new accounting guidance that will require additional disclosures about the credit quality of loans, lease receivables and other long-term receivables and the related allowance for credit losses. Certain additional disclosures in this new accounting guidance will be effective for the Company on December 31, 2010 with certain other additional disclosures that will be effective on March 31, 2011. The Company does not expect the adoption of this new accounting guidance to have a material impact on its consolidated financial statements.
 
 NOTE-4                      ACCOUNTS RECEIVABLE, TRADE
 
 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, 2011 and 2010.
 
 NOTE-5                      OTHER PAYABLES AND ACCRUED LIABILITIES
 
 Other payables and accrued liabilities consisted of:
 
 February 28,

2011


May 31, 2010Welfare payable

$
432,567


$
416,832Accrued operating expense


129,388



116,849VAT payable


249,884



257,752Other payable


148,000



192,756Other payables and accrued liabilities

$
959,839


$
984,189
 
 NOTE-6                      STOCKHOLDERS’ EQUITY
 
 On September 20, 2010, the Company issued an aggregate of 2,050,000 shares of common stock to certain consultants for advisory and professional services at the current fair value of $0.87 per share, totaling $1,783,500.
 
 On December 31, 2010, the Company issued an aggregate of 250,000 shares of common stock to its CEO and CFO for executive compensation at the current fair value of $1.1225 per share, totaling $280,625.
 
 As of February 28, 2011, the issued and outstanding common stock of the Company is 55,722,971 shares.
 9
 CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE NINE MONTHS ENDED FEBRUARY 28, 2011
 (Currency expressed in United States Dollars (“US$”), except for number of shares)
 (Unaudited)
  NOTE-7                      INCOME TAXES
 
 For the nine months ended February 28, 2011 and 2010, the local (“United States of America”) and foreign components of income (loss) before income taxes were comprised of the following:
 
 Nine months ended February 28,2011


2010Tax jurisdiction from:– Local

$
(2,335,805
)

$
(183,008
)– Foreign


11,146,036



8,625,457Income before income taxes

$
8,810,231


$
8,442,449
 
 The provision for income taxes consisted of the following:
 
 Nine months ended February 28,2011


2010Current tax:– Local

$
-


$
-– Foreign


2,779,817



2,160,300Deferred tax:– Local


-



-– Foreign


-



-Income tax expense

$
2,779,817


$
2,160,300
 
 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, 2011, the operations in the United States of America incurred $3,516,120 of cumulative net operating loss 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 carry-forwards 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 nine months ended February 28, 2011 and 2010 are as follows:
 
 Nine months ended February 28,2011


2010Income before income taxes

$
11,146,036


$
8,625,457Statutory income tax rate


25
%


25
%Income taxes calculated at statutory income tax rate


2,786,509



2,156,364Tax effect on non-deductible items


4,489



1,371Tax effect on non-taxable items


(11,181
)


(3,336
)Prior year’s adjustment


-



5,901Income tax expense

$
2,779,817


$
2,160,300
 10
 CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE NINE MONTHS ENDED FEBRUARY 28, 2011
 (Currency expressed in United States Dollars (“US$”), except for number of shares)
 (Unaudited)
  The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of February 28, 2011 and May 31, 2010:
 
 February 28, 2011


May 31, 2010Deferred tax assets:- Net operating loss carry-forwards

$
1,195,481


$
401,307Less: valuation allowance


(1,195,481
)


(401,307
)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 $1,195,481 as of February 28, 2011. During the nine months ended February 28, 2011, the valuation allowance increased by $794,174, primarily relating to net operating loss carry-forwards from the local tax regime.
 
 NOTE-8                      SEGMENT INFORMATION BY PRODUCTS
 
 The Company operates in one reportable operating segment in the production and sale of anode materials for lithium ion batteries in the PRC, as defined by ASC Topic 280. Summarized financial information concerning the Company’s major products is shown in the following table for the three and nine months ended February 28, 2011 and 2010:
 
 Three months ended February 28,2011


2010Lithium iron phosphate

$
3,828,224


$
1,579,166Cobaltosic oxide


9,531,706



9,229,536$
13,359,930


$
10,808,702
 
 Nine months ended February 28,2011


2010Lithium iron phosphate

$
9,764,849


$
2,327,841Cobaltosic oxide


27,988,368



27,904,217$
37,753,217


$
30,232,058
 
 All of the customers are located in the PRC for the periods presented.
 
 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, 2011 and 2010, the customers who account for
 10% or more of revenues of the Company are presented as follows:
 
 Three months ended February 28, 2011

February 28, 2011Revenues


Percentage

of revenues

Trade accounts receivableCustomer A

$
2,097,611



16
%

$
728,767Customer B


1,897,148



14
%


--Customer C


1,750,724



13
%


141,438Customer D


1,636,534



12
%


615,707Customer E


1,455,164



11
%


--Total:

$
8,837,181



66
%

$
1,485,912
 11
 CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE NINE MONTHS ENDED FEBRUARY 28, 2011
 (Currency expressed in United States Dollars (“US$”), except for number of shares)
 (Unaudited)
  Nine months ended February 28, 2011


February 28, 2011Revenues


Percentage

of revenues


Trade accounts receivableCustomer A

$
5,883,623



16
%

$
728,767Customer D


5,174,977



14
%


615,707Customer F


4,746,223



13
%


--Customer C


4,410,112



12
%


141,438Customer E


3,729,575



10
%


--Total:

$
23,944,510



65
%

$
1,485,912
  Three months ended February 28, 2010


February 28, 2010Revenues


Percentage

of revenues


Trade accounts receivableCustomer D

$
2,344,273



22
%

$
1,000,309Customer A


1,985,111



18
%


293,511Customer E


1,556,554



14
%


356,055Customer F


1,484,985



14
%


286,133Total:

$
7,370,923



68
%

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

February 28, 2010Revenues


Percentage

of revenues

Trade accounts receivableCustomer D

$
6,714,775



22
%

$
1,000,309Customer A


4,835,934



16
%


293,511Customer F


4,676,241



15
%


286,133Customer E


4,256,748



14
%


356,055Total:

$
20,483,698



67
%

$
1,936,008
  (b)
Major vendors
 
 For the three and nine months ended February 28, 2011 and 2010, the vendors who account for 10% or more of purchases of the Company are presented as follows:
 
 Three months ended February 28, 2011

February 28, 2011Purchases


Percentage

of purchases

Accounts

PayableVendor A

$
3,288,297



40
%

$
--Vendor C


1,810,174



22
%


--Vendor B


1,683,052



21
%


--Total:

$
6,781,523



83
%

$
--
 12
 CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE NINE MONTHS ENDED FEBRUARY 28, 2011
 (Currency expressed in United States Dollars (“US$”), except for number of shares)
 (Unaudited)
  Nine months ended February 28,

2011

February 28, 2011Purchases


Percentage

of purchases

Accounts

PayableVendor A

$
8,870,208



39
%

$
--Vendor C


5,271,443



23
%


--Vendor B


4,800,740



21
%


--Total:

$
18,942,391



83
%

$
--
 
 Three months ended February 28, 2010

February 28, 2010Purchases


Percentage

of purchases

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 purchases

Accounts

PayableVendor A

$
8,355,051



44
%

$
--Vendor C


5,285,420



28
%


--Vendor B


4,310,843



23
%


--Total:

$
17,951,314



95
%

$
--
 
 (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 the US$. To date, the majority of revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between the US$ and the RMB. If the RMB depreciates against the 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 it 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.
 13
 CHINA SUN GROUP HIGH-TECH CO.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE NINE MONTHS ENDED FEBRUARY 28, 2011
 (Currency expressed in United States Dollars (“US$”), except for number of shares)
 (Unaudited)
  NOTE-10                      COMMITMENTS AND CONTINGENCIES
 
 The Company’s subsidiary operating in PRC was committed under several non-cancelable operating leases for the terms from 5 to 10 years, with monthly rentals, due through July 2020. Costs incurred under these operating leases are recorded as rental expense and totaled approximately $12,050 and $5,484 for the nine months ended February 28, 2011 and 2010.
 
 As of February 28, 2011, the Company has the future minimum rental payments under the operating lease agreements in the next five years and thereafter, as follow:
 
 Years ending February 28,2012


16,7102013


16,7102014


16,7102015


16,7102016


14,431Thereafter


48,609Total:

$
129,880
 
 NOTE-11 SUBSEQUENT EVENTS
 
 In accordance with ASC Topic 855, “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company has evaluated all events or transactions that occurred after February 28, 2011 up through the date was the Company issued the audited consolidated financial statements. During the period, the Company did not have any material recognizable subsequent events.
                  14
  Item 2.                 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
  We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under this item as well as items elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.
  The nature of our business makes predicting the future trends of our revenues, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the factors discussed above in the section entitled “Risk Factors” and the following:
  •           the effect of political, economic, and market conditions and geopolitical events;
 •           legislative and regulatory changes that affect our business;
 •           the availability of funds and working capital;
 •           the actions and initiatives of current and potential competitors;
 •           investor sentiment; and
 •           our reputation.
 
 We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.
  The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere in this Report on Form 10-Q.
  Overview
  China Sun Group High-Tech Co. is a large producer of cobaltosic oxide and lithium cobalt oxide, both anode materials for lithium ion batteries. In 2010 the Company also began producing and selling lithium iron phosphate in quantity. The Company's sizable production capacity will help it meet the growing demand for anode materials as the demand for lithium batteries increases. Lithium batteries are becoming widely used due to their power capacity, long service life, and compatibility with carbon cathode materials, necessary for battery circuitry. The expected growth of the lithium ion battery industry affords the Company a business opportunity for increasing revenue. In addition, our current operations are solely in the PRC, which provides us access to low-cost skilled labor, raw materials, machinery and facilities and enables us to price our products competitively in an increasingly price-sensitive market.
  The Company provides a comprehensive selection of cobalt products including battery cobalt carbonate, nano-level cobaltosic oxide, and high-crystallinity ball lithium cobalt oxide.  The Company’s main products are cobaltosic oxide (Co3O4) and lithium iron phosphate (LiFePo4).  Beginning in fiscal 2010, the Company began producing lithium iron phosphate and planned to convert five of its twelve production lines to the production of lithium iron phosphate.  Sales of lithium iron phosphate to customers in quantity began in the second quarter of fiscal 2010.  On February 28, 2011, the Company had seven production lines for the production of cobaltosic oxide and lithium cobalt oxide and five production lines for the production of lithium iron phosphate. Three of the five lithium iron phosphate production lines are currently in production and two lines can be brought into production when market conditions allow. During the three and nine months ended February 28, 2011, the Company produced 304 and 889 tons of cobaltosic oxide, respectively, and 205 and 517.88 tons of lithium iron phosphate, respectively.
 15
 
 Results of Operations
  Three Months ended February 28, 2011 and 2010
  Net Revenue
  Net revenue for the three months ended February 28, 2011 was $13,359,930, an increase of $2,551,228 or 24% from net revenue of $10,808,702 for the comparable period in 2010. The increase in net revenue primarily resulted from an increase in sales of our new product, lithium iron phosphate.  Eighty-eight percent (88%) of the net revenue increase was attributed to an increase in sales of our new product, lithium iron phosphate. Sales of lithium iron phosphate for the three months ended February 28, 2011 was 205 tons, an increase of 131 tons or 177% from 74 tons for the comparable period in 2010, while there was no significant fluctuation in sales of cobaltosic oxide.
  Cost of Revenue
  Cost of revenue for the three months ended February 28, 2011 was $8,753,182, an increase of $1,326,038 or 18% from $7,427,144 for the comparable period in 2010.  This increase in cost of revenue resulted from the increase in sales.
  Gross Profit
  Gross profit for the three months ended February 28, 2011 was $4,606,748, an increase of $1,225,190 or 36% from $3,381,558 for the comparable period in 2010. The increase in gross profit was primarily due to increased sales of our new higher profit margin product, lithium iron phosphate. One hundred percent (100%) of the gross margin increase was attributed to an increase in sales of our new product, lithium iron phosphate.
  Sales and Marketing Expenses
  Sales and marketing expenses for the three months ended February 28, 2011 were $47,493, compared to $30,057 for the three months ended February 28, 2010. This represents an increase of $17,436 or 58% compared to the same period in 2010. The increase was primarily attributable to increased sales to meet customer demand.
  General and Administrative Expenses
    Research and Development Expenses
  Research and development expenses for the three months ended February 28, 2011 were $33,838, an increase of $7,510 or 28% compared to $26,328 for the comparable period in 2010. The increase was primarily attributable to an increase in average wages.
  Income from Operations
  Income from operations for the three months ended February 28, 2011 was $3,666,837, compared to $2,948,629 for the corresponding period in 2010. This represents an increase of $718,208 or 24% from the comparable period in 2010. The increase resulted primarily from the increase in sales and gross profit in the Company’s PRC subsidiaries.
  Income Taxes
  Provision for income tax expense was $1,021,688 for the three months ended February 28, 2011, an increase of $264,768 or 35% as compared to $756,920 for the corresponding period in 2010. The increase resulted primarily from the increase in sales and profit before taxation in the Company’s PRC subsidiaries.
  Net Income
  Net income for the three months ended February 28, 2011 was $2,659,680, an increase of $458,557 or 21% as compared to the net income of $2,201,123 for the corresponding period in 2010. The increase resulted primarily from the increase in sales in the Company’s PRC subsidiaries.
  16
  Nine months ended February 28, 2011 and 2010
  Net Revenue
  Net revenue for the nine months ended February 28, 2011 was $37,753,217, an increase of $7,521,159 or 25% from net revenue of $30,232,058 for the comparable period in 2010. The increase in net revenue primarily resulted from an increase in sales of our new product, lithium iron phosphate. Ninety-nine percent (99%) of the net revenue increase is attributed to an increase in sales of our new product, lithium iron phosphate. Sales of lithium iron phosphate for the nine months ended February 28, 2011 were 517.88 tons, an increase of 406.88 tons or 366% from 111 tons for the comparable period in 2010, while there was no significant fluctuation in sales of cobaltosic oxide.
  Cost of Revenue
  Cost of revenue for the nine months ended February 28, 2011 was $25,367,854, an increase of $4,607,413 or 22% from $20,760,441 for the comparable period in 2010.  This increase in cost of revenue resulted from the increase in sales.
  Gross Profit
  Gross profit for the nine months ended February 28, 2011 was $12,385,363, an increase of $2,913,746 or 31% from $9,471,617 for the comparable period in 2010. The increase in gross profit was primarily due to increased sales of our new higher margin product, lithium iron phosphate.
  Sales and Marketing Expenses
  Sales and marketing expenses for the nine months ended February 28, 2011 were $116,266, compared to $83,195 for the nine months ended February 28, 2010. This represents an increase of $33,071 or 40% compared to the same period in 2010. The increase was primarily attributable to increased sales as a result of increased customer demand.
  General and Administrative Expenses
  General and administrative expenses for the nine months ended February 28, 2011 were $3,454,394, an increase of $2,559,694 or 286% from $894,700 for the comparable period in 2010. The increase in general and administrative expenses was primarily due to the share-based consultancy fee of $1,783,500 paid in September 2010, share-based executive compensation of $280,625 paid in December 2010 and higher legal and other professional expenses incurred during the nine months period ended February 28, 2011 compared to the corresponding period in 2010.
  Research and Development Expenses
  Research and development expenses for the nine months ended February 28, 2011 were $87,285, an increase of $9,784 or 13% compared to $77,501 for the comparable period in 2010. The increase was primarily attributable to an increase in average wages.
  Income from Operations
  Income from operations for the nine months ended February 28, 2011 was $8,727,418 compared to $8,416,221 for the nine months ended February 28, 2010. This represents an increase of $311,197 or 4% compared to the same period in 2010. The increase resulted primarily from the increase in sales in the Company’s PRC subsidiaries.
  Income Taxes
  Provision for income tax expense was $2,779,817 for the nine months ended February 28, 2011, an increase of $619,517 or 28 % as compared to $2,160,300 for the corresponding period in 2010. The increase resulted primarily from the increase in sales and hence profit before taxation in the Company’s PRC subsidiaries while the net operating loss of the Company in the United States of America increased primarily from the share-based consultancy fee of $1,783,500 paid during the nine months ended February 28, 2011.
  Net Income
  Net income for the nine months ended February 28, 2011 was $6,030,414, a decrease of $251,735 or 4% as compared to the net income of $6,282,149 for the corresponding period in 2010. The decrease in net income was primarily due to the share-based consultancy fee of $1,783,500 and the share-based executive compensation of $280,625 paid during the period.
  Liquidity and Capital Resources
  Cash and Cash Equivalents
  Our cash and cash equivalents were $18,017,266 at the beginning of the nine months ended February 28, 2011 and increased to $25,400,563 at the end of the nine months ended February 28, 2011, representing an increase of $7,383,297 or 41%. This net change in cash and cash equivalents represented the combined effects of cash generated in the total amount of $6,616,317 from operating activities, cash used in the total amount of $52,513 from investing activities and effects of exchange rate changes of $819,493 in 2011.
  Net cash provided by operating activities
  Net cash provided by operating activities was $6,616,317 for the nine months ended February 28, 2011, an increase of $1,008,279 or 18% as compared to of $5,608,038 provided by operating activities for the same period in 2010. This increase was primarily due to the decrease in inventories of $586,798 and the increase in customer deposits of $187,520 offset by an increase in accounts receivable of $125,965, the decrease in income tax payable of $892,542, the increase in deposits and prepayments of $536,805, the decrease in accounts payable of $1,999,474 and the decrease in other payables and accrued liabilities of $54,348 during the period.
  Net cash used in investing activities
  Net cash used in investing activities was $52,513 for the nine months ended February 28, 2011. The cash outflow was primarily attributable to the 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, 2011.
 
 17
 
 Income Taxes
  Cash paid for income tax expense was $3,742,036 for the nine months ended February 28, 2011.
  Inflation
  We believe that inflation did not have a material or significant impact on our revenue or our results of operations.
  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 may include debt financing, issuance of equity securities and entrance into some financing arrangements. There can be no assurance, however, that any of the financing arrangements described herein will be available and, if available, can be obtained on terms favorable to us.
  Contractual Obligations and Commitments
  We are committed under several non-cancelable operating lease agreements, with terms from five to ten years, due through July 25, 2020. Annual lease payments are $16,710 over the next four years, $14,431 for the fifth year and $48,609 for period thereafter until 2020. The Company has a minimum rental payment obligation totaling $129,880.
  During the fiscal year ended May 31, 2008, our subsidiary Dalian Xinyang High-Tech Development Co., Ltd. (DLXY) entered into an agreement to purchase an interest in a cobalt ore mine in the Congo, with the anticipation that such interests would provide us with an additional supply of raw material and would also enable us to sell these materials to other enterprises in this industry.  No payments were made under this agreement and the Company has abandoned this project.
  On November 30 2010, DLXY entered into a 2011 Supply Agreement for Dynamic Lithium Battery Materials, with Henan Huanyu Sai Er New Energy Technology Co., Ltd (“Huanyu”).  Pursuant to the terms of the Supply Agreement, we agreed to supply a minimum of 470 tons of lithium iron phosphate materials to Huanyu during the 2011 calendar year. As of February 28, 2011, we have supplied146.96 tons of lithium iron phosphate materials to Huanyu.  The purchase price of the lithium iron phosphate materials and other relevant commercial terms and conditions will be determined by the parties on a monthly basis.
  Critical Accounting Policies
  Revenue recognition
  In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured.
  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.
  Accounts receivables and allowance for doubtful accounts
  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.
 18
  Stock based compensation
  For non-employee stock based compensation, the Company adopts ASC Topic 505-50, “Equity-Based Payments to Non-Employees”, stock based compensation related to non-employees is accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with ASC 718.
  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 the 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 the functional currency, 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.
  New Financial Accounting Pronouncements
  In April 2010, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASU 2010-13 provides guidance on the classification of a share-based payment award as either equity or a liability. A share-based payment that contains a condition that is not a market, performance, or service condition is required to be classified as a liability. ASU 2010-13 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010 and is not expected to have a significant impact on the Company’s consolidated financial statements.
  In July 2010, the FASB issued new accounting guidance that will require additional disclosures about the credit quality of loans, lease receivables and other long-term receivables and the related allowance for credit losses. Certain additional disclosures in this new accounting guidance will be effective for the Company on December 31, 2010 with certain other additional disclosures that will be effective on March 31, 2011. The Company does not expect the adoption of this new accounting guidance to have a material impact on its 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, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
  19
  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.




On December 31, 2010, we issued 250,000 shares of our common stock, at the current fair value of $1.1225 per share, totaling $280,625 in the aggregate, to our Chief Executive Officer and Chief Financial Officer as compensation.  These transactions were not registered under the Securities Act of 1933, as amended (the “Securities Act”) pursuant to the exemption from registration provided by Regulation D, Rule 506.





Item 3.                 Defaults Upon Senior Securities.




None.




Item 4.                 (Removed and Reserved.)




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.

Title of Document31.1

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

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 2002.32.2

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, 2011
By:
/s/ Guosheng FuName: Guosheng FuTitle: Chief Executive Officer(Principal Executive Officer)





.Date: April 14, 2011
By:
/s/ Ming Fen LiuName: Ming Fen LiuTitle: Chief Financial Officer(Principal Financial Officer)


































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