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Tuesday, August 14, 2007

China Education Alliance (CEDA) Q2 results

China Education Alliance (combined links) filed their 10-Q today.

10-Q (comparing against Q1's results)
Period ending June 30, 2007
58 million shares on Aug 10, 2007


Cash is way, way up. $8.3 million up from $3.6 million.
PP&E, net is up by $1 million to $5.5 million.

Deferred revenue liability (debit cards issued for downloading materials) is way up to $1.2 million from $205K
Notes payable increased by nearly $2 million to $3.4 million (that's probably where a lot of that cash came from)

Current ratio is around 3.

Paid-in capital increased by $343K for some reason.
Retained earnings increased by $1.38 million.

differences are from Q1

Online revenues increased by $1 million or 42%!! This is quarter over quarter!
Training center revenues increased by $172K or 37%!
Total revenue is now $4.35 million.

Online COGS actually decreased!
Training center COGS increased only 4%!

Overall gross margin was 80%, up from 71% in Q1.

Selling costs increased by 45%.
Admin costs increased to $438K from $158K.

Interest expense is up to $389K from $104K

$153K provision for tax, up from $84K (I consider that good)

Net income was $1.4 million, up from $1.0 million
Net margin was 32%, about the same. I can definitely handle that.

Return on total assets was 9.1%. Fair. UPDATE 10/1/07: This is waaaay wrong! The actual return on non-cash assets is more like in the high double digits! And return on equity is running at around mid double digits. I was looking at quarterly income.
Return on equity was 14%. [see above]

I had assumed 75 million totally diluted shares when I looked at Q1.
The GAAP weighted average is 62 million.

Six Months

Operations generated $4.86 million in cash on $2.40 million net income (most of that was this quarter)
Customer advances, drop in pre-paid expenses, amortization of a loan discount, depreciation, etc. Every single adjustment was an increase in cash.

Capex was $501K vs $384 depreciation.
No other investment.

$1.33 million in loans were paid off
$3.4 million in additional loans were taken out
$2.6K loan from a shareholder
Financing overall generated $2.07 million

The net increase in cash for 6 months was $6.48 million


$390K pre-paid advertising
$264K pre-paid to teachers
$127K pre-paid rent

No customer concentration (obviously).

PP&E is mostly buildings and communication equipment/software, plus furniture/fixtures. About 14% depreciated.

The $3.4 million was convertible debt used to repay the bridge loan. They created a preferred stock, series A convertible preferred.

Convertible Debt
I covered this in the Q1 analysis and ended up with 75 million totall diluted shares. I had started picking this apart again with the nagging feeling that I had done it before. D'oh!

Q2 Results
The vocational studies programs were added [as expected].
The online revenue includes some advertising revenue (not expense!).
Online gross margins are better because costs are fairly fixed.
Training center margins increased due to less amortization of of intangibles and decreased payments to lecturers (hmm).

Selling expenses increased enormously because they really didn't have a selling effort in the prior year. These include agency fees associated with increased sales of debit cards.

Admin also greatly increased due to the growth of the business.

50% tax holiday for 2007, 2008, and 2009. Taxes will double in 2010.

I've noticed in going back over previous quarters that the business is not very seasonal.


This is great. I'd put the value of the company at $1.20 or more. The stock closed today at 60 cents. If they keep expanding like this, then it would be worth a lot more. I continue to hold the stock.

What do you make of the enormous quarterly interest expense ($388K) in relation to the outstanding debt ($3.4mn)? It looks weird to me.
Good catch! They claim it's associated with the bridge loan, probably associated with paying off the loan. It's possible that they got the accounting wrong or it's possible that it belongs in the interest expense category.
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