UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q





x  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934





For the quarterly period ended September 30, 2010





o  Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934





For the transition period from _______ to _______.





000-53463


(Commission file number)





COVENANT GROUP OF CHINA INC.(Exact name of registrant as specified in its charter)





Nevada

68-0677260(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)





Two Bala Plaza, Suite 300

Bala Cynwyd, PA 19004(Address of principal executive offices)





(610) 660-7828(Registrant’s telephone number)





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








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





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes oNo  o




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





Large accelerated filer   o
Accelerated filer   o
Non-accelerated filer   o

(Do not check if a smaller reporting company)
Smaller reporting company   x





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





On November 12, 2010, 9,683,909 shares of the registrant's common stock were outstanding.















TABLE OF CONTENTS





PART I – FINANCIAL INFORMATIONItem 1.
Financial Statements
3Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24Item 3.
Quantitative and Qualitative Disclosures About Market Risk
32Item 4T.
Controls and Procedures
33PART II - OTHER INFORMATIONItem 1.
Legal Proceedings
33Item 1A.
Risk Factors
33Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
33Item 3.
Defaults Upon Senior Securities
33Item 4.
Removed and Reserved
33Item 5.
Other Information
33Item 6.
Exhibits
34SIGNATURES

35







PART I – FINANCIAL INFORMATION





Item 1.                 Financial Statements





COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEET


September 30, 2010


December 31, 2009(Unaudited)


(Audited)ASSETSCURRENT ASSETSCash and cash equivalent

$
1,700,573


$
969,271Accounts receivable, net


2,900,652



2,156,112Retentions receivable


238,505



344,428Other receivables


164,704



234,066Prepayment and deposits


147,478



98,537Inventories


159,865



102,950Total current assets


5,311,777



3,905,364NON-CURRENT ASSETSRetentions receivable


149,229



146,451Property, plant and equipment, net


21,141



21,794Goodwill


572,020



572,020Intangible assets


20,833



-Total non-current assets


763,223



740,265Assets of discontinued operations


-



4,162,726Total assets

$
6,075,000


$
8,808,355LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESShort term loans

$
651,386


$
37,638Note payable


-



100,000Accounts payable


630,215



983,656Unearned revenue


172,232



155,432Taxes payable


186,225



9,980Other payables and accrued liabilities


242,279



438,774Dividend payable


487,332



478,260Loans payable, net of unamortized discount on warrants


846,633



-Total current liabilities


3,216,302



2,203,740Liabilities of discontinued operations


-



1,616,586Total liabilities


3,216,302



3,820,326STOCKHOLDERS' EQUITIYCommon stock, $0.00001 par value, 20,000,000 sharesauthorized, 11,083,909 shares issued and 9,683,909 sharesoutstanding as of September 30, 2010, and  11,480,909shares issued and  outstanding as of December 31, 2009respectively


97



115Additional paid-in capital


5,918,591



5,572,018Deferred stock compensation


(30,625
)


-Statutory surplus reserve


67,737



67,737Accumulated deficit


(351,414
)


(647,735
)Accumulated other comprehensive loss


42,365



(4,106
)5,646,751



4,988,029Less: treasury stock, at cost; 1,400,000 shares of common stock


(2,788,053
)


-Total stockholders' equity


2,858,698



4,988,029TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
6,075,000


$
8,808,355
  3





COVENANT GROUP OF CHINA INC.


CONSOLIDATED STATEMENTS OF OPERATION AND COMPREHENSIVE INCOME


FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2010


(Unaudited)


FOR THE NINE MONTHS


FOR THE THREE MONTHS


FROM INCEPTION (JUNE 10, 2009)


FOR THE THREE MONTHSENDED SEPTEMBER 30, 2010


ENDED SEPTEMBER 30, 2010


TO SEPTEMBER 30, 2009


ENDED SEPTEMBER 30, 2009NET SALES

$
4,672,677


$
1,695,657


$
1,809,815


$
1,809,815COST OF SALES


3,561,711



1,260,321



1,440,937



1,440,937GROSS PROFIT


1,110,966



435,336



368,878



368,878OPERATING EXPENSESSelling expenses


30,919



7,965



1,694



1,694General and administrative expenses


902,880



333,674



310,428



310,428Total Operating Expenses


933,799



341,639



312,122



312,122INCOME FROM OPERATIONS


177,167



93,697



56,756



56,756OTHER INCOME (EXPENSES)Other income


378



1



1,038



1,038Other expense


(604
)


(155
)


(14
)


(14
)Income (Loss) on settlement of debt


(23,200
)


-



157



157Interest expense


(97,684
)


(82,348
)


(627
)


(627
)Total Other Income (Expenses), net


(121,110
)


(82,502
)


554



554INCOME FROM CONTINUTING OPEARATIONS


-



-



57,310



57,310INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX


-



-



47,361



47,361NET INCOME


56,057



11,195



104,671



104,671COMPREHENSIVE INCOMEForeign currency translation


46,471



32,698



1,502



1,502COMPREHENSIVE INCOME

$
102,528


$
43,893


$
106,173


$
106,173BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING


9,806,755



9,683,909



8,980,000



8,980,000BASIC AND DILUTED NET INCOME PER SHARE

$
0.01


$
0.00


$
0.01


$
0.01


4


COVENANT GROUP OF CHINA INC.


CONSOLIDATED STATEMENTS OF CASH FLOW


FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2010


(Unaudited)


2010


2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income


$
56,057


$
57,310Adjustments to reconcile net income from continuing operations to net cashused in operating activities from continuing operations:Depreciation and amortization


14,272



104,652Change in allowance for doubtful accounts


(6,255
)


27,406Loss on disposal of fixed assets


115



-Loss on settlement of debt


23,200



-Stock issued for compensation


21,200



-Deferred compensation


30,625



-Amortization of discount on warrants


87,537



-(Increase) decrease in current assets:Accounts receivable


(686,462
)


(491,663
)Retentions receivable


110,709



4,023Other receivables


72,656



(49,328
)Prepayment and deposits


(46,341
)


112,574Inventory


(54,108
)


(1,374
)Increase (decrease) in current liabilities:Accounts payable


(366,320
)


1,246Receipt in advance


13,637



(72,649
)Accrued liabilities and other payables


(201,637
)


(4,940
)Taxes payable


173,323



(126,548
)NET CASH USED IN OPERATING ACTIVITIES OF CONTINUNING OPERATIONS


(757,792
)


(439,291
)NET CASH PROVIDED BY OPERATING ACTIVITIES OF DISCONTINUNED OPERATIONS


-



235,908NET CASH USED IN OPERATING ACTIVITIES


(757,792
)


(203,383
)CASH FLOWS FROM INVESTING ACTIVITIES:Cash acquired from acquisition


-



710,552Cash disposed with discontinued operations


-



(371,639
)Acquisition of property & equipment


(34,171
)


(92,990
)NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS


(34,171
)


245,923NET CASH PROVIDED BY INVESTING ACTIVITIES OF DISCONTINUED OPERATIONS


-



135,617NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES


(34,171
)


381,540CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from short term loans


1,503,514



453,888NET CASH  PROVIDED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS


1,503,514



453,888NET CASH PROVIDED BY FINANCING ACTIVITIES OF DISCONTINUED OPERATIONS


-



-NET CASH PROVIDED BY FINANCING ACTIVITIES


1,503,514



453,888EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS


19,751



321NET INCREASE IN CASH & CASH EQUIVALENTS


731,302



632,366CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD


969,271



-CASH & CASH EQUIVALENTS, END OF PERIOD

$
1,700,573


$
632,366Supplemental disclosure of cash flow information:Cash paid for continuing operation during the period for:Interest paid

$
14,000


$
627Cash paid for discontinued operation during the period for:Income tax paid

$
-


$
113,082Supplemental disclosure of non-cash investing activities:Net assets of discontinued operations

$
2,788,053


$
-Supplemental disclosure of non-cash financing activities:Dividend declared by continuing operations

$
-


$
197,231Dividend declared by discontinued operations

$
-


$
149,062
  5





COVENANT GROUP OF CHINA INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2010


(Unaudited)





1. ORGANIZATION AND DESCRIPTION OF BUSINESS





Covenant Group of China Inc. (Covenant Group or the Company) (FKA: Everest Resources Corp.) was incorporated in the State of Nevada on November 8, 2006. On December 24, 2009, Covenant Group entered into and closed on a share exchange agreement with Covenant Group Holdings Inc. (Covenant Holdings), a privately held company incorporated under the laws of the State of Delaware. Pursuant to the share exchange agreement, Covenant Group acquired all of the issued and outstanding capital stock of Covenant Holdings in exchange for 9,380,909 shares of common stock.  Prior to the acquisition of Covenant Holdings, the Company was in the development stage and had minimal business operations.





Covenant Holdings was formed in the State of Delaware on June 10, 2009 to acquire equity interests in private Chinese operating companies and provide these companies with strategic support.  Covenant Holdings had no significant activity from June 10, 2009 through December 31, 2009 except for two acquisitions.





On June 24, 2009, Covenant Holdings entered into a stock acquisition and reorganization agreement with Hainan Jien Intelligent Engineering Co. Ltd. (Jien or Hainan Jien) and its stockholders. Pursuant to the terms of the agreement, Covenant Holdings acquired 100% of the common stock of Jien, representing 100% of its outstanding equity interests, in exchange for 1,350,000 shares of a public shell's common stock, which would acquire all of the rights and obligations of Covenant Holdings.  The acquisition stock price was initially valued at a provisional amount of $2 per share, which was the stock price for Covenant Holdings’ prior private capital raises. The Company changed its valuation stock price to $1.76 per share, which was determined by the volume weighted average stock price for the first day of trading of the Company’s common stock plus all private sales of Covenant Holdings’ common stock prior to the completion of the reverse merger with the Company.  Jien was incorporated in Hainan Province, People’s Republic of China (PRC) in 1999.  Jien specializes in the design and installation of security and surveillance infrastructure to protect financial institutions and government agencies, and it also implements intelligent construction projects for commercial customers.





On June 24, 2009, Covenant Holdings entered into a stock acquisition and reorganization agreement with Chongqing Sysway Information Technology Co. Ltd. (Chongqing Sysway) and its stockholders. Pursuant to the terms of the agreement, Covenant Holdings acquired 100% of the common stock of Chongqing Sysway, representing 100% of its outstanding equity interests, in exchange for 1,400,000 shares of a public shell's common stock, which would acquire all of the rights and obligations of Covenant Holdings.  The acquisition stock price was initially valued at a provisional amount of $2 per share, which was the stock price for Covenant Holdings’ prior private capital raises. The Company changed its valuation stock price to $1.76 per share, which was determined by the volume weighted average stock price for the first day of trading of the Company’s common stock plus all private sales of Covenant Holdings’ common stock prior to the completion of the reverse merger with the Company.   Chongqing Sysway was incorporated in Chongqing City, Sichuan Province, PRC, in 1999 as a State Owned Enterprise (SOE). Since 2005, Chongqing Sysway has operated as a private enterprise mainly engaged in systems integration services, including computer system installation, website design, and system firewall setup, particularly for the tobacco industry.





For accounting purposes, the effective acquisition date of Jien and Chongqing Sysway is deemed to be July 1, 2009 as the results of any activity from June 24, 2009 through June 30, 2009 were deemed to be immaterial to the financial statements taken as a whole.




6





On December 24, 2009, Covenant Holdings entered into a share exchange agreement with Covenant Group.  Covenant Group agreed to exchange 9,380,909 shares of its common stock, on a one-for-one basis, for each share of Covenant Holdings shares held of record on the date of the closing. Concurrent with the share exchange agreement, one of Covenant Group’s shareholders agreed to cancel 4,500,000 shares out of 6,600,000 of the total issued and outstanding shares of Covenant Group in exchange for the immediate payment of $100,000.  He further agreed to cancel an additional 500,000 shares upon Covenant Holdings’ payment of the principal due on a note issued to the shareholder in the amount of $190,000, which, together with the $100,000 payment, represented the consideration for the acquisition of the shell company.  As of December 31, 2009, $90,000 of the $190,000 note payable was paid. During the first quarter of 2010, the 500,000 shares were cancelled and the Company issued 300,000 shares to this shareholder in lieu of the payment for the note payable of $100,000. In May of 2010, the Company and this shareholder agreed to revise and reduce the 300,000 shares to 70,000 shares. The share exchange was accounted for as a "reverse acquisition," since the Covenant Holdings shareholders own a majority of the outstanding shares of the Company's common stock immediately following the share exchange.  Covenant Holdings was deemed to be the accounting acquiror in the reverse acquisition.  Consequently, the assets and liabilities and the historical operations that were reflected in the financial statements prior to the share exchange were those of Covenant Holdings and were recorded at the historical cost basis of Covenant Holdings.  The consolidated financial statements after completion of the share exchange would include the assets and liabilities of the Company and Covenant Holdings, and the historical operations of Covenant Holdings and operations of the Company from the closing date of the share exchange.  As a result of the issuance of the shares of the Company’s common stock pursuant to the share exchange, a change in control of the Company occurred on the date of the consummation of the share exchange.





The Company's Board of Directors decided on April 30, 2010, to terminate and rescind the Acquisition Agreement with Chongqing Sysway due to several breaches of the agreement by Chongqing Sysway, including the failure of the prior owners of Chongqing Sysway to repay a dividend paid to them by Chongqing Sysway in excess of that permitted under the agreement and under China law and the failure of Chongqing Sysway and its prior owners to cooperate with the Company in the preparation of its financial statement disclosures required under United States securities laws. As a result of the termination and rescission of the agreement, the Company transferred all of the shares of capital stock of Chongqing Sysway to the prior owners of Chongqing Sysway, and the 1,400,000 shares of common stock of the Company issued in exchange for the shares of capital stock of Chongqing Sysway were returned to the Company and treated as treasury shares. The effect of this transaction was to return the Company, Chongqing Sysway, and the prior owners of the capital stock of Chongqing Sysway to their status prior to the completion of the acquisition by the Company of the capital stock of Chongqing Sysway on December 24, 2009. The termination and rescission of the acquisition agreement resulted in the activities of Sysway being reflected on the financial statements as discontinued operations (see Note 18).





On January 12, 2010, the Company formed a wholly owned subsidiary – Pandaz LLC, a Delaware LLC (Pandaz Delaware). On January 13, 2010, Pandaz Delaware entered into an asset purchase agreement with The Pandaz LLC, a Nevada LLC, for certain assets and intellectual property associated with an automobile dealer and customer interface, vehicle search function and automobile purchasing website that the company is tentatively looking to implement in China.  The total purchase consideration was $25,000, of which, $10,000 was paid as the forgiveness of a bridge loan that the Company provided to the seller on January 7, 2010 and $15,000 was paid as a one-time cash payment.





2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principle of Consolidation





The consolidated financial statements include the accounts of Covenant Holdings, Covenant Group, Pandaz Delaware and Jien. All intercompany transactions and account balances are eliminated in consolidation.





Basis of Presentation





The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission (SEC). Operating results for the nine and three months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.





7




Use of Estimates




In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates.





Cash and Cash Equivalents





For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.





Accounts and Retentions Receivable





The Company’s policy is to maintain reserves for potential credit losses on accounts receivable.  Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  Based on historical collection activity, the Company had allowances of $8,730 at September 30, 2010 and $78,356 at December 31, 2009.





At September 30, 2010, the Company had retentions receivable for product quality assurance of $387,734. At December 31, 2009, the Company had $490,879 of retentions receivable. The retention rate varies from 3% to 5% of the sales price, with variable terms from 1 year to 3 years. $238,505 and $344,428 of the retentions receivable at September 30, 2010 and December 31, 2009, respectively, are current and due within one year; $149,229 and $146,451 of the retentions receivable are treated as long term assets at September 30, 2010 and December 31, 2009, respectively.





Inventories





The Company’s inventory is valued at the lower of cost or market with cost determined on a first-in, first-out basis.





Property and Equipment





Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized.  When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.  Depreciation of property and equipment is provided using the straight-line method for substantially all assets with 5% salvage value and estimated lives ranging from 3 to 25 years as follows:





Building
20 - 25 yearsLeasehold improvements
Shorter of lease term or 10 yearsVehicle
5 - 10 yearsOffice Equipment
3 - 5 years






8





Impairment of Long-Lived Assets





Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.





Recoverability of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.  Based on its review, the Company believes that, as of September 30, 2010 and December 31, 2009, there were no significant impairments of its long-lived assets.





Goodwill





Goodwill represents the excess of the fair value of the consideration transferred over the net of the acquisition date amount of identifiable assets acquired and the liability assumed. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”), codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, goodwill is not amortized but is tested for impairment annually, or when circumstances indicate a possible impairment may exist. Impairment testing is performed at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair value of the reporting unit, with the fair value of the reporting unit determined using a discounted cash flow (DCF) analysis. A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.





Warranties





The Company offers a warranty to its customers on its products for a period from three months to three years depending on the contract terms negotiated with the customers; most warranty terms are one year. The Company accrues for warranty costs based on estimates of the costs that may be incurred under its warranty obligations. The warranty expense and related accrual is included in the Company's selling expenses and other payables respectively, and is recorded at the time revenue is recognized. Factors that affect the Company's warranty liability include the number of sold equipment, its estimates of anticipated rates of warranty claims, costs per claim and estimated support labor costs and the associated overhead.  The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.  The Company’s warranty expense was immaterial for the nine and three months ended September 30, 2010 and 2009.





Income Taxes





The Company utilizes Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes,” codified in FASB ASC Topic 740, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.




9





The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (codified in FASB ASC Topic 740) on June 10, 2009.  As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48.  As a result of the implementation of Interpretation 48, the Company recognized no material adjustments to liabilities or stockholders equity.  When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions taken are not offset or aggregated with other positions.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.





Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of income. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.





Covenant Holdings had a US net operating loss of $494,280 at September 30, 2010 and $690,724 at December 31, 2009.  A 100% valuation allowance has been established due to the uncertainty of its realization.





Covenant Group of China and Pandaz Delaware had US net operating losses of $413,851 and $39,413 at September 30, 2010, respectively.





Jien is qualified as a small business in the construction industry in the PRC.  The Company is subject to a 1.76% and a 3% tax rate on net sales for 2010 and 2009, respectively. Since the tax is based on sales, under US GAAP, it is not an income tax.  Accordingly, $76,143 and $30,419 were recorded as general and administrative expense for the nine and three months ended September 30, 2010, respectively; $51,602 was recorded as general and administrative expense for the nine and three months ended September 30, 2009.





The following table reconciles the U.S. statutory rates to the Company’s consolidated effective tax rate for the nine and three months ended at September 30, 2010 and 2009, respectively:





Nine Months

Ended


Three Months

EndedSeptember 30, 2010U.S. statutory rates

$
19,060


$
3,806Foreign tax rate less than U.S. statutory rate


(65,202
)


(21,507
)Change in valuation allowance


219,371



83,430Non tax deductible expense (non taxable income) for US company


7,888



(5,987)Foreign income exempt from foreign income tax


(181,117
)


(59,742
)Income tax expense

$
-


$
-





10




From June10,

Through


Three Months

EndedSeptember 30, 2009U.S. statutory rates

$
19,486


$
19,486Foreign tax rate less than U.S. statutory rate


(18,160
)


(18,160
)Unrecognized tax benefit on US operating loss


49,118



49,118Foreign income exempt from foreign income tax


(50,444
)


(50,444
)Income tax expense

$
-


$
-





Deferred tax assets (liabilities) at September 30, 2010 consist of the following:





Deferred tax assetU.S. net operating loss

$
424,454Stock based compensation


29,763Total


454,217Less valuation allowance


(454,217
)Net deferred tax asset

$
-





The valuation allowance for deferred tax assets as of September 30, 2010 was $454,217. The change in the total valuation for the nine months ended September 30, 2010 was an increase of $219,371.  The deferred tax asset arose from the net operating loss generated at the US parent company level. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the net operating losses and temporary differences become deductible.  Management considered projected future taxable income and tax planning strategies in making this assessment.  The value of the deferred tax assets was offset by a valuation allowance, due to the current uncertainty of the future realization of the deferred tax assets.





Revenue Recognition





The Company's revenue recognition policies are in compliance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 104 (codified in FASB ASC Topic 605).  Revenue is recognized when services have been rendered or product delivery has occurred, a formal arrangement exists, the price is fixed or determinable, no other significant obligations of the Company exist and collectability is reasonably assured.  Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.





The Company derives the majority of its revenue from the supply and installation of surveillance and security equipment and systems.  The two deliverables do not meet the separation criteria under Emerging Issues Task Force (EITF) Issue 00-21 “Revenue Arrangements with Multiple Deliverables” (EITF No. 00-21) (codified in FASB ASC Topic 605).  Revenue from the supply and installation of surveillance and security equipment and systems are recognized when the installation is completed and the customer acceptance is received. For contracts that are partially completed at a reporting period, the company recognizes revenue based on percentage of completion method as work on the contract progresses. The income recognized is the percentage of total estimated income that incurred costs to date bear to estimated total costs after giving effect of costs to complete based on the most recent information. The customer signs off on a progress report to indicate acceptance of the percentage recognized. Sales revenue represents the invoiced value of goods and services, net of value-added tax (VAT).  Jien became a general tax payer since February 1, 2010 so that all of the Company’s products sold in the PRC are subject to a fixed VAT rate of 17% of the gross sales price, and can be offset by VAT incurred by the Company on its purchase. Prior to February 2010, the Company was a small business and subject to a fixed VAT rate 4% in 2008 and 3% in 2009, which cannot be offset by VAT incurred in purchase.





Only the sale of goods is subject to VAT. Revenue from installation contracts is subject to a 3% business tax, which is reflected in the cost of goods sold.




11





Most of the major contracts are bundled with post-installation service for the duration of 1 to 3 years depending on customers’ requests.  During this period, customers are entitled to exchange parts if they are found to be not working in line with specifications or if there is quality problem.





The Company subcontracts all its major projects to third party subcontractors who supply both the equipments and parts and provide installation service. Back-to-back warranty from third party subcontractors is provided for both products and services.  Since warranty service is performed by subcontractors, there is no substantial performance obligation once the installation is completed and accepted by the customers.  Accordingly, the earnings process is considered completed upon completion of project. In cases where the subcontractors provide a shorter warranty period than that requested by the customers, the Company services the customers itself as the Company has a core team of engineers and technicians to handle this part of the service.  In such cases, the warranty service is not deemed to be a separate deliverable.





There is no general right of return indicated in the contracts. If any equipment delivered does not fit the required specifications, customers are entitled to an exchange for the correct item; or if the item is not functioning properly, the Company is responsible for fixing it or replacing it with a new item, which is usually covered by the manufacturer’s warranty and/or the third party subcontractor’s warranty. Customers are not entitled to a refund.





Because there is no general right of return and the software portion of a typical contract accounts for an insignificant part of the contract, the Company’s revenue arrangements do not contain multiple deliverables.





Cost of Revenue





Cost of goods sold consists primarily of material costs, labor costs, and related overhead, which are directly attributable to the production of the service.  Write-down of inventory to lower of cost or market is also recorded in cost of goods sold.





Basic and Diluted Earnings (Loss) per Share (EPS)





Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is similarly computed, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted net earnings per share are based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to have been exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.  At September 30, 2010, the Company has outstanding warrants with an anti-dilutive feature; therefore, the basic and diluted EPS are the same.





Concentration of Credit Risk





Financial instruments that potentially subject the Company to credit risk consist primarily of accounts receivable and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its clients' financial condition and customer payment practices to minimize collection risk on accounts receivable.





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




12





Statement of Cash Flows





In accordance with SFAS No. 95, “Statement of Cash Flows,” codified in FASB ASC Topic 230, cash flows from the Company's operations are calculated based upon the local currencies.  As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.





Fair Value of Financial Instruments





For certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, other receivables, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities.





ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures.  The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:





●
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.●
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.●
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.





The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC 815.





As of September 30, 2010 and December 31, 2009, the Company did not have any financial instruments that are required to be presented on the balance sheet at fair value.





Foreign Currency Translation and Transactions





The accompanying consolidated financial statements are presented in United States Dollars (“USD”). The Company’s functional currency is the USD, while the Company’s wholly-owned Chinese subsidiaries’ functional currency is the Renminbi (“RMB”). The functional currencies of the Company’s foreign operations are translated into USD for balance sheet accounts using the current exchange rates in effect as of the balance sheet date and for revenue and expense accounts using the weighted-average exchange rate during the fiscal year. The translation adjustments are recorded as a separate component of stockholders’ equity, captioned accumulated other comprehensive income (loss). Gains and losses resulting from transactions denominated in foreign currencies are included in other income (expense) in the consolidated statements of operations. There have been no significant fluctuations in the exchange rate for the conversion of RMB to USD after the balance sheet date.





Comprehensive Income (Loss)





The Company uses SFAS 130 “Reporting Comprehensive Income” (codified in FASB ASC Topic 220). Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for the nine and three months ended September 30, 2010 and 2009 included net income and foreign currency translation adjustments.




13





Stock-Based Compensation





The Company accounts for its stock-based compensation in accordance with SFAS No. 123R, “Share-Based Payment, an Amendment of FASB Statement No. 123,” codified in FASB ASC Topic 718. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.





Segment Reporting





SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," codified in FASB ASC Topic 280, requires use of the “management approach” model for segment reporting.  The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance.  Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.





SFAS 131 has no effect on the Company's financial statements as substantially all of the Company's operations are conducted in one industry segment.  The Company consists of one reportable business segment.  Most of the Company's assets are located in the PRC and its principal market is in the PRC, except US banks accounts for Covenant Holdings, Covenant Group of China, and Pandaz Delaware, and $25,000 of intangible assets that belong to Pandaz Delaware.





New Accounting Pronouncements





Recently Issued Accounting Pronouncements Not Yet Adopted





In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2009-13 on ASC 605, Revenue Recognition – Multiple Deliverable Revenue Arrangement – a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 amended guidance related to multiple-element arrangements, which requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. The consensus eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances. All entities must adopt the guidance no later than the beginning of their first fiscal year beginning on or after June 15, 2010. Entities may elect to adopt the guidance through either prospective application for revenue arrangements entered into, or materially modified, after the effective date or through retrospective application to all revenue arrangements for all periods presented. We are currently evaluating the impact, if any, of ASU 2009-13 on our financial position and results of operations.





In October 2009, the FASB issued ASU No. 2009-14 on ASC 985, Certain Revenue Arrangements That Include Software Elements (ASU 2009-14). ASU 2009-14 amended guidance that is expected to significantly affect how entities account for revenue arrangements that contain both hardware and software elements. As a result, many tangible products that rely on software will be accounted for under the revised multiple-element arrangements revenue recognition guidance, rather than the software revenue recognition guidance. The revised guidance must be adopted by all entities no later than fiscal years beginning on or after June 15, 2010. An entity must select the same transition method and same period for the adoption of both this guidance and the revisions to the multiple-element arrangements guidance noted above. We are currently evaluating the impact, if any, of ASU 2009-14 on our financial position and results of operations.





In April 2010 the FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation – Stock Compensation (ASC 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. This Update provides amendments to Accounting Standards Codification (ASC) Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency  of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. The Company does not expect the adoption of ASC Topic 718 will have an impact on the Company’s consolidated financial statements.




14





Recently Adopted Accounting Pronouncements





In January 2010, FASB issued ASU No. 2010-06,Fair Value Measurements and Disclosures (ASC Topic 820), Improving Disclosures about Fair Value Measurements.  This update provides amendments to ASC Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers etween Levels 1, 2, and 3. This standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material impact to the Company’s financial statements.





In January 2010, FASB issued ASU No. 2010-05,Compensation – Stock Compensation (ASC Topic 718), Escrowed Share Arrangements and the Presumption of Compensation . This update codifies Emerging Issues Task Force D-110. This standard is not currently applicable to the Company.





In January 2010, FASB issued ASU N0. 2010-01,Equity (ASC Topic 505), Accounting for Distributions to Shareholders with Components of Stock and Cash.  The update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected prospectively in earnings per share and is not considered a stock dividend for purposes of ASC Topic 505 and Topic 260,Earnings Per Share . This standard is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. This standard is not currently applicable to the Company.





3. INVENTORY





Inventory consisted of the following at September 30, 2010 and December 31, 2009:





2010


2009Raw Material

$
14,645


$
20,056Work in Process


145,220



82,894Total

$
159,865


$
102,950





4. ACQUISITION AND GOODWILL





On June 24, 2009, Covenant Holdings entered into stock acquisition and reorganization agreements with Jien and Chongqing Sysway (note 1).  For convenience of reporting the acquisition for accounting purposes, July 1, 2009 has been designated as the acquisition date.





The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.





Jien


Chongqing Sysway


TotalCash

$
710,552


$
44,098


$
754,650Accounts receivable


2,420,881



1,380,413



3,801,294Retention receivable


271,770



1,084,047



1,355,817Prepaid expenses


238,275



-



238,275Advance to suppliers


-



1,661



1,661Other receivables


154,237



132,186



286,423Inventory


134,087



83,858



217,945Property and equipment


45,102



37,265



82,367Intangible assets-core software


-



152,256



152,256Goodwill


572,020



902,303



1,474,323Accounts payable


(1,442,990
)


(991,463
)


(2,434,453
)Other current liabilities


(182,370
)


(25,499
)


(207,869
)Unearned revenue


(108,245
)


-



(108,245
)Tax payable


(405,263
)


(337,125
)


(742,388
)Short term loan


(32,056
)


-



(32,056
)Purchase price

$
2,376,000


$
2,464,000


$
4,840,000





15





The fair value of the consideration transferred was initially valued at a provisional amount of $2 per share, which was the stock price for Covenant Holdings’ prior private capital raises. The Company subsequently changed its valuation stock price to $1.76 per share, which was determined by the volume weighted average stock price for the first day of trading of the Company’s common stock plus all private sales of Covenant Holdings’ common stock prior to the completion of the reverse merger with the Company.  The excess of the fair value of the consideration transferred over the net of the acquisition date amounts of identifiable assets acquired and liabilities assumed was allocated to goodwill.





The Company's Board of Directors decided on April 30, 2010 to terminate and rescind the Acquisition Agreement with Chongqing Sysway due to several breaches of the agreement by Chongqing Sysway, including the failure of the prior owners of Chongqing Sysway to repay a dividend paid to them by Chongqing Sysway in excess of that permitted under the agreement and under China law and the failure of Chongqing Sysway and its prior owners to cooperate with the Company in the preparation of its financial statement disclosures required under United States securities laws.





The following pro forma consolidated results of operations of the Company for the nine months ended September 30, 2009 presents the consolidated operations of the Company as if the acquisition of Jien occurred on January 1, 2009.





For The Nine Months Ended September 30, 2009Net revenue

$
4,835,602Cost of revenue


(3,741,556
)Gross profit


1,094,046Total operating expenses


(541,613
)Income from operations


552,433Non-operating expenses


(3,957
)Income tax


-Net income

$
548,476




On August 27, 2010, Covenant Holdings, the former shareholders of Jien and Jien entered into an Agreement on Share Transfer and Increase of Registered Capital.  Under the agreement, Covenant Holdings agreed to make a one-time payment of RMB 1,100,000 (equivalent to $150,000) to the former shareholders for all the shares of Jien and to further finance Jien by contributing $2,350,000 in cash, thereby increasing the total registered capital of Jien to $2,500,000.  On October 21, 2010, Covenant Holdings made the $150,000 payment to the former shareholders of Jien.  Covenant Holdings will contribute $350,000 to Jien upon Jien receiving approval from the State Administration of Foreign Exchange (SAFE) to open a foreign exchange bank account in China, which is currently pending.  Within six months following the execution of the Agreement, Covenant Holdings shall remit an additional $2,000,000 to Jien to further increase Jien’s registered capital.  Covenant Holdings shall use its best efforts to remit such additional capital.  The registration of Jien’s shares in Covenant Holdings’ name was completed in China on November 4, 2010.




16





5. PROPERTY AND EQUIPMENT, NET





Property and equipment consisted of the following at September 30, 2010 and December 31, 2009:





2010


2009Vehicle

$
7,473


$
-Office equipment


32,511



32,876Leasehold Improvement


12,483



12,251Subtotal


52,467



45,127Less: Accumulated depreciation


(31,326
)


(23,333
)$
21,141


$
21,794





Depreciation expense for the nine and three months ended September 30, 2010 was $11,883 and $3,871, respectively. Depreciation expense for the period from June 10, 2009 through September 30, 2009 and three months ended September 30, 2009 was $11,662.





6. OTHER RECEIVABLES





Other receivables consisted of the following at September 30, 2010 and December 31, 2009:





2010


2009Short term advance to third parties

$
127,117


$
180,043Advance to staff


10,225



42,307Advance to subcontractors


25,869



-Deposit


1,493



11,716$
164,704


$
234,066





7. INTANGIBLE ASSETS





Intangible assets of $25,000 at September 30, 2010 mainly consisted of website operating software with vehicle search function, manufacture’s code and dealer interface capabilities for the amount of $15,000 and intellectual property for technical information for the amount of $10,000, which were purchased by Pandaz Delaware during the first quarter of 2010.  The amortization for the intangible assets for the nine and three months ended September 30, 2010 was $4,166 and $2,083, respectively.




8. TAX PAYABLE





Tax payable consisted of the following at September 30, 2010 and December 31, 2009:





2010


2009Income tax payable

$
88,492


$
38,590Business tax payable


62,245



(26,346
)Other taxes payable


35,488



(2,264
)$
186,225


$
9,980





17





9. ACCRUED LIABILITIES AND OTHER PAYABLES





Accrued liabilities and other payables consisted of the following at September 30, 2010 and December 31, 2009:




2010


2009Warranty provision

$
40,889


$
48,475Short term advance from third parties


201,390



390,299$
242,279


$
438,774


10. COMMON STOCK





Effective November 10, 2009, the Company and the lender of three bridge loans agreed to cancel the promissory note of $399,870. In lieu of principal and interest payments due to the lender, the Company issued 200,909 shares of the Company’s common stock to the lender.





Pursuant to the confidential private placement memorandum dated November 24, 2009, the Company offered to sell up to 750,000 shares at $2.00 per share, with a minimum purchase of 10,000 Shares ($20,000) per investor and a minimum total quantity of 150,000 Shares ($300,000) that must be subscribed for by all investors to affect a closing and avoid termination of the offering. At December 16, 2009, the Company sold 200,000 shares through the private placement, which were converted into publicly-traded securities upon the Company’s merger with a public shell company on December 24, 2009.





During the first quarter of 2010, one shareholder cancelled 500,000 shares of the Company’s stock that was originally held as collateral for a note arising from the share exchange transaction on December 24, 2009 with an outstanding balance of $100,000. The Company issued 300,000 shares to this shareholder in lieu of the payment for the note payable of $100,000.  On May 13, 2010, the Company and this shareholder entered into a Second Amendment to the Share Cancellation and Loan Agreement, whereby the shareholder agreed to reduce the 300,000 shares to 70,000 shares as settlement of the debt (Note 14).





On April 8, 2010, the Company’s board of directors approved the issuance of 8,000 shares of the Company’s common stock to two individuals as partial consideration for web design service rendered. The Company recorded $21,200, fair value of stock-based compensation for the shares issued.





On June 15, 2010, the Company’s board of directors approved the issuance of 25,000 shares of the Company’s common stock to a company as consideration for providing services in connection with the Company’s offering of convertible preferred shares. This company commenced its work on the offering on April 1, 2010 and the offering is to remain open for one year from that date.  The Company recorded $61,250, fair value of the stock issued, as deferred compensation. During the nine and three months ended September 30, 2010, the Company amortized $30,625 as stock-based compensation.





11. DIVIDEND PAYABLE





The Company declared a 30% dividend of Jien’s 2008 net income to Jien’s original shareholders and management as part of the acquisition agreement dated June 24, 2009. The dividend declared for Jien was $200,608, and has been recorded as a dividend payable at December 31, 2009. As part of the acquisition agreement, the Company also agreed to pay the original shareholders and management of Jien a 30% dividend on 2009 year end profits. The dividend was declared and was recorded as a dividend payable for Jien in the amount of $277,653, which was the retained earnings that were available for declaring a dividend at December 31, 2009.










18








12. MAJOR CUSTOMERS AND SUPPLIERS





Four customers accounted for 44% of the total sales for the nine months ended September 30, 2010, with each accounting for 12%, 12%, 10% and 10% of total sales, respectively. At September 30, 2010, the total receivable balance due from these customers was $796,907.





One supplier accounted for 62% of the total purchases for the nine months ended September 30, 2010. At September 30, 2010, the total payable due to this vendor was $460,372.





13. SHORT TERM LOANS





During the three months ended March 31, 2010, the Company borrowed $263,294 (RMB 1,788,000) from Shenzhen Development Bank. The loan bears interest at 5.59% per year and is due on July 26, 2010.  This loan is collateralized by $396,024 (RMB 2,689,360) of accounts receivable. This loan was paid in full upon maturity.





During the three months ended September 30, 2010, the Company borrowed $135,799 (RMB 910,000), $241,602 (RMB 1,619,000) and $273,985 (RMB 1,836,000) from Shenzhen Development Bank. The loans bear interest at 5.589% per year and are due on November 27, December 26 and December 6, 2010, respectively. These loans are collateralized by $838,998 (RMB 5,622,211) of accounts receivable.





At December 31, 2009, the Company had borrowed $37,600 from Shenzhen Development Bank with interest at 5.832% per year, due in February of 2010; this loan was paid in full upon maturity.





14. NOTE PAYABLE





At December 31, 2009, note payable represented the $100,000 remaining balance from a $190,000 promissory note issued to a former majority shareholder of Covenant Group plus cash consideration for the acquisition of the shell company. This note was settled on March 25, 2010 by issuing the shareholder 300,000 common shares of the Company with a fair value of $528,000, resulting in a loss on settlement of $428,000.  On May 13, 2010, the Company and this shareholder entered into a Second Amendment to the Share Cancellation and Loan Agreement, whereby the shareholder agreed to reduce the 300,000 shares to 70,000 shares as settlement of the debt.  As a result, the loss on settlement became $23,200.





15. LOANS PAYABLE WITH WARRANTS ISSUED





On April 22, 2010, the Company entered into a bridge loan agreement to obtain $120,000 in short-term financing from a private investor.  In addition, 200,000 restricted common stock shares were issued to this investor in connection with this financing.  On June 30, 2010, the Company entered an amendment to this loan agreement whereby both parties agreed to cancel the 200,000 restricted common stock shares and the Company issued a warrant to purchase up to 14,400 shares of restricted common stock at a $3 strike price, exercisable within 2 years from April 22, 2010. The entire principal balance will be payable in full three months from April 22, 2010. On August 13, 2010, the parties entered into a second amendment to this agreement to extend the term of the loan, whereby the entire principal balance will be payable in full three months from August 13, 2010. The loan was extended to February 28, 2011.





On June 10, 2010, the Company entered into a bridge loan agreement to obtain $130,000 in short-term financing from a private investor.   In addition, the Company issued a warrant to purchase up to 15,600 shares of restricted common stock at a $3 strike price, exercisable within 2 years from June 10, 2010.  The entire principal balance will be payable in full three months from June 10, 2010. The loan was extended to February 28, 2011.




19





The warrants are immediately exercisable and expire on the second anniversary of their issuance. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions:  discount rate– 2.76%; dividend yield–  0%; expected volatility–  88% and term of 2 years.  The fair value of the warrants was $40,972.





On July 1, 2010, the Company entered into a bridge loan agreement with an investor for an amount up to $1,000,000.  Under the agreement, the Company can withdraw from this loan with mutual agreement of Covenant and the investor.  On July 2 and September 8, 2010, the Company withdrew $500,000 and $150,000 from this loan, respectively. Upon draw down of $650,000, the investor was granted 97,500 warrants. As consideration for the loan, the investor is entitled to warrants to purchase up to 150,000 shares of the Company’s common stock at a $3.00 strike price, with a two-year term from date of grant.  The investor is granted the warrants pro-rata with the amount drawn from the loan. The principal balance will be payable in full five months from each borrowing date.





The 97,500 warrants are immediately exercisable and expire on the second anniversary of their issuance. The value of warrants was determined by using the Black-Scholes pricing model with the following assumptions:  discount rate– 2.76%; dividend yield– 0%; expected volatility– 88% and term of 2 years.  The fair value of the warrants was $194,226.





The fair value of the warrants was allocated to the total proceeds from the loans, based on the relative fair value of the warrants and debts, as unamortized interest totaling $140,904, to be amortized over the term of the loans.  The warrants were classified as equity. The amortized interest expense for the nine and three months ended September 30, 2010 was $87,537 and $69,930. At September 30, 2010, loans payable net of unamortized interest on warrants was $846,633.  During the nine and three months ended September 30, 2010, no warrants were exercised.





The following table summarizes the loan payable transactions for the period January 1, 2010 through September 30, 2010:


Proceeds from loans:

$
900,000Discount due to warrants issued with loans:


(140,904
)Amortization of discount:


87,537Balance at September 30, 2010:

$
846,633
  Following is a summary of the warrant activity:


Number of

Shares

Average

Exercise

Price per Share

Weighted

Average

Remaining

Contractual

Term in YearsOutstanding at December 31, 2009
—

$
—

—Exercisable at December 31, 2009
—


—

—Granted
127,500


3.00

2.00Exercised
—


—

—Forfeited
—


—

—Outstanding at September 30, 2010
127,500


3.00

1.73Exercisable at September 30, 2010
127,500

$
3.00

1.73




20




16. STATUTORY RESERVES





Pursuant to the corporate law of the PRC effective January 1, 2006, PRC subsidiaries of the Company are required to maintain a statutory reserve by appropriating from its after-tax profit before declaration or payment of dividends. The statutory reserve represents restricted retained earnings, in which dividends cannot be distributed.





Surplus reserve fund





The PRC subsidiaries of the Company are required to transfer 10% of their net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Company’s registered capital.  The Company had $67,737 in this reserve at September 30, 2010.





The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.





Common welfare fund





Common welfare fund is a voluntary fund to which the Company can elect to transfer 5% to 10% of its net income.  The Company did not make any contribution to this fund for the period since business inception through September 30, 2010.





This fund can only be utilized on capital items for the collective benefit of the Company’s employees, such as construction of dormitories, cafeteria facilities, and other staff welfare facilities. This fund is non-distributable other than upon liquidation.





Pursuant to the "Circular of the Ministry of Finance (MOF) on the Issue of Corporate Financial Management after the Corporate Law Enforced" (No.67 [2006]), effective on April 1, 2006, issued by the MOF, companies transferred the balance of SCWF (Statutory Common Welfare Fund) as of December 31, 2005 to Statutory Surplus Reserve. Any deficit in the SCWF was charged in turn to Statutory Surplus Reserve, additional paid-in capital and undistributed profit of previous years. If a deficit still remains, it should be transferred to retained earnings and be reduced to zero by a transfer from after tax profit of following years. At December 31, 2005, the Company did not have a deficit in the SCWF.





17. COMMITMENTS





Jien leased its office under a long term, non-cancelable, and renewable operating lease agreement on November 8, 2007, with an expiration date of November 7, 2009.  Upon expiration, the Company renewed the lease for a period from November 8, 2009 to November 7, 2012, with monthly rent of approximately $3,600 (RMB 24,509). Annual rental expense is approximately $43,200 for the years ended December 31, 2010 and 2011, and approximately $36,000 for 2012. For the nine and three months ended September 30, 2010, the rental expense was $28,800 and $10,800, respectively. For the period since business inception through September 30, 2009 and for the three months ended September 30, 2009, the rental expense was $5,267.





18. DISPOSAL OF SUBSIDIARY





The Company records discontinued operations if both of the following conditions are met: (a) the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the Company as a result of the disposal transaction and (b) the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction. During a period in which a component of the Company either has been disposed of or is classified as held for sale, the income statement of the Company for current and prior periods shall report the results of operations of the component, including any gain or loss recognized in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” (codified in FASB ASC Topic 360) in discontinued operations. The results of operations of a component classified as held for sale shall be reported in discontinued operations in the period(s) in which they occur. The results of discontinued operations, less applicable income taxes (benefit), shall be reported as a separate component of income before extraordinary items and the cumulative effect of accounting changes (if applicable).




21





The Company's Board of Directors decided on April 30, 2010 to terminate and rescind the Acquisition Agreement with Chongqing Sysway due to several breaches of the agreement by Chongqing Sysway, including the failure of the prior owners of Chongqing Sysway to repay a dividend paid to them by Chongqing Sysway in excess of that permitted under the agreement and under China law and the failure of Chongqing Sysway and its prior owners to cooperate with the Company in the preparation of the financial statement disclosures required under United States securities laws.





As a result of the termination and rescission of the agreement, the Company transferred all of the shares of capital stock of Chongqing Sysway to the prior owners of Chongqing Sysway, and the 1,400,000 shares of common stock of the Company issued in exchange for the shares of capital stock of Chongqing Sysway were returned to the Company and treated as treasury shares. The intent of this transaction was to return the Company, Chongqing Sysway, and the prior owners of the capital stock of Chongqing Sysway to their status prior to the completion of the acquisition by the Company of the capital stock of Chongqing Sysway on December 24, 2009. For convenience of reporting for accounting purposes, January 1, 2010 has been designated as the date of rescission.





The assets and liabilities of Chongqing Sysway have been reclassified at December 31, 2009 as assets of discontinued operations and liabilities of discontinued operations.





Identifiable net assets of Chongqing Sysway as of December 31, 2009 were as follows:





Cash & cash equivalents

$
413,093Accounts receivable, net


1,456,008Other current assets


1,159,231Goodwill


902,303Other noncurrent assets


232,091Total assets

$
4,162,726Accounts payable

$
829,444Tax payable


536,633Dividend payable


242,851Other current liabilities


7,658Total liabilities

$
1,616,586





19. CONTINGENCIES





The Company’s operations in the PRC are subject to specific 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 environments and foreign currency exchange. The Company’ s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.





The Company’s sales, purchases and expenses transactions are denominated in RMB, and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in order to effect the remittance.




22





20. EQUITY CREDIT AGREEMENT





On January 31, 2010, the Company entered into an equity credit agreement with an institutional investor providing the Company with the right, but not the obligation, to issue shares of its common stock at any time and from time to time during the next two years for gross proceeds of up to $20,000,000. The Company may require the investor to purchase shares of its common stock from time to time under the equity credit agreement by delivering a put notice specifying the total purchase price for the shares to be purchased. The investment amount may not be greater than the lesser of (a) $1,000,000 or (b) 300% of the average dollar volume (closing bid price times the volume on the OTC Bulletin Board for a trading day) for the 20 trading days preceding the put notice. The purchase price per share for the shares to be purchased for the investment amount will be 94% of the lowest closing bid price on the OTC Bulletin Board during the five trading days following the put notice.





The Company also agreed to issue to the investor warrants to purchase an additional 300,000 shares of its common stock during a five year period at an exercise price of $2.00 per share. The warrant will be issued to the investor upon the effectiveness of a registration statement on Form S-1 to be filed with the Securities and Exchange Commission (SEC).  The warrant will be exercisable in whole or in part upon issuance and will remain exercisable for a five-year period.





The Company also entered into a registration rights agreement as part of the transaction. The registration rights agreement requires the Company to prepare promptly, and file with the SEC within 60 days, the registration statement for the resale of the shares of common stock issuable upon exercise of the warrant.





As of September 30, 2010, the Company has not delivered any put notices to the investor.





21.  SUBSEQUENT EVENT




With assistance from Jien, the Company initiated the registration of Jien’s shares in the name of the Company in China, and on October 8, 2010, Jien was approved by the Ministry of Foreign Commerce in Hainan Province as a Wholly-Owned Foreign Enterprise (WOFE), allowing it the right to seek a WOFE business license and open a foreign exchange account as a WOFE.  On October 21, 2010, Covenant Holdings made the $150,000 payment to the former shareholders of Jien pursuant to the Agreement on Share Transfer and Increase of Registered Capital.  On November 4, 2010, Jien received its WOFE business license from the Administration of Industry and Commerce in Hainan Province, which reflects Covenant Holdings as the 100% owner of Jien’s equity.  The Company will contribute $350,000 to Jien upon Jien receiving approval from SAFE to open a foreign exchange bank account in China, which is currently pending.


23





CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS





This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the SEC (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by the Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, “predict”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the factors discussed in the section “results of operations” below), and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.





Although the Company believes that the expectations reflected in the forward-looking statements are based on reasonable assumptions, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.





Our financial statements are prepared in US Dollars and in accordance with accounting principles generally accepted in the United States. See “Foreign Currency Translation” and “Comprehensive Income (Loss)” below for information concerning the exchange rates at which Renminbi (“RMB”) were translated into US Dollars (“USD”) at various pertinent dates and for pertinent periods.





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





Overview





We are a holding company primarily engaged in the business of acquiring equity interests in private companies based and operating in the PRC and providing these companies with support, including administrative, legal, accounting and marketing assistance, and an infusion of capital with the goal of growing such companies’ operations and profits.  We believe that equity investments in China present one of the most attractive global investment opportunities available in the coming four to seven years.  We plan to focus on growth company acquisitions located in China.





We were incorporated in the State of Nevada on November 8, 2006 under the name Everest Resources Corp. as a development stage corporation that intended to engage in the exploration of gold.  On December 24, 2009, we changed our name to Covenant Group of China Inc. and acquired all of the capital stock of Covenant Holdings, a privately held company incorporated under the laws of the State of Delaware and engaged in the business of acquiring equity interests in private Chinese operating companies and providing these companies with strategic support.  The acquisition of the capital stock of Covenant Holdings was accomplished on December 24, 2009, pursuant to the terms of a share exchange agreement by and among the Company, Covenant Holdings and all of the shareholders of Covenant Holdings.  Upon the closing of the share exchange, each of the Covenant Holdings shareholders exchanged their respective shares of Covenant Holdings, on a one-for-one basis, for 9,380,909 shares of the Company’s common stock.  As a result of the share exchange, Covenant Holdings became a wholly owned subsidiary of the Company.




24





Prior to our acquisition of Covenant Holdings, we were in the development stage and had minimal business operations.  We had no interest in any property, but had the right to conduct mineral exploration activities on 471 acres located in southern British Columbia, Canada pursuant to an agreement with the former majority shareholder of the Company, Gary Sidhu.  In connection with the acquisition of Covenant Holdings, Mr. Sidhu terminated the Company’s mineral exploration rights, and he agreed to surrender 5,000,000 shares of the Company’s common stock in exchange for $100,000 and a promissory note from the Company in the principal amount of $190,000, $90,000 of which the Company has prepaid.  Mr. Sidhu surrendered 4,500,000 shares of our common stock and agreed to surrender his remaining 500,000 shares upon full payment of the promissory note by the Company.  On March 25, 2010, Mr. Sidhu and the Company entered into an agreement pursuant to which Mr. Sidhu agreed to cancel the promissory note and surrender his remaining 500,000 shares in exchange for the Company issuing to him 300,000 shares of common stock of the Company.  On May 13, 2010, Mr. Sidhu and the Company entered into an agreement pursuant to which Mr. Sidhu agreed to reduce the number of shares that he will receive from 300,000 to 70,000.  See “Prospectus Summary” in this prospectus.





There was no significant activity from June 10, 2009 through December 31, 2009, except for the acquisitions of our two operating subsidiaries, Hainan Jien and Chongqing Sysway.  On June 24, 2009, Covenant Holdings entered into a stock acquisition and reorganization agreement with Hainan Jien and its stockholders.  Pursuant to the terms of this agreement, Covenant Holdings acquired 100% of the capital stock of Jien, representing 100% of the company’s outstanding equity interests, in exchange for 1,350,000 shares of a public shell’s common stock.  For purposes of this acquisition, the common stock of the shell company that would acquire all of the rights and obligations of Covenant Holdings was valued at $1.76 per share, which was determined by the volume weighted average stock price for the first day of trading of the Company’s common stock plus all private sales of Covenant Holdings’ common stock prior to the completion of the reverse merger with the Company.  Jien was incorporated in Hainan Province, China in 1999.  Jien specializes in the design and installation of security and surveillance infrastructure to protect financial institutions and government agencies, and it also implements “intelligent construction” projects for commercial customers.





On June 24, 2009, Covenant Holdings entered into a stock acquisition and reorganization agreement with Chongqing Sysway and its stockholders.  Pursuant to the terms of this agreement, Covenant Holdings acquired 100% of the capital stock of Sysway, representing 100% of the company’s outstanding equity interests, in exchange for 1,400,000 shares of a public shell’s common stock.  For purposes of this acquisition, the common stock of the shell company that would acquire all of the rights and obligations of Covenant Holdings was valued at $1.76 per share, which was determined in the same manner as in the acquisition of Hainan Jien.   Chongqing Sysway was incorporated in 1999 in Chongqing City, Sichuan Province, PRC, as a State Owned Enterprise (“SOE”).  Since 2005 Chongqing Sysway has operated as a private enterprise mainly engaged in systems integration services, including computer systems installation, website design, and system firewall setup, particularly for the tobacco industry.





Under the stock acquisition and reorganization agreement between the Company and Hainan Jien, the Company agreed to make a capital contribution of $2,500,000 to Hainan Jien.  On August 27, 2010, the Company entered into an agreement with Hainan Jien and its former shareholders pursuant to which Hainan Jien and such shareholders have agreed to arrange for the official transfer of the shares of Hainan Jien from such shareholders to the Company in the PRC, which was completed on November 4, 2010.  The Company has paid $150,000 to such shareholders and will invest $350,000 in Hainan Jien upon Jien’s approval from SAFE to open a foreign exchange account in China.  The $150,000 payment to the former shareholders of Hainan Jien is required under PRC law in order to maintain the existing registered capital of Hainan Jien.  In addition, the Company has agreed to use its best efforts to invest an additional $825,000 in Hainan Jien on or before October 31, 2010 and another $1,175,000 on or before January 31, 2011.  As a result of administrative delays in the share registration process, Covenant Holdings, Jien and the former Jien shareholders are working amicably to fund Jien and increase Jien’s registered capital as close as possible to the envisioned funding schedule.





The former shareholders and Hainan Jien have agreed to assist the Company with increasing Hainan Jien’s registered capital with PRC governmental authorities in accordance with the Company’s investments.  The parties have agreed that in the event the Company fails to make such capital contributions to Hainan Jien, the former shareholders will have no right to have the shares of stock of Hainan Jien returned to them.





The Company intends to rely on a private placement of convertible preferred stock and other private offerings to provide the funding for the remaining $2,000,000 that the Company has agreed to contribute to Hainan Jien. Additionally, to the extent the Company has the ability to sell shares under the Equity Credit Agreement at or prior to the time that any obligation to make capital contributions to Jien remains outstanding, the Company may use the sale of shares under the Equity Credit Agreement to provide such funding, though it is too early for the Company to determine how much, if any, funds will be accessed via the Equity Credit Agreement for this purpose.




25





Rescission of our Acquisition of Chongqing Sysway





On April 30, 2010, the Board of Directors of the Company voted to terminate and rescind the stock acquisition and reorganization agreement with Chongqing Sysway due to several breaches of such agreement by Chongqing Sysway, including the failure of the prior owners of Chongqing to repay a dividend paid to them by Chongqing Sysway in excess of that permitted under the agreement and under China law and the failure of Chongqing Sysway and its prior owners to cooperate with the Company in the preparation of the financial statement disclosures required under United States securities laws.





As a result of the termination and rescission of the agreement, the Company has transferred all of the shares of capital stock of Chongqing Sysway to the prior owners of Chongqing Sysway and the 1,400,000 shares of common stock of the Company issued in exchange for the shares of capital stock of Chongqing Sysway have been returned to the Company and treated as treasury shares.  The intent of this transaction is to return the Company, Chongqing Sysway, and the prior owners of the capital stock of Chongqing Sysway to their status prior to the completion of the acquisition by the Company of the capital stock of Chongqing Sysway on December 24, 2009.





The assets and liabilities of Chongqing Sysway and the results of operations of Chongqing Sysway are reflected in the consolidated financial statements of the Company as discontinued operations.  As a result, the consolidated results of operations of Covenant Group of China for the three months ended September 30, 2009 reflect the results of operations of Jien but exclude the results of operations of Chongqing Sysway as if the rescission of Chongqing Sysway acquisition occurred on July 1, 2009.


Critical Accounting Policies





While our significant accounting policies are more fully described in Note 2 of our 2009  consolidated audited annual  financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.





Basis of Presentation





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





Principle of Consolidation





The consolidated financial statements include the accounts of Covenant Holdings, Covenant Group of China, Pandaz Delaware and Hainan Jien and all intercompany transactions and account balances are eliminated in consolidation.





Use of Estimates





In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year.  Significant estimates, required by management, include the recoverability of long-lived assets and the valuation of inventories.  Actual results could differ from those estimates.





Accounts Receivable and Retentions Receivable





The Company’s policy is to maintain reserves for potential credit losses on accounts receivable.  Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  We have retentions receivable for product quality assurance; our retention rate varies from 3% to 5% of the sales price with variable terms from 1 year to 3 years.




26





Inventories





The Company’s inventory is valued at the lower of cost or market with cost determined on a first in, first out basis.





Property and Equipment





Property and equipment are stated at cost, net of accumulated depreciation.  Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized.  When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.  Depreciation of property and equipment is provided using the straight-line method for substantially all assets with 5% salvage value and estimated lives ranging from 3 to 25 years as follows:





Buildings
20-25 yearsLeasehold improvements
Shorter of lease term or 10 yearsVehicles
5-10 yearsOffice Equipment
3-5 years





Goodwill





Goodwill represents the excess of the fair value of the consideration transferred over the net of the acquisition date amount of identifiable assets acquired and the liability assumed.  In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement No. 142”), codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, goodwill is not amortized but is tested for impairment annually, or when circumstances indicate a possible impairment may exist.  Impairment testing is performed at a reporting unit level.  An impairment loss generally would be recognized when the carrying amount of the reporting unit exceeds the fair value of the reporting unit, with the fair value of the reporting unit determined using a discounted cash flow (DCF) analysis.  A number of significant assumptions and estimates are involved in the application of the DCF analysis to forecast operating cash flows, including the discount rate, the internal rate of return, and projections of realizations and costs to produce.  Management considers historical experience and all available information at the time the fair values of its reporting units are estimated.





Revenue Recognition





The Company's revenue recognition policies are in compliance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 104 (codified in FASB ASC Topic 605).  Revenue is recognized when services have been rendered or product delivery has occurred, a formal arrangement exists, the price is fixed or determinable, no other significant obligations of the Company exist and collectability is reasonably assured.  Payments received before all of the relevant criteria for revenue recognition are recorded as unearned revenue.





The Company derives the majority of its revenue from the supply and installation of surveillance and security equipment and systems.  The two deliverables do not meet the separation criteria under Emerging Issues Task Force (EITF) Issue 00-21 “Revenue Arrangements with Multiple Deliverables” (EITF No. 00-21) (codified in FASB ASC Topic 605).  Revenue from the supply and installation of surveillance and security equipment and systems are recognized when the installation is completed and the customer acceptance is received. For contracts that are partially completed at the end of a reporting period, the company recognizes revenue based on a percentage of completion method as work on the contract progresses. The income recognized is the percentage of total estimated income that incurred costs to date bear to estimated total costs after giving effect of costs to complete based on the most recent information. The customer signs off on a progress report to indicate acceptance of the percentage recognized.




27





Sales revenue represents the invoiced value of goods and services, net of value-added tax (VAT).  Jien became a general taxpayer on February 1, 2010 so that all of the Company’s products sold in the PRC are subject to a fixed VAT of 17% of the gross sales price, which can be offset by VAT incurred by Jien on its purchases. Prior to February 2010, the Company was a small business and subject to a fixed VAT rate 4% in 2008 and 3% in 2009, which cannot be offset by VAT incurred on purchases.Only the sale of goods is subject to VAT. Revenue from installation contracts is subject to a 3% business tax, which is reflected in the cost of goods sold.





Most of the major contracts are bundled with a post-installation service for duration of 1 to 3 years depending on customers’ requests.  During this period, customers are entitled to exchange parts if they are found to be not working in line with specifications or if there is quality problem.





The Company subcontracts all its major projects to third party subcontractors who supply both the equipments and parts and provide installation service. Back-to-back warranty from third party subcontractors is provided for both products and services.  Since the warranty service is covered by subcontractors, there is no substantial performance obligation once the installation is completed and accepted by the customers.  Accordingly, the earnings process is considered completed upon completion of project. In cases where subcontractors provide a shorter warranty period than that requested by customers, Jien will service the customers itself as Jien has a core team of engineers and technicians to handle this part of the service.  In such cases, the warranty service is not deemed to be a separate deliverable.





There is no general right of return indicated in the contracts. If any equipment delivered does not fit the required specifications, customers are entitled to exchange for the correct item; or if the item is not functioning properly, the Company is responsible for fixing it or replacing it with a new item, which is usually covered by a manufacturer’s warranty and/or the third party subcontractor’s warranty. Customers are not entitled to a refund.Because there is no general right of return and the software portion of a typical contract amounts to an insignificant part of the contract, the Company’s revenue arrangements do not contain multiple deliverables.





Cost of Revenue





Cost of goods sold consists primarily of material costs, labor costs, and related overhead that are directly attributable to the production of the service.  Write-down of inventory to lower of cost or market is also recorded in cost of goods sold.





Foreign Currency Translation and Transactions and Comprehensive Income (Loss)





The accompanying consolidated financial statements are presented in United States Dollars (“USD”).  The Company’s functional currency is the USD, while the Company’s wholly owned Chinese subsidiary’s functional currency is the Renminbi (“RMB”).  The functional currencies of the Company’s foreign operations are translated into USD for balance sheet accounts using the current exchange rates in effect as of the balance sheet date and for revenue and expense accounts using the weighted-average exchange rate during the fiscal year.  The translation adjustments are recorded as a separate component of stockholders’ equity, captioned accumulated other comprehensive income (loss).  Gains and losses resulting from transactions denominated in foreign currencies are included in other income (expense) in the consolidated statements of operations.  There have been no significant fluctuations in the exchange rate for the conversion of RMB to USD after the balance sheet date.





Comprehensive Income (Loss)





The Company uses SFAS No. 130, “Reporting Comprehensive Income” (codified in FASB ASC Topic 220).   Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.




28





Segment Reporting





SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (codified in FASB ASC Topic 280), requires use of the “management approach” model for segment reporting.  The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance.  Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.





SFAS 131 has no effect on the Company’s financial statements as substantially all of the Company’s operations are conducted in one industry segment.  The Company consists of one reportable business segment.  Most of the Company’s assets are located in the PRC, except US bank accounts for Covenant Holdings, Covenant Group of China, and Pandas Delaware, and $25,000 of intangible assets that belong to Pandaz Delaware.





RESULTS OF OPERATIONS





For the three months ended September 30, 2010 and the comparative period of 2009





The following table presents the actual consolidated results of operations of Covenant Group of China for the three months ended September 30, 2010 as compared to the consolidated results of operations of Covenant Group of China for the three months ended September 30, 2009, indicated as a percentage of net sales.





For Three Months Ended September 30,2010


2009$


% of Sales


$


% of SalesSales


1,695,657






1,809,815Cost of sales


1,260,321



74
%


1,440,937



80
%Gross Profit


435,336



26
%


368,878



20
%Operating Expenses


341,639



20
%


312,122



17
%Income from Operations


93,697



6
%


56,756



3
%Other Income (Expenses), net


(82,502)



(5)
%


554



0
%Income from Continuing Operations


11,195



-
%


57,310



3
%Income from Discontinued Operations, Net of Tax


-



-
%


47,361



3
%Net Income


11,195



1
%


104,671



6
%




NET REVENUES





Net revenues for the three months ended September 30, 2010 were $1,695,657, as compared to net revenues of $1,809,815 for the comparative period of 2009, a decrease of $114,158, or approximately 6%. The  decrease in net revenues was primarily attributable to contracts with smaller amounts Jien obtained during the three months ending September 30 2010 even though the number of the contracts increased compared to the same period of 2009. Of its larger projects during the three months ended September 30, 2009, Jien recognized $630,000 from a project with Hainan Province Medical School and $600,000 from a real estate company project due to its completion. .





COST OF REVENUES





Cost of revenue includes material costs, labor costs, and related overhead, which are directly attributable to our provided services and products. For the three months ended September 30, 2010, cost of revenues amounted to $1,260,321, or approximately 74% of net revenues, as compared to cost of revenues of $1,440,937, or approximately 80% of net revenues, for the comparative period of 2009.





The decrease in cost of revenue as a percentage of net revenue was attributable to our efficient control on labor cost and material cost despite overall price inflation in China. Though the cost of each project varies based on the nature of each project, Jien was able to internalize work on projects as opposed to selectively outsourcing work, which has resulted in cost savings.




29




GROSS PROFIT





Gross profit for the three months ended September 30, 2010 was $435,336, as compared to $368,878 for the comparative period of year 2009, an increase of $66,458 or approximately 18%. Gross profit margin was 26% for the three months ended September 30, 2010 and 20% for the comparative period of 2009. This increase in gross profit margin was due to the relatively lower cost of revenue as a percentage of revenue for the three months ended September 30, 2010 for the reasons described above.





OPERATING EXPENSES





Operating expenses consisted of selling, general and administrative expenses totaling $341,639 for the three months ended September 30, 2010, compared to $312,122 for the comparative period of 2009, an increase of $29,517 or 9%.  The increase in operating expenses was primarily due to increased expenses in audit, legal and consulting fees arising from the Company being a public company as a result of the reverse merger at the end of 2009.





The operating expense for Jien was approximately $183,948 for the three months ended September 30, 2010 as compared to $167,647 for the same period of 2009, a slight increase of $16,301or 10%. This increase was mainly attributable to a bad debt write off of $79,000 but partially offset by management’s cost savings realized on traveling and entertainment, as well as the decreased tax rate on net sales from 3% in 2009 to 1.76% in 2010.





NET INCOME





For the three months ended September 30, 2010, the Company had net income of $11,195 as compared to net income of $57,310 for the comparative period of 2009, a decrease of $46,115, or approximately 80%. This decrease in net income was mainly due to a non-cash interest expense of approximately $70,000 resulting from the amortization of the fair value of the warrants that were attached to the short-term loans.





For the nine months ended September 30, 2010 and the comparative period of 2009





The following table presents the actual consolidated results of operations of Covenant Group of China for the nine months ended September 30, 2010 as compared to the pro forma consolidated results of operations of Covenant Group of China for the nine months ended September 30, 2009 as if the acquisition of Jien occurred on January 1, 2009, indicated as a percentage of net sales.  The pro forma consolidated results of operations of Covenant Group of China for the nine months ended September 30, 2009 exclude the results of operations of Chongqing Sysway.





For Nine Months Ended September 30,2010


2009 (Pro Forma)$



% of Sales


$



% of SalesSales


4,672,677






4,835,602Cost of sales


3,561,711



76
%


3,741,556



77
%Gross Profit


1,110,966



24
%


1,094,046



23
%Operating Expenses


933,799



19
%


541,613



11
%Income from Operations


177,167



5
%


552,433



12
%Other Expenses, net


(121,110)



(3)
%


(3,957)



(0
)%Net Income


56,057



2
%


548,476



12
%




30




NET REVENUES





Net revenues for the nine months ended September 30, 2010 were $4,672,677, as compared to net revenues of $4,835,602 for the comparative period of 2009, a decrease of $162,925, or approximately 3%. Despite the slight decrease, Jien obtained new contracts from government agencies in the nine months ended September 30, 2010, such as the projects with the General Office of Peoples Government of Haikou Municipality,JingRui Real Estate Development Company, Government Affair Center, Haikou City Prison.. We recognized revenue by using the percentage of completion method for each project, which was determined based on the actual cost spent in proportion to the total estimated cost. The progress of the project usually proceeds faster for the beginning stage of the project.  For example, for the Hainan Province Medical School contract, we recognized approximately $1.2 million of revenue for the nine months ending September 30, 2009 when the project was 65% completed.  Comparatively, during the nine months ending September 30, 2010, we only recognized approximately $0.4 million for this project.





COST OF REVENUES





Cost of revenue includes material costs, labor costs, and related overhead, which are directly attributable to our provided services. For the nine months ended September 30, 2010, cost of revenues amounted to $3,561,711, or approximately 76% of net revenues, as compared to cost of revenues of $3,741,556, or approximately 77% of net revenues, for the comparative period of 2009. The decrease in cost of revenue as a percentage of net revenue was attributable to controls on labor costs and selectively outsourcing certain projects..





GROSS PROFIT





Gross profit for the nine months ended September 30, 2010 was $1,110,996, as compared to $1,094,046 for the comparative period of year 2009, an increase of $16,920 or approximately 2%. Gross profit margin was 24% for the nine months ended September 30, 2010 and 23% for the comparative period of 2009. This slight increase in gross profit margin was due to the slight decrease in cost of revenue as a percentage of revenue due to the cost controls outlined above.





OPERATING EXPENSES





Operating expenses consisted of selling, general and administrative expenses totaling $933,799 for the nine months ended September 30, 2010, compared to $541,613 for the comparative period of 2009, an increase of $392,186 or 72%.  The increase in operating expenses was primarily due to increased expenses in audit, legal, and consulting fees arising from the Company being a public company as a result of the reverse merger at the end of 2009.





The operating expense for Jien was approximately $376,729 for the nine months ended September 30, 2010 as compared to $397,147 for the same period of 2009, a decrease of $ 20,418 or 5%. This decrease was mainly attributable to cost savings on travel, rental and entertainment expenses by Jien’s management, as well as the decrease of the tax rate on net sales from 3% in 2009 to 1.76 in 2010, partially offset by the increased bad debt write off.





NET INCOME





For the nine months ended September 30, 2010, the Company had net income of $56,057 as compared to net income of $548,476 for the comparative period of 2009, a decrease of $492,419, or approximately 90%. This decrease in net income was mainly due to increased expenses in audit, legal, and consulting fees arising from the Company being a public company, a bad debt allowance expense of $79,000, a one-time, non-cash expense of approximately $23,200 resulting from the settlement of a note payable to Mr. Sidhu in exchange for the issuance of 70,000 shares of the Company’s common stock, and a non-cash interest expense of approximately $88,000 resulting from amortization of the fair value of the warrants that were attached to the short term loans.




31





LIQUIDITY AND CAPITAL RESOURCES





For the nine months ended September 30, 2010 and the comparative period of 2009





As of September 30, 2010, we had cash and cash equivalents of $1,700,573, of which Covenant Group of China directly held $582,202 and Jien held $1,118,109. Other current assets were $3,611,204 and current liabilities were $3,216,302.  Working capital was $2,095,475. The ratio of current assets to current liabilities was 1.65:1 at September 30, 2010.





The following table presents the actual summary of cash provided by or used in each of the indicated types of activities of Covenant Group of China for the nine months ended September 30, 2010 as compared to the pro forma summary of cash provided by or used in each of the indicated types of activities of Covenant Group of China for the nine months ended September 30, 2009 as if the acquisition of Jien occurred on January 1, 2009.





2010


(Pro Forma)

2009Cash provided by (used in):Operating Activities

$
(757,792
)

$
78,131Investing Activities


(34,171
)


-Financing Activities


1,503,514



485,934





Net cash flow used in operating activities was $757,792 during the nine months ended September 30, 2010, as compared to net cash flow provided by operating activities of $78,131 for the comparative period of 2009. The decrease in net cash flow generated in operating activities during the nine months ended September 30, 2010 was mainly due to decreased net income, increased purchases of inventory, payments for accounts payable, and increased accounts receivable outstanding.  These effects are attributable to an increasingly competitive business environment, whereby competitors bid for new contracts on the basis of extending credit terms to customers, though credit terms from materials suppliers have remained fixed.  To remain competitive, Jien has extended more favorable payment terms to its customers while simultaneously managing the strict credit terms of its suppliers.  Jien plans to address this difficult business environment through continued cost reduction and negotiating better payment terms with its materials suppliers.





Net cash flow used in investing activities was $34,171 in the nine months ended September 30, 2010, compared to net cash used in investing activities of $0 in the comparative period of 2009. The cash was used mainly for the acquisition of fixed assets.





Net cash flow provided by financing activities was $1,503,514 in the nine months ended September 30, 2010 as compared to net cash provided by financing activities of $485,934 in the comparative period of 2009.  The increased cash flow provided by financing activities was primarily due to a short-term bank loan received by Jien and three bridge loans obtained by the holding company in the nine months ended September 30, 2010.





Off-Balance Sheet Arrangements





We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties.  We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated financial statements.  Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.  We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.





Item 3.    Quantitative and Qualitative Disclosures About Market Risk





Omitted.




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Item 4T.    Controls and Procedures





The Company carried out an evaluation, under the supervision and with the participation of its management, including the President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rule 13a-15(e)) as of the end of the period covered by this quarterly report. Based upon that evaluation, the President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.





There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.





Part II.    OTHER INFORMATION





Item 1.    Legal Proceedings





There have been no material changes from the disclosure provided in Part 1, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2009.





Item 1A.  Risk Factors





There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.





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





On July 1, 2010, the Company entered into a bridge loan agreement for $1 million of short-term financing with JD Holdings 1, Inc. (“JDC”). As additional consideration for entering into the bridge loan agreement, the Company agreed to issue warrants to purchase up to 150,000 shares of the Company’s common stock at a $3.00 strike price over a 2-year term. Under the terms of the loan agreement, the warrants will become exercisable pro-rata with the amount the Company draws down against the $1 million loan. As of September 17, 2010, the Company has drawn down $650,000 of this financing, requiring the issuance of warrants to JDC, currently exercisable, to purchase up to 97,500 shares of the Company’s common stock pursuant to the terms set forth above. The issuance of such warrants was exempt from the registration requirements of the Securities Act pursuant to the exemption provided under Section 4(2) of the Securities Act.





There are no contractual limitations on the payment of cash dividends by the Company, including under any loan agreement.





Item 3.    Defaults Upon Senior Securities





None.





Item 4.    [Removed and Reserved.]





Item 5.    Other Information





None.





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  Item 6.    Exhibits
  (a)
Exhibits




Exhibit Number

Description of Exhibit3.1

Articles of Incorporation of Covenant Group of China Inc. (formerly Everest Resources Corp.) (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form SB-2 of the Registrant filed on August 30, 2007)3.2

Certificate of Amendment to the Articles of Incorporation of Covenant Group of China Inc. (formerly Everest Resources Corp.) (Incorporated herein by reference to Exhibit 3(i).1 to the Current Report on Form 8-K of the Registrant filed on December 31, 2009)3.3

Bylaws of Covenant Group of China Inc. (formerly Everest Resources Corp.) (Incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form SB-2 of the Registrant filed on August 30, 2007)3.4

Amendment to Bylaws of Covenant Group of China Inc. (formerly Everest Resources Corp.) (Incorporated herein by reference to Exhibit 3(ii).2 to the Current Report on Form 8-K of the Registrant filed on December 31, 2009)10.1

First Amendment to Promissory Note by and between Covenant Group of China Inc. and Walston Dupont Global Advisors LLC, dated October 28, 201010.2

Third Amendment to Promissory Note by and between Covenant Group of China Inc. and Sui Generis Capital Partners LLC, dated October 28, 201031.1

Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Executive Officer).32.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).






34


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.





COVENANT GROUP OF CHINA INC.November 15, 2010
By:
/s/  Kenneth WongKenneth WongPresident (Principal Executive Officer)November 15, 2010
By:
/s/ Justin D. CsikJustin D. CsikChief Financial Officer

(Principal Financial and Accounting Officer)




35