- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

( Mark One)

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

For the quarterly period ended August 31, 2010

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

For the transition period from ______________ to ______________

Commission File Number: 333-118259

CHINA SUN GROUP HIGH-TECH CO.

(Exact name of registrant as specified in its charter)

Delaware	54-2142880
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1 Hutan Street, Zhongshan District

Dalian, The People’s Republic of China

(Address of principal executive offices) (Zip Code)

011 – 86- (411) 8288 9800/ 8289 2736

(Registrant’s telephone number, including area code)

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

þ Yes □ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). □ Yes □ No

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

Large accelerated filer o	Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). □ Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

There are presently 53,472,971 shares of common stock, $0.001 par value, issued and outstanding as of October 11, 2010.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

		Page
Item 1.	Financial Statements.	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	2
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	5
Item 4.	Controls and Procedures.	5

PART II – OTHER INFORMATION

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

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

CHINA SUN GROUP HIGH-TECH CO.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

		Page

Condensed Consolidated Balance Sheets as of August 31, 2010 and May 31, 2010		F-2

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended August 31, 2010 and 2009		F-3

Condensed Consolidated Statements of Cash Flows for the Three Months Ended August 31, 2010 and 2009		F-4

Condensed Consolidated Statement of Stockholders’ Equity for the Three Months ended August 31, 2010		F-5

Notes to Condensed Consolidated Financial Statements		F-6 – F-14

F - 1

CHINA SUN GROUP HIGH-TECH CO.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF AUGUST 31, 2010 AND MAY 31, 2010

(Currency expressed in United States Dollars (“US$”), except for number of shares)

	August 31, 2010		May 31, 2010
	(Unaudited)		(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	19,369,159	$	18,017,266
Accounts receivable, trade		2,906,581		2,793,038
Inventories		591,949		1,218,336
Deposits and prepayments		9,785		3,049

Total current assets		22,877,474		22,031,689

Non-current assets:
Technical know-how, net		2,438,475		2,475,298
Property, plant and equipment, net		20,271,428		20,567,954

TOTAL ASSETS	$	45,587,377	$	45,074,941

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade	$	397,263	$	2,127,244
Income tax payable		1,085,744		1,488,619
Other payables and accrued liabilities		1,091,503		984,189

Total liabilities		2,574,510		4,600,052

Commitments and contingencies

Stockholders’ equity:
Convertible preferred stock, $0.001 par value; 20,000,000 shares authorized; none of shares issued and outstanding, respectively		-		-
Common stock, $0.001 par value; 100,000,000 shares authorized; 53,422,971 shares and 53,422,971 shares issued and outstanding, respectively		53,423		53,423
Additional paid-in capital		9,585,204		9,585,204
Accumulated other comprehensive income		3,150,587		3,043,344
Statutory reserve		2,277,365		2,277,365
Retained earnings		27,946,288		25,515,553

Total stockholders’ equity		43,012,867		40,474,889

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	45,587,377	$	45,074,941

See accompanying notes to condensed consolidated financial statements.

F - 2

CHINA SUN GROUP HIGH-TECH CO.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED AUGUST 31, 2010 AND 2009

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

	Three months ended August 31,
	2010			2009

Revenues, net	$	11,753,459		$	9,313,336

Cost of revenue (inclusive of depreciation and amortization)		8,046,456			6,254,566

Gross profit		3,707,003			3,058,770

Operating expenses:
Sales and marketing		31,326			23,294
Research and development		20,933			25,575
General and administrative		400,385			241,678

Total operating expenses		452,644			290,547

INCOME FROM OPERATIONS		3,254,359			2,768,223

Other income:
Interest income		10,639			8,058

INCOME BEFORE INCOME TAXES		3,264,998			2,776,281

Income tax expense		(834,263	)		(712,938	)

NET INCOME	$	2,430,735		$	2,063,343

Other comprehensive income (loss):
- Foreign currency translation gain (loss)		107,243			(75,273	)

COMPREHENSIVE INCOME	$	2,537,978		$	1,988,070

Net income per share – Basic and diluted	$	0.05		$	0.04

Weighted average common stock outstanding – Basic and diluted		53,422,971			53,422,971

See accompanying notes to condensed consolidated financial statements.

F - 3

CHINA SUN GROUP HIGH-TECH CO.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED AUGUST 31, 2010 AND 2009

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

	Three months ended August 31,
	2010			2009
Cash flows from operating activities:
Net income	$	2,430,735		$	2,063,343
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment		401,323			210,253
Amortization of technical know-how		43,601			-
Changes in operating assets and liabilities:
Accounts receivable, trade		(106,097	)		189,105
Inventories		630,519			1,215,028
Value-added tax receivable		-			359,074
Deposits and prepayments		(6,736	)		209,908
Accounts payable, trade		(1,738,029	)		(836,861	)
Income tax payable		(407,449	)		(84,338	)
Other payables and accrued liabilities		105,284			(60,292	)
Net cash provided by operating activities		1,353,151			3,265,220

Cash flows from investing activities:
Purchase of plant and equipment		(48,486	)		(16,313	)
Addition of construction in progress		-			(1,024,155	)
Net cash used in investing activities		(48,486	)		(1,040,468	)

Effect of exchange rate changes on cash and cash equivalents		47,228			(21,055	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		1,351,893			2,203,697

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		18,017,266			9,209,953

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	19,369,159		$	11,413,650

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	1,241,712		$	797,276
Cash paid for interest	$	-		$	-

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer from construction in progress to property, plant and equipment	$	-		$	2,560,385

See accompanying notes to condensed consolidated financial statements.

F - 4

CHINA SUN GROUP HIGH-TECH CO.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED AUGUST 31, 2010

(Currency expressed in United States Dollars (“US$”), except for number of shares)

(Unaudited)

											Accumulated
									Additional		other						Total
	Convertible preferred stock				Common stock				paid-in		comprehensive		Statutory		Retained		stockholders’
	No. of share		Amount		No. of share		Amount		capital		income		reserve		earnings		equity

Balance as of June 1, 2010		-		-		53,422,971	$	53,423	$	9,585,204	$	3,043,344	$	2,277,365	$	25,515,553	$	40,474,889

Net income for the period		-		-		-		-		-		-		-		2,430,735		2,430,735

Foreign currency translation adjustment		-		-		-		-		-		107,243		-		-		107,243

Balance as of August 31, 2010		-	$	-		53,422,971	$	53,423	$	9,585,204	$	3,150,587	$	2,277,365	$	27,946,288	$	43,012,867

See accompanying notes to condensed consolidated financial statements.

F - 5

CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2010

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

NOTE － 1 BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with both accounting principles generally accepted in the United States (“GAAP”) and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

In the opinion of management, the consolidated balance sheet as of May 31, 2010 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended August 31, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year ending May 31, 2011 or for any future periods.

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended May 31, 2010.

NOTE － 2 ORGANIZATION AND BUSINESS BACKGROUND

China Sun Group High-Tech Co. (the “Company” or “CSGH”) was organized under the laws of the State of North Carolina on February 2, 2004 as a subchapter S-Corporation. On August 24, 2007, the Company was reincorporated in the State of Delaware and changed its name from “Capital Resource Funding, Inc.” to “China Sun Group High-Tech Co.”

The Company, through its operating subsidiaries in the PRC, mainly engages in the production and sales of cobaltosic oxide and lithium iron phosphate, both anode materials used in lithium ion rechargeable batteries in the PRC.

CSGH and its subsidiaries are hereinafter referred to as (the “Company”).

NOTE － 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying condensed consolidated financial statements and notes.

l	Use of estimates

In preparing these condensed consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the periods reported. Actual results may differ from these estimates.

l	Basis of consolidation

The condensed consolidated financial statements include the financial statements of CSGH and its subsidiaries. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.

l	Cash and cash equivalents

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.

F - 6

CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2010

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

The Company maintains cash and cash equivalent balances at a financial institution in the PRC, which are insured by China Citic Bank. The Company has cash concentration risk of $19,362,052 as of August 31, 2010.

l	Accounts receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on management's assessment of known requirements, aging of receivables, payment history, the customers’ current credit worthiness and the economic environment.

l	Inventories

Inventories include material, labor and manufacturing overhead and are stated at lower of cost or market value, cost being determined on a weighted average method. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of August 31, 2010, the Company did not record an allowance for obsolete inventories, nor have there been any write-offs.

l	Technical know-how

Technical know-how represents the developed product technology acquired from a third party and is carried at its purchase cost, net of accumulated amortization. The Company determined that the estimated useful life of the acquired technology is 15 years and subject to amortization using a straight-line basis over the estimated useful life when its developed products are approved by the government agency.

Amortization expense for the three months ended August 31, 2010 and 2009 were $43,601 and $0 which was recorded in cost of revenue.

l	Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

	Depreciable life	Residual value
Building	40 years	5%
Plant and machinery	5-40 years	5%
Office equipment	5 years	5%
Motor vehicle	5 years	5%

Expenditure for repairs and maintenance is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.

Depreciation expense for the three months ended August 31, 2010 and 2009 were $401,323 and $210,253, which included $335,000 and $145,750 in cost of revenue, respectively.

l	Valuation of long-lived assets

Long-lived assets primarily include technical know-how and property, plant and equipment. In accordance with Accounting Standards Codification (“ASC”) Topic 360-10-5, “ Impairment or Disposal of Long-Lived Assets ,” the Company periodically reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. Determining the fair value of long-lived assets includes significant judgment by management, and different judgments could yield different results. There has been no impairment as of August 31, 2010.

F - 7

CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2010

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

l	Revenue recognition

In accordance with the ASC Topic 605, “Revenue Recognition,” the Company recognizes revenue when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectibility is reasonably assured.

Revenue is recognized when products are delivered to customers. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. In instances where products are configured to customer requirements, revenue is recorded upon the successful completion of the Company’s final test procedures and the customer’s acceptance.

Revenue represents the invoiced value of goods, net of value-added tax (“VAT”). All of the Company's products that are sold in the PRC are subject to VAT which is levied at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

l	Comprehensive income

ASC Topic 220 , “Comprehensive Income,” establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during the period from non-owner sources. Accumulated comprehensive income consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.

l	Income taxes

The provision for income taxes is determined in accordance with the provisions of ASC Topic 740, “ Income Taxes ” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in the financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

For the periods ended August 31, 2010 and 2009, the Company did not have any interest and penalties associated with tax positions. As of August 31, 2010, the Company did not have any significant unrecognized uncertain tax positions.

The Company conducts major businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the foreign tax authority.

l	Net income per share

The Company calculates net income per share in accordance with ASC Topic 260, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.

F - 8

CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2010

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

l	Foreign currencies translation

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the condensed consolidated statement of operations.

The reporting currency of the Company is United States Dollar ("US$"). The Company's subsidiaries in the PRC, maintain their books and records in their local currency, Renminbi Yuan ("RMB"), which is functional currency as being the primary currency of the economic environment in which these entities operate.

In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic 830-30, “ Translation of Financial Statement, ” using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

Translation of amounts from RMB into US$1 has been made at the following exchange rates for the respective period:

	August 31, 2010		August 31, 2009
Period-end RMB:US$1 exchange rate		6.8130		6.8412
Average period RMB:US$1 exchange rate		6.8041		6.8427

l	Related parties

Parties, which can be a corporation or an individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Companies are also considered to be related if they are subject to common control or common significant influence.

l	Segment reporting

ASC Topic 280, “Segment Reporting,” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in the financial statements. For the periods ended August 31, 2010, the Company operates one reportable business segment in the PRC.

l	Fair value measurement

ASC Topic 820 “ Fair Value Measurements and Disclosures ” ("ASC 820"), establishes a new framework for measuring fair value and expands related disclosures. Broadly, ASC 820 framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820 establishes a three-level valuation hierarchy based upon observable and non-observable inputs. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

For financial assets and liabilities, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.

F - 9

CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2010

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

l	Financial instruments

Cash and cash equivalents, accounts receivable, deposits and prepayments, accounts payable, income tax payable, other payables and accrued liabilities are carried at cost which approximated fair value. Any changes in fair value of assets or liabilities carried at fair value are recognized in other comprehensive income for each period.

l	Recent accounting pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

In April 2010, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades . ASU 2010-13 provides guidance on the classification of a share-based payment award as either equity or a liability. A share-based payment that contains a condition that is not a market, performance, or service condition is required to be classified as a liability. ASU 2010-13 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010 and is not expected to have a significant impact on the Company’s financial statements.

In July 2010, the FASB issued new accounting guidance that will require additional disclosures about the credit quality of loans, lease receivables and other long-term receivables and the related allowance for credit losses. Certain additional disclosures in this new accounting guidance will be effective for the Company on December 31, 2010 with certain other additional disclosures that will be effective on March 31, 2011. The Company does not expect the adoption of this new accounting guidance to have a material impact on its consolidated financial statements.

NOTE － 4 ACCOUNTS RECEIVABLE, NET

The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required. Based upon the aforementioned criteria, the Company has determined that no allowance for doubtful accounts is required for the three months ended August 31, 2010 and 2009.

NOTE － 5 OTHER PAYABLES AND ACCRUED LIABILITIES

Other payables and accrued liabilities consisted of:

	August 31, 2010		May 31, 2010

Welfare payable	$	417,964	$	416,832
Accrued operating expense		143,487		116,849
VAT payable		359,185		257,752
Other payable		170,867		192,756
Other payables and accrued liabilities	$	1,091,503	$	984,189

F - 10

CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2010

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

NOTE － 6 INCOME TAXES

For the three months ended August 31, 2010 and 2009, the local (“United States of America”) and foreign components of income before income taxes were comprised of the following:

	Three months ended August 31,
	2010			2009
Tax jurisdiction from:
– Local	$	(78,761	)	$	(62,543	)
– Foreign		3,343,759			2,838,824
Income before income taxes	$	3,264,998		$	2,776,281

The provision for income taxes consisted of the following:

	Three months ended August 31,
	2010		2009
Current tax:
– Local	$	-	$	-
– Foreign		834,263		712,938

Deferred tax:
– Local		-		-
– Foreign		-		-

Income tax expense	$	834,263	$	712,938

The effective tax rate in the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company operates in various countries - United States of America and the PRC - that are subject to tax in the jurisdictions in which they operate, as follows:

United States of America

The Company is registered in the State of Delaware and is subject to the tax laws of the United States of America.

As of August 31, 2010, the operation in the United States of America incurred $1,259,076 of cumulative net operating losses carryforwards for federal tax purposes, which are available to offset future taxable income. The Company has provided for a full valuation allowance for any future tax benefits from the net operating loss carryforwards as the management believes it is more likely than not that these assets will not be realized in the future.

The PRC

The Company’s PRC subsidiaries are subject to the Corporate Income Tax governed by the Income Tax Law of the People’s Republic of China, at a statutory income tax rate of 25%.

The reconciliation of income tax rate to the effective income tax rate based on income before income taxes from the operation in the PRC for the three months ended August 31, 2010 and 2009 are as follows:

	Three months ended August 31,
	2010			2009

Income before income taxes	$	3,343,759		$	2,838,824
Income statutory tax rate		25	%		25	%
Income taxes calculated at statutory income tax rate		835,940			709,706

Tax effect of non-deductible items		1,677			1,826
Prior year’s adjustment		-			1,406
Income tax expense	$	834,263		$	712,938

F - 11

CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2010

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of August 31, 2010 and May 31, 2010:

	August 31, 2010			May 31, 2010
Deferred tax assets:
- Net operating loss carryforwards	$	428,086		$	401,307
Less: valuation allowance		(428,086	)		(401,307	)
Deferred tax assets	$	-		$	-

Management believes that it is more likely than not that the deferred tax assets will not be fully realizable in the future. Accordingly, the Company provided for a full valuation allowance against its deferred tax assets of $428,086 as of August 31, 2010. During the three months ended August 31, 2010, the valuation allowance increased by $26,779, primarily relating to net operating loss carryforwards from the local tax regime.

NOTE － 7 CONCENTRATIONS OF RISK

The Company is exposed to the following concentrations of risk:

(a) Major customers

For the three months ended August 31, 2010 and 2009, the customers who account for 10% or more of revenues of the Company are presented as follows:

	Three months ended August 31, 2010					August 31, 2010
	Revenues		Percentage of revenues			Trade accounts receivable

Customer B	$	1,604,079		14	%	$	691,245
Customer E		1,933,665		16	%		557,712
Customer F		2,140,839		18	%		-
Customer G		1,421,390		12	%		-
Customer H		1,235,872		11	%		297,094
Total:	$	8,335,845		71	%	$	1,546,051

	Three months ended August 31, 2009						August 31, 2009
	Revenues			Percentage of revenues			Trade accounts receivable

Customer B		$	1,755,308		19	%		$	609,975
Customer D			1,640,989		18	%			302,466
Customer E			1,919,462		21	%			352,837
Customer F			927,200		10	%			-
Total:		$	6,242,959		67	%		$	1,265,278

F - 12

CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2010

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

For the three months ended August 31, 2010 and 2009, 100% of the Company’s revenues were derived from customers located in the PRC.

(b)	Major vendors

For the three months ended August 31, 2010 and 2009, the vendors who account for 10% or more of purchases of the Company are presented as follows:

	Three months ended August 31, 2010						August 31, 2010
	Purchases			Percentage of purchase			Accounts Payable

Vendor A		$	2,495,799		38	%		$	300,976
Vendor B			1,389,693		21	%			-
Vendor C			1,760,441		27	%			-
Vendor D			803,835		12	%			-
Total:		$	6,449,768		98	%		$	300,976

	Three months ended August 31, 2009						August 31, 2009
	Purchases			Percentage of purchase			Accounts payable

Vendor A		$	2,544,963		54	%		$	-
Vendor B			1,240,858		26	%			-
Vendor C			946,971		20	%			-
Total:		$	4,732,792		100	%		$	-

For the three months ended August 31, 2010 and 2009, 100% of the Company’s purchases were derived from vendors located in the PRC.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition, but does not require collateral to support such receivables.

(d) Exchange rate risk

The reporting currency of the Company is US$. To date, the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates against US$, the value of the RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.

(e) Economic and political risks

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

F - 13

CHINA SUN GROUP HIGH-TECH CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED AUGUST 31, 2010

(Currency expressed in United States Dollars (“US$”))

(Unaudited)

The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.

NOTE － 8 COMMITMENTS AND CONTINGENCIES

The Company’s subsidiary operating in PRC was committed under several non-cancelable operating leases for the terms from 5 to 10 years, with monthly rentals, due through July 2020. Costs incurred under these operating leases are recorded as rental expense and totaled approximately $2,939 and $1,826 for the three months ended August 31, 2010 and 2009.

As of August 31, 2010, the Company has the future minimum rental payments under the operating lease agreements in the next five years and thereafter, as follow:

Years ending August 31,
2011	$	16,146
2012		16,146
2013		16,146
2014		16,146
2015		16,146
Thereafter		46,967

Total:	$	127,697

NOTE － 9 SUBSEQUENT EVENTS

On September 20, 2010, the Company issued an aggregate 2,050,000 shares of common stock to certain consultants for the services at the fair value of $0.87 per share.

F - 14

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

Results of Operations

Three Months Ended August 31, 2010 and August 31, 2009

Net Revenue

Net revenue for the three months ended August 31, 2010 was $11,753,459, an increase of $2,440,123 or 26% from net revenue of $9,313,336 for the comparable period in 2009. The increase in revenue resulted from the introduction of a new product, lithium iron phosphate, since September 2009. The increase in sales volume was driven by customer demands.

Cost of Revenue

Cost of revenue for the three months ended August 31, 2010 was $8,046,456, an increase of $1,791,890 or 28.6% from $6,254,566 for the comparable period in 2009. This increase in cost of revenue resulted from the increase in demand for materials for the increase of sales volume as well as the increase in the unit prices of raw materials.

Gross Profit

Gross profit for the three months ended August 31, 2010 was $3,707,003, an increase of $648,233 or 21% from $3,058,770 for the comparable period in 2009. The increase in gross profit was primarily due to the increase of profit margin from the new product, lithium iron phosphate, and the increase in sales volume driven by customer demands.

Sales and Marketing Expenses

Sales and marketing expenses for the three months period ended August 31, 2010 totaled $31,326, compared to $23,294 for the three months ended August 31, 2009. This represents an increase of $8,032 or 34% for the three months period in 2010 compared to the same period in 2009. The increase was primarily attributable to the increase in customer demands and hence sales volume and gross profit.

General and Administrative Expenses

General and administrative expenses for the three months ended August 31, 2010 were $400,385, an increase of $158,707 or 65.6% from $241,678 for the comparable period in 2009. The increase resulted from higher legal and professional consulting expenses incurred during the three months period ended August 31, 2010 compared to the corresponding period in 2009.

Research and Development Expenses

Research and development expenses for the three months ended August 31, 2010 were $20,933, a decrease of $4,642 or 18% compared to $25,575 for the comparable period in 2009. The decrease was primarily attributable to the transfer of technical staffs to other departments for assisting the services for the new product in 2010 compared to the same period in 2009.

Income from Operations

Income from operations for the three months period ended August 31, 2010 totaled $3,254,359, compared to $2,768,223 for the three months ended August 31, 2009. This represents an increase of $486,136 or 18% for the three months period compared to 2009. The increase resulted primarily from the increased gross profit driven by customers demand.

Income Taxes

Provision for income tax expense was $834,263 for the three months ended August 31, 2010, an increase of $121,325 or 17% as compared to $712,938 for the corresponding period in 2009. The increase resulted primarily from the increase in sales and hence profit before taxation during the period.

Net Income

Net income for the three months ended August 31, 2010 was $2,430,735, an increase of $367,392 or 18% as compared to the net income of $2,063,343 for the corresponding period in 2009. The increase was primarily attributable to the increase in sales volume driven by customers demand for three months ended August 31, 2010 compared to the corresponding period in 2009.

Liquidity and Capital Resources

Cash and Cash Equivalents

Our cash and cash equivalents were $18,017,266 at the beginning of the three months ended August 31, 2010 which increased to $19,369,159, representing an icrease of $1,351,893 or 8% at the end of the three months period ended August 31, 2010. This net change in cash and cash equivalents represented the combined effects of cash generated in the total amount of $1,353,151 from operating activities, cash used in the total amount of $48,486 from investing activities and effects of exchange rate changes of $47,228 in 2010.

Net cash provided by operating activities

Net cash provided by our operating activities was $1,353,151 for the three months ended August 31, 2010, a decrease of $1,912,069 or 58.5% as compared to the cash of $3,265,220 provided by operating activities for the same period in 2009. This decrease was primarily due to the growth in sales revenue with the increase in accounts receivable by $106,097, the decrease in inventories by $630,519, the increase in income tax payable by $407,449, offset by the increase in deposits and prepayments by $6,736, the decrease in other payable and accrued liabilities by $105,248 and the decrease in accounts payable by $1,738,029 during the period.

Net cash used in investing activities

Net cash used in investing activities was $48,486 for the three months ended August 31, 2010. The cash outflow was primarily attributable to the purchase of plant and equipment during the period.

Net cash used in financing activities

There was no net cash generated or used for financing activities for the three months ended August 31, 2010.

Income Taxes

Cash paid for income tax expense was $1,241,712 for the three months ended August 31, 2010.

Trends

Currently, many companies in the cobalt product industry are looking to directly own cobalt producing mines which can provide direct access and supply of cobalt ore, the primary raw materials in the cobalt product industry. In June 2007, we acquired certain rights to a cobalt mine in Africa. This acquisition helps us to avoid the export limitations imposed by the Congo, reduces the freight expenses, and helps us to ensure a stable supply of cobalt ore for our production.

We are not aware of any trends, events or uncertainties that have or are reasonably likely to have a material impact on our short-term or long-term liquidity.

Inflation

We believe that inflation did not have a material or significant impact on our revenue or our results of operations.

General

We believe that we currently have sufficient income generated from our operations to meet our operating and/or capital needs.

However, we will continue to evaluate various sources of capital to meet our growth needs. Such sources will include debt financing, issuance of equity securities and entrance into some financing arrangements. There can be no assurance, however, that any of the contemplated financing arrangements described herein will be available and, if available, can be obtained on terms favorable to us.

Contractual Obligations and Commitments

We committed under several non-cancelable operating lease agreements, with terms from five to ten years, due through July 25, 2020. The annual lease payment is $16,146 over the next five years and $46,967 for period thereafter until 2020. The Company has a minimum rental payment obligation totaling $127,697.

During the fiscal year ended May 31, 2008, DLXY, our subsidiary entered into an agreement to purchase an interest in a cobalt ore mine in the Congo, with the anticipation that such interests would provide us with an additional supply of raw material and would also enable us to sell these materials to other enterprises in this industry. No payments were made under this agreement and the Company has abandoned this project.

On August 18, 2010, we entered into an Investment Agreement (the “Investment Agreement”) with Wealthy Support International Investment Ltd. (“Wealthy Support”). On September 13, 2010, we agreed to terminate the Investment Agreement with Wealthy Support.

We believe that we currently have sufficient income generated from our operations to meet our operating and/or capital needs.

However, we will continue to evaluate various sources of capital to meet our growth requirements. Such sources may include debt financings, the issuance of equity securities, and other financing arrangements. There can be no assurance, however, that any financing arrangements described herein will be available and, if available, can be obtained on terms favorable to us.

Critical accounting policies and estimates

Revenue recognition

Our subsidiary, DLXY is subject to valued-added tax (“VAT”) which is levied on the majority of the products of DLXY at the rate of 17% on the invoiced value of sales sold in the People’s Republic of China. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales.

Accounts receivables and allowance for doubtful accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. We extend unsecured credit to customers in the ordinary course of business but mitigate the associated risks by performing credit checks and actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on management's assessment of known requirements, aging of receivables, payment history, the customers’ current credit worthiness and the economic environment. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

New Financial Accounting Pronouncements

In April 2010, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASU 2010-13 provides guidance on the classification of a share-based payment award as either equity or a liability. A share-based payment that contains a condition that is not a market, performance, or service condition is required to be classified as a liability. ASU 2010-13 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010 and is not expected to have a significant impact on the Company’s financial statements.

In July 2010, the FASB issued new accounting guidance that will require additional disclosures about the credit quality of loans, lease receivables and other long-term receivables and the related allowance for credit losses. Certain additional disclosures in this new accounting guidance will be effective for the Company on December 31, 2010, with certain other additional disclosures that will become effective on March 31, 2011. The Company does not expect the adoption of this new accounting guidance to have a material impact on its consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of our Disclosure Controls

As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based upon their controls evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting during the fiscal quarter ended August 31, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

We know of no material legal proceeding pending against us.

Item 1A.

Risk Factors.

Not applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

(Removed and Reserved.)

Item 5.

Other Information.

None.

Item 6.

Exhibits.

Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.

Exhibit No.		Title of Document

31.1		Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA SUN GROUP HIGH-TECH CO.

Date: October 14, 2010	By:	/s/ Guosheng Fu
		Name: Guosheng Fu
		Title: Chief Executive Officer
		(Principle Executive Officer)

	.

Date: October 14, 2010	By:	/s/ Ming Fen Liu
		Name: Ming Fen Liu
		Title: Chief Financial Officer
		(Principle Executive Officer)

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