QUALITY ONLINE EDUCATION GROUP INC. The following should be read in conjunction with the consolidated financial
statements of the Company included elsewhere herein. All amounts are in
Forward-Looking Statements This report contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report and the documents that we reference and filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. Company Overview
Unless the context otherwise requires, the "Company," "we," "us," and "our" refer to the combined business ofADGS Advisory, Inc. , formerly known asLife Nutrition Products, Inc. , aDelaware corporation, and its direct and indirect wholly-owned subsidiaries,Almonds Kisses Limited (BVI), aBritish Virgin Islands company,ADGS Advisory Limited , aHong Kong corporation,Vantage Advisory Limited , aHong Kong corporation,Motion Tech Development Limited , aBritish Virgin Islands company, andTH Strategic Management Limited , aHong Kong corporation, as well asADGS Tax Advisory Limited , aHong Kong corporation which is an 80% owned subsidiary, andDynamic Golden Limited , aHong Kong corporation which untilNovember 19, 2013 was 30% owned byADGS Tax Advisory Limited and has since been 30% owned byAlmonds Kisses Limited (BVI). Pursuant to a Certificate of Amendment to the its Certificate of Incorporation filed with theState of Delaware and effective as ofJuly 19, 2013 , the Company changed its corporate name from "Life Nutrition Products, Inc. " to "ADGS Advisory, Inc. ".
We are primarily engaged in providing accounting, taxation, company secretarial,
general corporate and consultancy services in
On
Almonds Kisses BVI was incorporated onMarch 1, 2011 as a limited liability company in theBritish Virgin Islands .ADGS Advisory Limited ("ADGS Hong Kong") is aHong Kong corporation which was incorporated onApril 28, 2011 and had been wholly owned by the same group of shareholders until being acquired by Almonds Kisses BVI pursuant to a reorganization completed in 2012 to prepare for the Transaction.Vantage Advisory Limited is aHong Kong corporation which was incorporated onMarch 6, 2008 which has been wholly owned by Almonds Kisses BVI sinceJanuary 2013 . Motion Tech is aBritish Virgin Islands company which was incorporated onOctober 7, 2007 and has been wholly owned by Almonds Kisses BVI sinceAugust 2013 . Motion Tech is a property holding company which owns a residential property.TH Strategic Management Limited is aHong Kong corporation which was incorporated onMarch 16, 2010 which has also been wholly owned by Almonds Kisses BVI sinceOctober 2013 . ADGS Hong Kong owns 80% ofADGS Tax Advisory Limited ("ADGS Tax") which is aHong Kong incorporated holding company.Dynamic Golden Limited which is also aHong Kong incorporated company, which was 30% owned by ADGS Tax untilNovember 19, 2013 and has since been 30% owned by Almonds Kisses BVI, owns an investment in residential real property located in TuenMun, New Territories,Hong Kong . 3 The chart below presents our corporate structure as of the date of this report: ADGS Advisory, Inc. (formerly Life Nutrition Products, Inc.), a Delaware corporation ê 100% Almonds Kisses Limited (BVI), a British Virgin Islands company ê 100% ê 100% ê 100% ê 100% ê 30% ADGS Advisory Vantage Advisory TH Strategic Motion Tech Dynamic Golden Limited Limited, Management Development Limited, Limited, a Hong Kong a Hong Kong a Hong Kong Limited, a a Hong Kong corporation corporation corporation British Virgin corporation Islands company ê 80% ADGS Tax Advisory Limited a Hong Kong corporation Critical Accounting Policies While our significant accounting policies are more fully described in Note 2 to our 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 These interim consolidated financial statements are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures for a fair presentation of these interim consolidated financial statements have been included. The results reported in the consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying consolidated financial statements have been prepared in accordance with the rules and regulations of theSecurities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted inthe United States . These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes of the Company for the year endedAugust 31, 2013 , as filed in Form 10-K with theSecurities and Exchange Commission on December
24, 2013.
The unaudited condensed consolidated financial statements include all accounts of the Company and its subsidiaries as disclosed in note 1. All material inter-company balances and transactions have been eliminated in consolidation.
As both the Company and its subsidiaries, ADGS and ADGS Tax are under common control, the financial statements of the Company have been presented as if the receipt of assets and liabilities of the subsidiaries at their net carrying amount been entered into as ofMarch 1, 2011 in accordance with ASC 805-50-15-6. Accordingly, financial information related to periods prior to the assets and liabilities are that of the Company's subsidiaries. The accompanying financial statements are presented on a going concern basis. Although the Company had a working capital deficit of$233,445 atNovember 30, 2013 . Management plans to continue its efforts to raise funds through debt or equity in the near future to sustain our operations. Revenue recognition
The Company generates revenue primarily from providing accounting, taxation, company secretarial, consultancy services, consultancy service for slope inspection and rental income.
(i) Revenue generates from providing accounting, taxation, company secretarial
and consultancy services is recognized when persuasive evidence of an
arrangement exists, the related services are provided and when the collection is
probable, the price is fixed or determinable and collectability is reasonably
assured. The Group generates its revenues from providing professional services
under fixed-fee billing arrangements.
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In fixed-fee billing arrangements, the Company agrees to a pre-established fee in exchange for a pre-determined set of professional services. Generally, the client agrees to pay a fixed-fee in monthly installments over the specified contract term. These contracts are for varying periods and generally permit the client to cancel the contract before the end of the term.
(ii) Consultancy service for slope inspection represents under fixed price contract is recognized when the related services are provided and when the collection is probable, the price is fixed or determinable and collectability is reasonably assured.
(iii) Rental income Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over the lease term. (iv) Management fee income
The Company recognizes the management fee income when service is provided. Services include providing administration support service or accounting service to companies.
Purchased intangible assets
The Company assesses the useful lives and possible impairment of existing recognized intangible assets when an event occurs that may trigger such a review. Factors considered important which could trigger a review include:
- significant underperformance relative to historical or projected future operating results;
- significant changes in the manner of use of the acquired assets or the strategy for our overall business;
- identification of other impaired assets within a reporting unit; - disposition of a significant portion of an operating segment; - significant negative industry or economic trends;
The intangible assets are amortized using the straight line method over a period of 10 years.
Income taxes The Company accounts for income taxes under FASB ASC Topic 740 "Income Taxes". Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be effective when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of income in the period that includes the enactment date. The Company records uncertain tax positions when it is more likely than not that the tax positions will not be sustained upon examination by the respective
tax authority. The Company recognizes interest and penalty related to income tax matters as income tax expense. As ofNovember 30, 2013 andAugust 31, 2013 , there was no penalty or interest recognized as income tax expenses. Economic and political risks
The major operations of the Company are conducted in
Among other risks, the Company's operations are subject to the risks of restrictions on: changing taxation policies; and political conditions and governmental regulations.
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Recently issued accounting standards not yet adopted
The Company has reviewed all recently issued, but not effective, accounting pronouncements and does not believe the future adoption of any such pronouncements will cause a material impact on its financial condition or the result of its operation.
Trends and Uncertainties
Insofar that our revenues are mainly derived from providing professional services to our clients under fixed-fee billing arrangements, the number of clients we have at any given time and the fees billed are the Company's key uncertainties. The recent growth in revenues was primarily due to the acquisition of customer lists and client bases in 2011 and, therefore, we cannot be certain that this growth represents a trend which will continue although we have recently made acquisitions and we plan to make additional acquisitions in the upcoming years and we are regularly exploring such opportunities which may benefit our business and increase our revenues. In the future, we expect that we will seek to purchase other customer lists and client bases as part of our overall growth strategy, although there can be no assurance that we will be able to do any of the foregoing on terms which will be acceptable to us. Other key uncertainties include our high leverage and highly variable interest expense. To date, we have significantly relied upon debt financings to fund our operations. AtNovember 30, 2013 (unaudited) andAugust 31, 2013 (audited), we had outstanding bank loans (excluding bank overdrafts) in the principal amount of$2,256,142 and$2,286,785 , respectively. We also had bank overdrafts of$818,479 as ofNovember 30, 2013 compared with$744,077 as ofAugust 31, 2013 . Interest expense from bank loans and overdrafts (excluding capital lease interest) for the three months endedNovember 30, 2013 was$14,663 and for the three months endedNovember 30, 2012 was$29,260 . Such loans are primarily term loans with maturity dates ranging fromNovember 2013 toOctober 2037 . Approximately$0.5 million of the bank loans are to be repaid over the next five years. While we have begun to achieve profitable operations during fiscal 2013, there can be no assurance that such profitability will continue or that revenues from our operations will be able to service these debt obligations. In addition to the foregoing, as ofNovember 30, 2013 , advances to shareholder total$208,921 . The advances to shareholder represent unsecured, non-interesting bearing loans without fixed repayment terms. Although most of such advances have been repaid to the Company, such advances may have detrimentally affected our ability to do business insofar that such advances represented a major portion of the Company's available cash. These advances were provided as a special accommodation to such shareholder whose personal properties were provided as collateral for bank loans obtained by the Company. Although there is no binding obligation on the part of the shareholder to repay such loans, such shareholder previously informally agreed to repay such amounts on or beforeNovember 1, 2013 but has since revised such date to February28, 2014. The foregoing represents another key uncertainty since no assurance can be made that such advances will be repaid on or beforeFebruary 28, 2014 or at all. In addition, although such advances are no longer being made to such shareholder, such advances have not generated income to the Company and may have detrimentally affected our ability to grow the business for the benefit of all of the shareholders.
Principal Components of Our Income Statement
Revenue
Our revenue is derived from providing professional services to our clients under
fixed-fee billing arrangements. The most significant factors that affect our
revenue are number of clients and our fees billed. In fixed-fee billing
arrangements, we agree to a pre-established fee in exchange for a pre-determined
set of professional services. Generally, our client agrees to pay a fixed-fee
every month over the specified contract term. These contracts are for varying
periods and generally permit the client to cancel the contract before the end of
the term.
Operating expenses
Our operating expenses consist of direct cost of revenue, general and
administrative expenses.
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Direct cost of revenue
Our direct cost of revenue primarily consists of commission paid, consultant
fees, legal and professional fees, management fees, salaries, secretarial fees
and sub-contractor fees.
General and administrative expenses
Our general and administrative expenses include advertising and exhibitions, computer fee, depreciation of property and equipment, motor vehicles, rent, rates and building management fee and other miscellaneous expenses related to our administrative activities.
Our operating expenses are positively correlated to our revenue, with the anticipated expansion of our Company, we anticipate the absolute dollars of the operating expenses will increase accordingly.
Other comprehensive income
Other comprehensive income reflects foreign currency translation adjustment according to our accounting policies.
For the Three Months Ended November, 2013 and 2012 (unaudited)
The following table presents the consolidated statements of operations of the
Company for the three months ended November, 2013 as compared to the three
months ended November, 2012.
For the Three Months Ended November
2013 2012
(unaudited) (unaudited)
(A)
Revenue $ 1,126,764 $ 609,599
Less: Operating expenses
Direct cost of revenue (543,959 ) (363,431 )General and administrative expenses (214,281
) (210,409 ) Operating profit 368,524 35,759 Other income 34,788 - Other expenses (28,284 ) (29,427 ) Net profit 375,028 6,332 Income tax expenses (13,349 ) -
Other comprehensive income/(loss) 5,922 (51 ) Total comprehensive income 367,601 6,281 Comprehensive loss attributable to non-controlling interests 5,774 5,671
Comprehensive income attributable to
$ 11,952
(A) Represents the consolidated statement of comprehensive income of Almonds
Kisses Limited and subsidiaries (the "Accounting Acquirer") 7 Revenue
Our business for the three months ended November, 2013 expanded rapidly. We
recorded revenue of
General and administrative expenses
For the Three Months Ended
November %
2013 2012 change
Revenue $ 1,126,764 $ 609,599 +85 %
Less: Operating expenses
Direct cost of revenue (543,959 ) (363,431 ) +50 %General and administrativeexpenses (214,281 )
(210,409 ) +2 % Operating profit$ 368,524 $ 35,759 +931 % The significant increase in general and administrative expenses is mainly caused by the increase of revenue stream in our services which led to more general and administrative expenses incurred. Other expense
Other expense represents the interest expense for the bank loans of
Other comprehensive income/(loss)
Other comprehensive income/(loss) represents the foreign currency translation adjustment of$5,922 and$51 loss for the three months ended November, 2013
and 2012 respectively.
Liquidity and Capital Resources
As ofNovember 30, 2013 , we had cash on hand of$471,625 , which represented an increase of$307,311 from$164,314 as ofAugust 31, 2013 , total current assets of$1,778,918 , and total current liabilities of$2,012,363 . Working capital was in deficit of$233,445 and the ratio of current assets to current liabilities was 0.9 to 1 as ofNovember 30, 2013 . As ofNovember 30, 2013 we had long term debt of$3,380,843 , which represented an decrease of$72,769 from$3,453,612 as ofAugust 31, 2013 ; total assets of$5,681,959 as ofNovember 30, 2013 representing an increase of$916,082 from$4,765,877 as ofAugust 31, 2013 . The ratio of long term debts to total assets was 0.6 to 1 as ofNovember 30, 2013 . These conditions raise doubt about the Company's ability to continue as a going concern. The Company's continuation as a going concern is dependent on its ability to meet its obligations, to obtain additional financing as may be required and ultimately to attain profitability. The financial statements do not include any adjustment that might result from the outcome of this uncertainty. Our management plans to continue its efforts to raise funds through debt or equity, improve its profitability in the near future to sustain its operations. 8 The following is a summary of cash provided by or used in each of the indicated type of activities during the three months ended November, 2013 and 2012, respectively: For the Three Months Ended November 2013 2012 (unaudited) (unaudited) Cash provided by/(used in): Operating activities $ 229,511$ 129,637 Investing activities (169,602 ) (8,118 ) Financing activities 247,220 (78,668 )
Effect of change of exchange rates 182
(33 ) Cash, beginning of period 164,314 129,001 Cash, end of period $ 471,625$ 171,819
Net cash provided by operating activities was$229,511 for the three months endedNovember 2013 , as compared to net cash provided by operating activities of$129,637 for same period endedNovember 2012 . The increase was mainly due to a net profit of$361,679 , offset by accounts receivable of$(61,483) , other receivables of$(57,913) , accrued liabilities of$(35,081) accrued expenses for the Company and deferred revenue of$(36,276) due to the recognition of consultancy services provided to a third party with a fixed fee and term of
four years. Net cash used in investing activities was $(169,602)for the three months endedNovember 2013 , as compared to net cash used in investing activities of$8,118 for the three months endedNovember 2012 . The increase was mainly due to the partial payments on the acquisition of an intangible asset which was a client base from an independent unrelated third party and acquisition of subsidiary,TH Strategic Management Limited ,which amounted to$38,705 and$112,826 , respectively paid during the three months period endedNovember 30, 2013 . Net cash provided by financing activities was$247,220 for the three months endedNovember 2013 , as compared to net cash used in by financing activities of$78,668 for the three months endedNovember 2012 . The increase was primarily caused by repayment of related party advances (shareholder) of$209,601 and bank overdrafts of$74,398 , and repayment of bank loans of$(30,641) . The advances to shareholder represented unsecured, non-interesting bearing loans without fixed repayment terms. Although there is no binding obligation on the part of the shareholder to repay such loans, such shareholder previously informally agreed to repay such amounts on or beforeNovember 1, 2013 but has since revised such date to February28, 2014.
The Company had bank loans with outstanding principal of
Current
Outstanding loan annualized
Nature of loans Terms of loans amount interest rate Collateral
Property and
Ranging from personal
Ranging from 1 annual rate guarantee from
year to 25 from 0.38% to related party
Term loan years $ 2,256,142 6.98% and third party
$ 2,256,142 The valuations for the above collaterals on
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The Company had assets held under capital leases, which represent leases of motor vehicle. The cost of motor vehicle under capital lease was$112,913 atNovember 30, 2013 . The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as ofNovember 30, 2013 are as follows: Amount Year endingAugust 31, 2014 (Nine months)$ 22,488 2015 27,345 2016 27,345 2017 27,345 2018 10,752 Thereafter - Total minimum lease payment$ 115,275 Less: Imputed interest (9,041 ) Present value of net minimum lease payments$ 106,234
Less: Current maturities of capital leases obligations (23,775 ) Long-term capital leases obligations
$ 82,459
Material capital expenditure commitments
We anticipate that we will require a high level of capital expenditure in the foreseeable future to fund our future growth. We intend to fund our capital expenditures and future acquisitions out of internal sources of liquidity and/or through access to additional financing from external sources. Currently, the Company has not entered into any agreements for any potential acquisitions. As a result, there are no material capital expenditure commitments as ofNovember 30, 2013 . Contractual Obligations The following table sets forth information regarding the Company's contractual payment obligations excluding the bank overdrafts of$0.8 million as ofNovember 30, 2013 . Payment due by period Contractual obligations Total < 1 year 1 - 3 years 3 - 5 years > 5 years Borrowing: - Capital lease$ 115,275 $ 22,488 $ 54,690 $ 38,097 $ - - Bank loan 2,256,142 76,905 232,556 169,745 1,776,936 - Loan from a related party 750,725 - - 750,725 - Operating lease obligation: - Office rental 194,397 100,191 94,206 - -$ 3,316,539 $ 199,584 $ 381,452 $ 958,567 $ 1,776,936 10
Off-Balance Sheet Arrangement
There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to shareholders. We have not entered into any financial guarantees or 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 shareholder'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. We may be exposed to interest rate risk in relation to the bank loans we maintain. The interest rate risk is managed by the Directors of the Company on an ongoing basis with the primary objective of limiting the extent to which interest expense could be affected by adverse movement in interest rates. A 100 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management's assessment of the reasonably possible change in interest rates. If interest rates had been 100 basis points higher/lower and all other variables were held constant, the Company's post-tax profit for the three months endedNovember 30, 2013 would increase/decrease byUS$3,614 as compared with the combined post-tax profit for the three months endedNovember 30, 2012 .
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