China Interactive Education, Inc. Reports Financial Results for the Third Quarter 2010

ZHONGSHAN CITY, China, Nov. 19, 2010 /PRNewswire-Asia-FirstCall/ -- China Interactive Education, Inc. (OTC Bulletin Board: CIVN) ("China Interactive Education" or the "Company"), a pioneer in interactive teaching and learning solutions in China, today announced the Company's unaudited financial results for the third quarter of 2010.

Third Quarter 2010 Financial Highlights

• Revenues increased 117% quarter over quarter to $11.6 million
• Gross profit decreased 9% quarter over quarter to $3.5 million, representing a 30% gross margin
• Operating income decreased 21% quarter over quarter to $2.8 million, with a 24% operating profit margin
• Net income decreased 27% to $2.2 million, or $0.03 earnings per basic and diluted share

Nine Month 2010 Financial Highlights

• Revenues increased 120% period over period to $26.5 million
• Gross profit decreased 5% period over period to $7.9 million, representing a 30% gross margin
• Operating income decreased 41% period over period to $4.2 million, with a 16% operating profit margin
• Net income decreased 45% to $3.3 million, or $0.05 earnings per basic and diluted share

"The demand for our Interactive Classroom Solutions ("ICS") remains healthy and we are optimistic about the market potential of our products," commented Mr. Ruofei Chen, CEO of China Interactive Education. "Our ICS product line is well-received by our customers and we believe that it will generate additional follow-on opportunities next year when classrooms are due for equipment upgrade or replacement. With the positive returns generated from the initial marketing expenditure made in the first quarter under our brand name "Five Best Student," we continued to devote resources to engage in further marketing during the quarter. We believe this will help to contribute to our long-term growth as additional customers become aware of our products. In the Education Learning Product ("ELP") segment, our competitor began to lower its prices during the quarter faster than we had anticipated. As a result, revenue generated from this segment has been adversely affected. However, the retail distribution channels for our ELPs remained healthy and we expect that this will provide us with up-sell opportunities as we roll-out additional products next year."

Mr. Ruofei Chen further remarked, "During the quarter, we concentrated our efforts on filling orders that with the shortest cash turnaround cycle, and accepting fewer larger orders with a longer cash turnaround cycle, in order to maintain a healthy cash flow cycle.  Several of our expected contracts with local governments have been delayed as we continue to negotiate with such parties on payment terms.   Therefore, we are updating our guidance for 2010 revenue in the range of $52 - $54 million with net income in the range of $8.3 - $9.0 million.

Third Quarter 2010 Financial Results

Revenue. During the 2010 third quarter, we changed our principal business from the licensing of patent rights and provision of related technology development services to the sale of educational learning products and interactive classroom solutions products under our own "Five Best Student" brand. We continued to leverage market acceptance of these new products during the quarter and recorded significant revenue growth when compared to the same quarter last year. Our revenue increased by $6.23 million, or 117%, from $5.35 million for the three months ended September 30, 2009 to $11.58 million for the three months ended September 30, 2010. The increase in revenue was also due to the advertising and promotion efforts of the Company to promote the new business for the three months ended September 30, 2010. During the three months ended September 30, 2010, advertising and promotion expenses amounted to $142,707 while only $37,231 was spent for advertising and promotion for the three months ended September 30, 2009. During the three months ended September 30, 2010, sales of education learning products and interactive classroom solutions products accounted for 28% and 72% of our revenue, respectively.  

Cost of revenue. Our cost of revenue increased by $6.56 million, or 432%, to $8.08 million for the three months ended September 30, 2010, from $1.52 million for the three months ended September 30, 2009. The cost of revenue as a percentage of revenue increased from 28% for the three months ended September 30, 2009 to 70% for the three months ended September 30, 2010. The increase in cost of revenue represents the differences between the cost structure of licensing revenue and product revenue, in connection with our change of business noted above. The cost of manufacturing interactive classroom solution products and electronic learning products, in particular the hardware and related equipment, is higher than the cost of providing licensing of patent and related technology development services.

Gross profit. Our gross profit decreased by $0.33 million, or 9%, to $3.5 million for the three months ended September 30, 2010, from $3.83 million for the three months ended September 30, 2009. Gross profit as a percentage of net revenue was 30% and 72% for the three months ended September 30, 2010 and 2009, respectively. The decrease in gross margin was due to the increase in cost of revenue as a result of our change of business as mentioned above. For the three months ended September 30, 2009, our patent licensing and technology development services business had a gross margin of 72%. For the three months ended September 30, 2010, our educational learning products and interactive classroom solutions products had gross margins of 24% and 32%, respectively.

Selling expenses. For the three months ended September 30, 2010, our selling expenses increased by $0.23 million, or 405%, to $0.28 million, from $0.06 million for the three months ended September 30, 2009. During the 2010 period, we incurred expenses related to our marketing campaign for our change in business and in the build up of our own "Five Best Student" brand. The cost of advertisement and promotion related to brand building for the three months ended September 30, 2010 amounted to $142,707, while only $37,231 was spent for advertising and promotion for the three months ended September 30, 2009.

General and administrative expenses. For the three months ended September 30, 2010, our general and administrative expenses increased by $0.26 million, or 163%, to $0.42 million from $0.16 million for the three months ended September 30, 2009. Such increase was mainly due to the increase in legal and professional fees in connection with our status as a public company.

Research and development expenses. For the three months ended September 30, 2010, our research and development expenses decreased by $0.1 million, or 74%, to $0.04 million from $0.14 million for the three months ended September 30, 2009. Such decrease was due to our devotion of more resources in 2009 to develop educational products such that fewer resources were required in the 2010 period to further develop these products.

Income before income taxes. Our income before income taxes decreased by $0.69 million, or 20%, to $2.79 million for the three months ended September 30, 2010, from $3.48 million for the three months ended September 30, 2009, resulting from the decrease in gross profit and increase in selling expenses and administrative expenses for reasons stated above.

Net income. For the three months ended September 30, 2010, we generated a net income of $2.16 million, a decrease of $0.81 million, or 27%, from $2.96 million for the three months ended September 30, 2009, as a result of the factors described above.

Nine-Month 2010 Financial Results

Revenue. During the 2010 period, we changed our principal business from the licensing of patent rights and provision of related technology development services to the sale of educational learning products and interactive classroom solutions products under our own "Five Best Student" brand. For the nine months ended September 30, 2010, we were successful in introducing these new products to our target customers and created a strong demand for our products. We recorded significant revenue growth when compared to the same period last year. Our revenue increased to $26.51 million in the nine months ended September 30, 2010, from $12.04 million for the nine months ended September 30, 2009, representing a 120% increase. The increase in revenue was also due to the advertising and promotion efforts of the Company to promote the new business for the nine months ended September 30, 2010. During the nine months ended September 30, 2010, advertising and promotion expenses amounted to $1,668,111 while only $91,936 was spent for advertising and promotion for the same period last year. During the nine months ended September 30, 2010, sales of education learning products and interactive classroom solutions products accounted for 38% and 61% of our revenue, respectively.  

Cost of revenue. Our cost of revenue increased by $14.92 million, or 401%, to $18.64 million for the nine months ended September 30, 2010, from $3.72 million for the nine months ended September 30, 2009. The cost of revenue as a percentage of revenue increased from 31% for the nine months ended September 30, 2009 to 70% for the nine months ended September 30, 2010. The increase in cost of revenue represents the differences between the cost structure of licensing revenue and product revenue, in connection with our change of business noted above. The cost of manufacturing interactive classroom solution products and electronic learning products, in particular the hardware and related equipment, is higher than the cost of providing licensing of patent and related technology development services.

Gross profit. Our gross profit decreased by $0.45 million, or 5%, to $7.87 million for the nine months ended September 30, 2010, from $8.32 million for the nine months ended September 30, 2009. Gross profit as a percentage of net revenue was 30% and 69% for the nine months ended September 30, 2010 and 2009, respectively. The decrease in gross margin was due to the increase in cost of revenue as a result of our change of business as noted above. For the nine months ended September 30, 2009, our patent licensing and technology development services business had a gross margin of 69%. For the nine months ended September 30, 2010, our educational learning products and interactive classroom solutions products had gross margins of 32% and 28%, respectively.

Selling expenses. For the nine months ended September 30, 2010, our selling expenses increased by $2.47 million, or 2202%, to $2.58 million, from $0.11 million for the nine months ended September 30, 2009. During the 2010 period, we incurred expenses related to our marketing campaign for our change in business and in the build up of our own "Five Best Student" brand. During the nine months ended September 30, 2010, advertising and promotion expenses amounted to $1,668,111, while only $91,936 was spent for advertising and promotion for the same period last year.  

General and administrative expenses. For the nine months ended September 30, 2010, our general and administrative expenses increased by $0.62 million, or 183%, to $0.96 million, from $0.34 million for the nine months ended September 30, 2009. The increase was primarily attributable to additional expenses related to the commencement of operations at MenQ China's factory in Zhongshan in May 2009.

Research and development expenses. For the nine months ended September 30, 2010, our research and development expenses decreased by $0.63 million, or 85%, to $0.11 million from $0.74 million for the nine months ended September 30, 2009. Such decrease was due to our devotion of more resources in 2009 to develop educational products such that fewer resources were required in the 2010 period to further develop these products.

Income before income taxes. Our income before income taxes decreased by $2.88 million, or 40%, to $4.24 million for the nine months ended September 30, 2010, from $7.13 million for the nine months ended September 30, 2009, primarily due to the increase in selling expenses and administration expenses.

Net income. For the nine months ended September 30, 2010, we generated a net income of $3.29 million, a decrease of $2.72 million, or 45%, from $6 million for the nine months ended September 30, 2009, as a result of the factors described above.

SEGMENT DATA

The following table sets out the analysis of the Company's revenue by products and services.

Recent Developments

On September 21, 2010, we established the Guangzhou Research Institute of Collaborative Education Science and Technology ("CEST"), a private non-enterprise entity, in Guangzhou, China, and have engaged a group of six professors to provide advisory services to CEST, pursuant to separate consultancy agreements with each of them. CEST is mainly engaged in the research and development of education and technology applications. It is organized as an academic organization and will host academic workshops with schools, local and central governments, on the design and implementation of technology products in education.  

"With the establishment of CEST, we are delighted that we will have a research and design institute to further our product development and respond to customer needs," commented Mr. Ruofei Chen, CEO of China Interactive Education. "The institute will also promote our products and services which we expect will create additional product awareness that will help us in the contract bidding process."  

Fiscal Year 2010 Guidance Update

For the full year 2010, the Company projects $52 - $54 million in revenue. The Company expects that net income will likely to be within the range of $8.3 - $9 million.

About China Interactive Education

China Interactive Education, Inc., headquartered in Zhongshan, China, is a pioneer in providing interactive teaching and learning solutions to China's educational institutions, professional training schools, and individuals. The Company's proprietary educational materials, co-developed with one of China's leading universities and groups of educational professionals, are embedded in its self-developed interactive hardware and software solutions. China Interactive Education sells its interactive classroom solutions (ICS) directly to educational institutions, as well as through area distributors, and its electronic learning products (ELP) are sold under its own "Five Best Student" consumer brand as well as other licensed brands through retail points of sale throughout China. To learn more about the Company, please visit www.menq.com.cn.

Safe Harbor Statement

This press release may contain certain 'forward-looking statements' relating to the business of China Interactive Education, Inc., and its subsidiary companies. All statements, other than statements of historical fact included herein are forward-looking statements, including statements regarding: the likelihood that the Company's ICS solution will remain healthy and generate additional follow-on opportunities for the Company in the coming year; the likelihood that the Company's ELP retail distribution channels will remain healthy and provide the Company with additional selling opportunities in the coming year; the ability of the Company to maintain a healthy cash flow cycle; and the ability of the Company to perform under sales contracts; the general ability of the Company to achieve its commercial objectives, including the fiscal year 2010 guidance; the business strategy, plans and objectives of the Company and its subsidiaries; and any other statements of non-historical information. These forward-looking statements are often identified by the use of forward-looking terminology such as 'believes,' 'expects' or similar expressions. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, known and unknown risks and uncertainties, and these expectations may prove to be incorrect. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in the Company's reports that are filed with the Securities and Exchange Commission and available on its website (http://www.sec.gov). All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.