Attached files
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EX-32.1 - FORLINK SOFTWARE CORP INC | v184397_ex32-1.htm |
EX-31.2 - FORLINK SOFTWARE CORP INC | v184397_ex31-2.htm |
EX-31.1 - FORLINK SOFTWARE CORP INC | v184397_ex31-1.htm |
EX-32.2 - FORLINK SOFTWARE CORP INC | v184397_ex32-2.htm |
U.
S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
|
þ
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
|
For
the quarterly period ended March 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 0-18731
Forlink
Software Corporation, Inc.
(Exact
name of small business issuer as specified in its charter)
Nevada
(State
or other jurisdiction of
incorporation
or organization)
|
98-0398666
(I.R.S.
employer
identification
number)
|
Shenzhou
Mansion 9F, ZhongGuanCun South Street, No. 31,
Haidian District, Beijing,
China 100081
(Address
of principal executive offices and zip code)
01186-10
6811 8866
(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. YES þ 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 o 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
|
¨
|
Accelerated filer ¨
|
Non-accelerated filer
|
¨ (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 ¨ NO
þ
Number of
shares of common stock outstanding as of May 11, 2010:
4,651,173
FORLINK
SOFTWARE CORPORATION, INC.
FORM 10-Q
INDEX
Page
Number
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||
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
||
PART
I. FINANCIAL INFORMATION
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1
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|
Item
1.
|
Financial
Statements (unaudited)
|
1
|
Consolidated
Balance Sheet as of March 31, 2010
|
2
|
|
|
||
Consolidated
Statements of Operations
|
3
|
|
Consolidated
Statements of Cash Flows
|
4
|
|
Notes
to the Consolidated Financial Statements as of March 31,
2010
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5-20
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|
Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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21-28
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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29
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Item
4T.
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Controls
and Procedures
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29
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PART
II. OTHER INFORMATION
|
30
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Item
1.
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Legal
Proceedings
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30
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Item
1A.
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Risk
Factors
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30
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
31
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Item
3.
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Defaults
Upon Senior Securities
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31
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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31
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Item
5.
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Other
Information
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31
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Item
6.
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Exhibits
|
32
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SIGNATURES
|
33
|
i
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
document contains certain statements of a forward-looking nature. Such
forward-looking statements, including but not limited to growth and strategies,
future operating and financial results, financial expectations and current
business indicators are based upon current information and expectations and are
subject to change based on factors beyond the control of the Company.
Forward-looking statements typically are identified by the use of terms such as
“look,” “may,” “will,” “should,” “might,” “believe,” “plan,” “expect,”
“anticipate,” “estimate” and similar words, although some forward-looking
statements are expressed differently. The accuracy of such statements may be
impacted by a number of business risks and uncertainties that could cause actual
results to differ materially from those projected or anticipated.
Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation to
update this forward-looking information. Nonetheless, the Company reserves the
right to make such updates from time to time by press release, periodic report
or other method of public disclosure without the need for specific reference to
this Current Report on Form 10-Q (“Form 10-Q”). No such update shall be deemed
to indicate that other statements not addressed by such update remain correct or
create an obligation to provide any other updates.
ii
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS.
The
information required by Item 1 commences on the next page.
1
Forlink
Software Corporation, Inc.
Consolidated
Balance Sheets
(Expressed in US Dollars)
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 1,206,815 | $ | 2,240,863 | ||||
Accounts
receivable
|
3,007,101 | 2,434,557 | ||||||
Other
receivables, deposits and prepayments (Note 3)
|
1,257,227 | 687,413 | ||||||
Inventories
(Note 4)
|
1,048,234 | 935,566 | ||||||
Deferred
taxes assets
|
23,115 | 0 | ||||||
Total
current assets
|
6,542,492 | 6,298,399 | ||||||
Property,
plant and equipment (Note 6)
|
352,284 | 391,671 | ||||||
Long
term investments (Note 7)
|
4,576,573 | 4,707,136 | ||||||
Total
assets
|
$ | 11,471,349 | $ | 11,397,206 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 1,677,500 | $ | 1,193,643 | ||||
Amounts
due to stockholders (Note 5)
|
513,970 | 415,078 | ||||||
Customer
deposits
|
1,619,210 | 1,329,203 | ||||||
Other
payables and accrued expenses (Note 9)
|
373,929 | 535,668 | ||||||
Income
tax payable
|
0 | 0 | ||||||
Other
tax payable
|
0 | 727,097 | ||||||
Deferred
taxes debt
|
65,663 | 38,992 | ||||||
Total
current liabilities
|
$ | 4,250,272 | $ | 4,239,681 | ||||
Commitments
and contingencies
|
||||||||
Non-controlling
interest (Note 9)
|
$ | 137,745 | $ | 151,785 | ||||
Stockholders’
equity
|
||||||||
Common
stock, par value $0.001 per share;
|
||||||||
200,000,000
and 200,000,000 shares authorized;
|
||||||||
4,966,173
and 4,966,173 shares issued and
4,651,173
and 4,651,173 shares outstanding, respectively
|
$ | 99,322 | $ | 99,322 | ||||
Treasury
stock
|
(163,800 | ) | (163,800 | ) | ||||
Additional
paid-in capital
|
10,195,693 | 10,195,693 | ||||||
Accumulated
losses
|
(4,136,275 | ) | (4,214,220 | ) | ||||
Accumulated
other comprehensive income
|
1,088,392 | 1,088,745 | ||||||
Total
stockholders’ equity
|
$ | 7,083,332 | $ | 7,005,740 | ||||
Total
liabilities and stockholders’ equity
|
$ | 11,471,349 | $ | 11,397,206 |
See
accompanying notes to unaudited consolidated condensed financial
statements.
2
Forlink
Software Corporation, Inc.
Consolidated
Statements of Operations
(unaudited)
(Expressed
in US Dollars)
Three Months ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
sales
|
683,075 | 856,903 | ||||||
Cost
of sales
|
(364,832 | ) | (596,395 | ) | ||||
Gross
profit
|
318,243 | 260,508 | ||||||
Selling
expenses
|
(223,160 | ) | (292,052 | ) | ||||
Research
and development expenses
|
(179,047 | ) | (113,403 | ) | ||||
General
and administrative expenses
|
(341,512 | ) | (217,413 | ) | ||||
Total
operating expenses
|
(743,719 | ) | (622,868 | ) | ||||
Operating
profit/(loss)
|
(425,476 | ) | (362,360 | ) | ||||
Income
from equity method investee
|
(22,182 | ) | (8,358 | ) | ||||
Income
from cost method investee
|
- | 7,297 | ||||||
Interest
income
|
2,220 | 4,037 | ||||||
Other
income, net
|
512,899 | 81,672 | ||||||
Profit
/ (Loss) before tax
|
67,461 | (277,712 | ) | |||||
Income
tax
|
3,555 | 0 | ||||||
Minority
interest
|
(14,040 | ) | (15,407 | ) | ||||
Net
profit/(loss)
|
77,946 | (262,305 | ) | |||||
Profit/(loss)
per share
|
0.02 | (0.06 | ) | |||||
Weighted
average common shares outstanding -basic and diluted
|
4,651,173 | 4,651,173 |
See
accompanying notes to unaudited consolidated condensed financial
statements.
3
Forlink
Software Corporation, Inc.
Consolidated
Statements of Cash Flows
Increase
in Cash and Cash Equivalents
(unaudited)
(Expressed in US Dollars)
|
Three Months Ended
March 31,
|
|||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
profit/(loss)
|
$ | 77,945 | $ | (262,305 | ) | |||
Adjustments
to reconcile net profit/(loss) to
|
||||||||
net
cash provided by/(used in) operating activities
|
||||||||
Minority
interest
|
(14,040 | ) | (15,407 | ) | ||||
(Gain)/loss
from write-off of property, plant and equipment
|
||||||||
Depreciation
of property, plant and equipment
|
45,411 | 65,162 | ||||||
Income
from equity method investee
|
||||||||
Loss
from equity method investee
|
22,182 | 8,358 | ||||||
Dividend
received from investee
|
- | (7,297 | ) | |||||
Effect
of deferred taxes
|
3,560 | 23,271 | ||||||
Change
in:
|
||||||||
Accounts
receivables
|
(572,793 | ) | (28,718 | ) | ||||
Other
receivables, deposits and prepayments
|
(585,513 | ) | (462,748 | ) | ||||
Inventories
|
(112,764 | ) | (314,560 | ) | ||||
Accounts
payable
|
483,979 | 395,451 | ||||||
Amounts
due to stockholders
|
98,934 | 17,464 | ||||||
Customer
deposits
|
297,453 | 132,959 | ||||||
Other
payables and accrued expenses
|
(168,994 | ) | (73,644 | ) | ||||
Income
tax payable
|
- | (16 | ) | |||||
Other
taxes payable
|
(727,023 | ) | (104,848 | ) | ||||
Net
cash provided by/(used in) operating activities
|
(1,151,662 | ) | (626,878 | ) | ||||
Cash
flows from investing activities
|
||||||||
Purchase
of long term investment
|
||||||||
Acquisition
of property, plant and equipment
|
- | 5,934 | ||||||
Proceeds
from disposal of long term investment
|
- | - | ||||||
Dividend
from investee
|
107,980 | 111,104 | ||||||
Net
cash used in investing activities
|
107,980 | 117,038 | ||||||
Cash
flows from financing activities
|
||||||||
Repayment
to short term borrowings
|
- | - | ||||||
(Repayments
to)/advances from stockholders
|
- | - | ||||||
Proceeds
from issuances of common stock under Plan 2002
|
- | - | ||||||
Net
cash provided by financing activities
|
- | - | ||||||
Effect
of exchange rate changes
|
9,634 | (51,270 | ) | |||||
Net
increase/(decrease) in cash and cash equivalents
|
(1,034,048 | ) | (561,110 | ) | ||||
Cash
and cash equivalents at beginning of period
|
2,240,863 | 2,543,430 | ||||||
Cash
and cash equivalents at end of period
|
$ | 1,206,815 | $ | 1,982,320 | ||||
Supplemental
disclosure of cash flow information
|
||||||||
Income
tax paid
|
$ | - | - | |||||
Interest
paid
|
$ | - | $ | - |
See
accompanying notes to unaudited consolidated condensed financial
statements.
4
NOTE
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Forlink
Software Corporation, Inc. (the "Company" or the "Registrant" or "Forlink"), is
a Nevada corporation which was originally incorporated on January 7, 1986 as
"Why Not?, Inc. " under the laws of the State of Utah and subsequently
reorganized under the laws of Nevada on December 30, 1993. From 1996
until 1999, the Company continued as an unfunded venture in search of a suitable
business acquisition or business combination.
On
November 3, 1999, the Company entered into a Plan of Reorganization with Beijing
Forlink Software Technology Co., Ltd. (hereinafter "BFSTC"), a limited liability
company organized under the laws of the People’s Republic of China (“PRC” or
“China”), under the terms of which BFSTC gained control of the
Company. Pursuant to the Plan of Reorganization, the Company acquired
100% of the registered and fully paid-up capital of BFSTC in exchange for
20,000,000 shares of the Company's authorized, but unissued, common
stock. BFSTC is engaged in the provision of computer software
consultancy and engineering services and the development and sale of computer
software in the PRC. As a part of its computer consultancy and
engineering services, BFSTC is also engaged in the sale of computer
hardware. In June 2001, BFSTC changed its name to Forlink
Technologies Co. Ltd. (“FTCL”). FTCL is the Company’s major operating subsidiary
in China.
In August
2001, the Company acquired Beijing Slait Science & Technology Development
Limited Co. (“SLAIT”) pursuant to a Plan of Reorganization dated January 11,
2001. The Company issued 59,430,000 shares of its common stock to
SLAIT’s original beneficial owners in exchange for 100% of the
outstanding equity of SLAIT. As a result of the share exchange,
the former beneficial owners of SLAIT own approximately 70% of the issued and
outstanding shares of the Company, and SLAIT became a wholly-owned subsidiary of
the Company. The Company also agreed to transfer 1,085,000 Renminbi
(“RMB”) (approximately US$131,039) to the former owners of SLAIT. A change in
control occurred in which all but one of the officers and directors of the
Company resigned and two former directors (also former owners) of SLAIT became
officers and directors of the Company. Prior to its dissolution in
2004, SLAIT provided application system integration technology and specializes
in large volume transaction processing software for networks such as mobile
phone billing and band operation. Subsequent to the acquisition, the
principal activities of SLAIT were gradually shifted to those of FTCL. On
February 13, 2004, SLAIT was officially dissolved in accordance with relevant
PRC regulations.
On June
18, 2003, Forlink Technologies (Hong Kong) Limited (“FTHK”) was incorporated in
Hong Kong Special Administrative Region as a limited liability company. In
December 2003, FTHK became a wholly owned subsidiary of Forlink. FTHK is
an investment holding company set up to take advantage of the favorable business
environment in Hong Kong and to facilitate the Company’s investment
transactions. Through FTHK, on December 18, 2003, the Company invested
$760,870 in All China Logistics Online Co., Ltd. ("All China Logistics"), a
privately held PRC company providing logistic services in China, in exchange for
a 17.8% equity interest.
On June
14, 2004, Forlink Technologies (Chengdu) Limited ("FTCD") was established as a
limited liability company in Chengdu, PRC and subsequently became a wholly owned
subsidiary of FTHK in September 2004. FTCD is in the business of providing
software outsourcing services and software development. The
registered capital of FTCD is $5,000,000 and the fully paid up capital was
$750,000 as of December 31, 2005. In April 2006, FTHK further invested $130,000
in FTCD. FTCD commenced operations in late 2005. The registered capital of FTCD
was reduced to $200,000 in December 2007, which amount was fully paid as of
December 2007.
5
In
compliance with China’s foreign investment restrictions on telecom value-added
services and other laws and regulations, the Company conducts telecom
value-added services and application integration services for government
organizations in China via Beijing Forlink Hua Xin Technology Co. Ltd.
("BFHX"). BFHX was established in the PRC on September 19, 2003 as a
limited liability company. The registered capital of BFHX is
$120,733 (RMB 1,000,000) and was fully paid up as of March 31,
2005. Mr. Yi He and Mr. Wei Li have been entrusted as nominee
owners of BFHX to hold 70% and 30%, respectively, of the fully paid up
capital of BFHX on behalf of the Company as the primary
beneficiary. BFHX is considered a variable interest entity
("VIE"), and because the Company is the primary beneficiary, the
Company’s consolidated financial statements include BFHX. Upon
the request of the Company, Mr. Yi He and Mr. Wei Li are required to
transfer their ownership interests in BFHX to the Company or its designees
at any time for the amount of the fully paid registered capital of
BFHX. Mr. Yi He is the Chief Executive Officer, a director and a
major stockholder of the Company. Mr. Wei Li is
the administration manager of FTCL.
On
October 24, 2005, the Company entered into a definitive agreement to acquire a
17.5% equity interest of China Liquid Chemical Exchange Company Limited
(“CLCE”), a PRC limited liability company, in exchange for deployment of the
Company’s For-online Electronic Trading System. In early 2007, CLCE
increased its share capital to $1,708,526 (RMB 13,000,000). As the Company did
not subscribe for the new shares, the Company’s shareholding of CLCE was diluted
and as of March 31 2009 was 13.46%. CLCE commenced operations fully in early
2007.
On
October 3, 2006, the Company entered into a Transfer of Right to Invest and
Project Cooperation Agreement (“Statelink Agreement”) with Statelink
International Group, Ltd., a British Virgin Islands company (“Statelink”),
pursuant to which the Company acquired 22.73% registered capital in Guangxi
Caexpo International Trade and Logistics Co., Ltd. (“Guangxi Caexpo”), a PRC
limited liability company in the businesses of real estate development,
advertising and computer distribution for cash consideration of $2,557,545 (RMB
20,000,000) from BFHX and stock consideration of 13,000,000 shares of the
Company’s restricted common stock. On October 26, 2006, BFHX established Forlink
Technologies (Guangxi) Limited (“FTGX”), a PRC limited liability company, to
carry out a contract from Guangxi Caexpo to build an “Electronic Trade and
Logistics Information Platform and Call Center” (the “Project”). At the time of
incorporation, BFHX injected RMB 20,000,000 (approximately US$2,557,545) as
registered capital to FTGX.
On
October 12, 2006, the Company invested $31,969 (RMB 250,000) in Wuxi Stainless
Steel Exchange Co., Ltd. (“Wuxi Exchange”), a PRC limited liability company, for
a 12.5% equity interest. On January 14, 2007, the Company entered into an
agreement with a major shareholder of Wuxi Exchange to transfer 2.5% of the
Company’s interest in Wuxi Exchange to the major shareholder for a cash payment
of RMB 500,000.
On
January 25, 2007, the board of directors and the majority holders of the
Company’s common stock jointly approved an amendment to the Company’s Articles
of Incorporation by written consent, to increase the number of authorized shares
of common stock from 100,000,000 to 200,000,000. The Certificate of Amendment to
the Articles of Incorporation to effect the increase of the number of the
Company’s authorized common shares was filed with Nevada’s Secretary of State on
April 4, 2007.
On April
29, 2007, the Company invested, through BFHX, $138,158 (RMB 1,050,000) in
Beijing GuoXin Forlink Internet Technologies Limited (“BGXF”), a privately held
PRC company that operates a finance study website, for a 35% equity
interest. The investment in BGXF is accounted for under the equity
method of accounting due to the Company’s significant influence over the
operational and financial policies of BGXF. BGXF commenced operations
on March 9 2008. On October 14, 2008, the registered capital of BGXF was
increased to RMB 4,285,700, and since the Company did not invest additional
funds into BGFX, the ratio of its holding was diluted to a 24.5% equity
interest.
6
On July
12, 2007, the Company invested through FTGX, $1,063,830 (RMB 8,000,000) in
Nanning Bulk Commodities Exchange Corporation Limited (“NNBCE”), a privately
held PRC company, for an 80% equity interest, and NNBCE became a subsidiary of
FTGX. Set up on April 29, 2007, NNBCE commenced operations on March
28, 2008, and provides logistical e-commerce services.
On
September 5, 2007, the Company invested $465,425 (RMB 3,500,000), through NNBCE,
in Guangxi Bulk Sugar & Ethanol Exchange Corporation Limited (“GBSEE”), a
PRC limited liability company established on September 12, 2007, for a 35%
equity interest. Concurrently, All China Logistics was entrusted as nominee
owner of GBSEE to hold 20% of the fully paid up capital of GBSEE on behalf of
NNBCE as the primary beneficiary. Upon the request of NNBCE, All China Logistics
is required to transfer its ownership interests in GBSEE to NNBCE or its
designees at any time for the amount of the 20% fully paid up capital. In
accordance with Financial Accounting Standards Board (“FASB”) Interpretation No.
46R “Consolidation of Variable Interest Entities - An Interpretation of ARB No.
51” (“FIN 46R”), NNBCE is deemed to hold the primary beneficial interest of 55%
equity interest in GBSEE. GBSEE was established to provide logistical e-commerce
services, but it was dissolved on December 16, 2007 before it commenced any
operations and NNBCE received payments back of its investment in GBSEE of
$410,397 (RMB 3,000,000) in December 2007; $66,211 (RMB 484,000) in February
2008, and $2,189 (RMB 16,000) in September 2008.
On
December 24, 2007, the board of directors and the majority holders of the
Company’s common stock jointly approved an amendment to the Company’s Articles
of Incorporation by written consent, to effect a 1-for-20 reverse stock split.
The Certificate of Amendment to the Articles of Incorporation to effect the
reverse split was filed with Nevada’s Secretary of State on February 21,
2008.
On March
20, 2008, the Company invested $71,124 (RMB 500,000), through BFHX, in Shandong
LongDong Internet Technologies Limited (“SDLD”), a PRC limited liability company
established on October 24, 2007, for a 5% equity interest. SDLD,
which commenced operations in December 2007, is in the business of providing of
providing primary products e-commerce services. The purpose of this investment
is to gain cash dividends from SDLD.
The
Company transferred all its ownership interests in FTCL to BFHX for the amount
of FTCL’s 100% fully paid up capital on February 8, 2010.
Forlink,
its subsidiaries and VIE (hereinafter collectively referred to as the
“Company”), are all operating companies. Set forth below is a diagram
illustrating the Company’s corporate structure as of March 31,
2010:
7
8
NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis
of Accounting and Principles of Consolidation
The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America that include the
financial statements of Forlink and its subsidiaries and VIE, namely, FTCL,
FTHK, BFHX, FTCD, FTGX, and NNBCE. All interentity transactions and
balances have been eliminated.
Noncontrolling
interests at the balance sheet date, being the portion of the net assets of
subsidiaries attributable to equity interests that are not owned by Forlink,
whether directly or indirectly through subsidiaries, are presented in the
consolidated balance sheet separately from liabilities and the shareholders’
equity. Non-controlling interests in the results of the Company for
the years are also separately presented in the income statement.
Use
of Estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Foreign
Currency Translation and Transactions
The
functional currency of Forlink is US Dollar (“US$”) and the financial records
are maintained and the financial statements prepared in US$. The
functional currency of FTHK is HK Dollar (“HK$”) and its financial records are
maintained, and its financial statements prepared, in HK$. The
functional currency of FTCL, BFHX, FTCD, FTGX, and NNBCE is Renminbi (“RMB”) and
their financial records are maintained, and their financial statements are
prepared, in RMB.
Foreign
currency transactions during the period are translated into each company’s
denominated currency at the exchange rates at the transaction
dates. Gain and loss resulting from foreign currency transactions are
included in the consolidated statement of operations. Assets and
liabilities denominated in foreign currencies at the balance sheet date are
translated into each company’s denominated currency at the yearend exchange
rates. All exchange differences are dealt with in the consolidated statements of
operations.
The
financial statements of the Company’s operations based outside of the United
States have been translated into US$ under the guidance of the FASB Accounting
Standards Codification (ASC) Topic 830 “Foreign Currency
Matters”. Management has determined that the functional currency for
each of the Company’s foreign operations is its applicable local currency. When
translating functional currency financial statements into US$, year-end exchange
rates are applied to the consolidated balance sheets, while average period rates
are applied to consolidated statements of operations. Translation
gains and losses are recorded in translation reserve as a component of
stockholders’ equity.
The value
of the RMB is subject to changes in China’s central government policies and to
international economic and political developments affecting supply and demand in
the China Foreign Exchange Trading System market. Since 1994, the conversion of
RMB into foreign currencies, including US$, has been based on rates set by the
People’s Bank of China, which are set daily based on the previous day’s
inter-bank foreign exchange market rates and current exchange rates on the world
financial markets. Since 1994, the official exchange rate generally
has been stable. In July 2005, the Chinese government announced that
it will no longer peg its currency exclusively to US$ but will switch to a
managed floating exchange rate based on market supply and demand with reference
to a basket of currencies which will likely increase the volatility of RMB as
compared to US$. The exchange rate of RMB to US$ changed from RMB8.28 to RMB8.11
in late July 2005.
9
The
exchange rates used as of March 31, 2010 and December 31, 2009 are
US$1:HK$7.80:RMB6.84, and US$1:HK$7.78:RMB6.85, respectively. The weighted
average rates ruling for the periods ended March 31, 2010 and March 31, 2009 are
US$1:HK$7.80:RMB6.84, and US$1:HK$7.78:RMB6.85, respectively.
Foreign
Currency Risk
The RMB
is not a freely convertible currency. The State Administration for Foreign
Exchange, under the authority of the People’s Bank of China, controls the
conversion of RMB into foreign currencies. The value of the RMB is
subject to changes in central government policies and to international economic
and political developments affecting supply and demand in the China Foreign
Exchange Trading System market.
The PRC
subsidiaries conduct their business substantially in the PRC, and their
financial performance and position are measured in terms of RMB. Any
devaluation of the RMB against the US$ would consequently have an adverse effect
on the financial performance and asset values of the Company when measured in
terms of US$. The PRC subsidiaries’ products are primarily procured, sold and
delivered in the PRC for RMB. Thus, their revenues and profits are
predominantly denominated in RMB. Should the RMB devalue against US$,
such devaluation could have a material adverse effect on the Company’s profits
and the foreign currency equivalent of such profits repatriated by the PRC
entities to the Company.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash in hand and all highly liquid investments with an
original maturity of three months or less.
Allowance
for Doubtful Accounts
We record
an allowance for doubtful accounts based on specifically identified amounts that
the Company believes to be uncollectible. We have a limited number of
customers with individually large amounts due at any given balance sheet
date. Any unanticipated change in one of those customers’ credit
worthiness or other matters affecting the collectability of amounts due from
such customers, could have a material effect on the results of operations in the
period in which such changes or events occur. After all attempts to
collect a receivable have failed, the receivable is written off against the
allowance.
Inventories
Inventories
are stated at the lower of cost or market. For inventory used in
system integration services, cost is calculated using the specific
identification method. For the sale of computer hardware, cost is
calculated using first-in, first-out method. Cost includes all costs
of purchase, cost of conversion and other costs incurred in bringing the
inventories to their present location and condition. Market value is
determined by reference to the sales proceeds of items sold in the ordinary
course of business after the balance sheet date or to management estimates based
on prevailing market conditions.
Property,
Plant, Equipment and Depreciation
Property,
plant and equipment are stated at cost. Depreciation is computed using the
straight-line method to allocate the cost of depreciable assets over the
estimated useful lives of the assets as follows:
10
Estimated useful life
(in years)
|
|||
Building
|
20
|
||
Computer
equipment
|
3
|
||
Office
equipment
|
5
|
||
Motor
vehicle
|
10
|
Major
improvements of property, plant and equipment are capitalized, while
expenditures for repair and maintenance and minor renewals and betterments are
charged directly to the statements of operations as incurred. When assets are
disposed of, the related cost and accumulated depreciation thereon are removed
from the accounts and any resulting gain or loss is included in the statement of
operations.
Computer
Software Development Costs
Software
development costs are expensed as incurred until technological feasibility in
the form of a working model has been established. Deferred software
development costs will be amortized over the estimated economic life of the
software once the product is available for general release to
customers. For the current software products, the Company determined
that technological feasibility was reached at the point in time it was available
for general distribution. Therefore, no costs were
capitalized.
Long
term investments
The
Company’s long term investments consist of (1) equity investments which are
accounted for in accordance with the equity method and (2) cost investments
which are accounted for under the cost method. Under the equity method, each
such investment is reported at cost plus the Company’s proportionate share of
the income or loss or other changes in stockholders’ equity of each such
investee since its acquisition. The consolidated results of operations include
such proportionate share of income or loss. See Note 7.
Fair
Values of Financial Instruments
The
Company adopted ASC Topic 820 Fair Value Measurements and
Disclosures. The adoption of ASC 820 did not materially impact the
Company's financial position, results of operations or cash flows. ASC 820
requires the disclosure of the estimated fair value of financial instruments
including those financial instruments for which fair value option was not
elected. The carrying amounts of the financial assets and liabilities
approximate to their fair values due to short maturities or the applicable
interest rates approximate the current market rates.
Revenue
Recognition
The
Company generally provides services under multiple element arrangements, which
include software license fees, hardware and software sales, and the provision of
system integration services including consulting, implementation, and software
maintenance. The Company evaluates revenue recognition on a contract-by-contract
basis as the terms of each arrangement vary. The evaluation of the
contractual arrangements often requires judgments and estimates that affect the
timing of revenue recognized in the statements of
operations. Specifically, the Company may be required to make
judgments about:
|
·
|
whether
the fees associated with our products and services are fixed or
determinable;
|
|
·
|
whether
collection of our fees is reasonably
assured;
|
|
·
|
whether
professional services are essential to the functionality of the related
software product;
|
|
·
|
whether
we have the ability to make reasonably dependable estimates in the
application of the percentage-of-completion method;
and
|
|
·
|
whether
we have verifiable objective evidence of fair value for our products and
services.
|
The
Company recognizes revenues in accordance with the guidance of subtopic 985-605
of the Accounting Standards Codification “Software Revenue Recognition,” which
requires that there be a signed contract evidencing an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and collectability is
probable.
11
Software
license revenue is recognized over the accounting periods contained in the terms
of the relevant agreements, commencing upon the delivery of the software
provided that (1) there is evidence of an arrangement, (2) the fee is fixed or
determinable and (3) collection of the fee is considered probable.
Revenue
from non-software, multiple-element arrangements is recognized in accordance
with the GASB guidance of subtopic 605-25, “Revenue of Multi-element
Arrangement.” The Company recognizes revenue from the multiple-deliverables
which has value to the customer on a stand-alone basis. Deliverables
in an arrangement that do not meet the separation criteria in ASC 605-25 are
treated as one unit of accounting for purposes of revenue
recognition.
In the
case of maintenance revenues, vendor-specific objective evidence, or VSOE, of
fair value is based on substantive renewal prices, and the revenues are
recognized ratably over the maintenance period.
In the
case of consulting and implementation services revenues, where VSOE is based on
prices from stand-alone sale transactions, the revenues are recognized as
services that are performed pursuant to paragraph ASC 985-605-25.
For
hardware transactions where software is incidental, the Company does
not apply separate accounting guidance to the hardware and software
elements. The Company applies the provisions of the FASB ASC 985-605-15
“Software Revenue Recognition.” Per this guidance, if the software is considered
not essential to the functionality of the hardware, then the hardware is not
considered “software related” and is excluded from the scope of ASC
985-605-15. Such sale of computer hardware is recognized as revenue
on the transfer of risks and rewards of ownership, which generally coincides
with the time when the goods are delivered to customers and title has
passed.
Remote
hosting services, where VSOE is based upon consistent pricing charged to
customers based on volumes and performance requirements on a stand-alone basis
and substantive renewal terms, are recognized ratably over the contract term as
the services are performed. The remote hosting arrangements generally
require the Company to perform one-time set-up activities and include a one-time
set-up fee. This one-time set-up fee is generally paid by the
customer at contract execution. The Company has determined that these
set-up activities do not constitute a separate unit of accounting, and
accordingly, the related set-up fees are recognized protractedly over the term
of the contract.
Stock
Based Compensation
Effective
January 1, 2006, we adopted the FASB ASC 718 Stock Compensation, using the
modified prospective application transition method.
The FASB
ASC 718 requires the Company to record the cost of stock options and other
equity-based compensation in its income statement based upon the estimated fair
value of those rewards. The Company elected to use the modified
prospective method for adoption, which requires compensation expense to be
recorded for all unvested stock options and other equity-based compensation
beginning in the first quarter of adoption. Accordingly, prior
periods have not been restated to reflect stock based
compensation. On January 1, 2006, the Company adopted the FASB ASC
718 using the modified prospective method, and the adoption of this standard did
not have a material impact on the Company’s consolidated financial statements
because most of the Company’s outstanding stock options were vested as of
December 31, 2005 and the unvested portion of the stock options was considered
immaterial.
12
The FASB
ASC 718 also requires the Company to estimate forfeitures in calculating the
expense relating to share-based compensation as opposed to recognizing
forfeitures as an expense reduction as they incur. The adjustment to
apply estimated forfeitures to previously share-based compensation was
considered immaterial by the Company and as such was not classified as a
cumulative effect of a change in accounting principle. As of January
1, 2006, the Company had no unrecognized compensation cost remaining associated
with existing stock option grants. Also, the Company made no modifications to
outstanding stock option grants prior to the adoption of the FASB ASC 718, and
there were no changes in valuation methodologies or assumptions compared to
those used by the Company prior to January 1, 2006.
The
Company did not adopt any new share-based compensation plans in
2010. 200,000 stock options issued under the Company’s 2002 Stock
Plan were exercised during the year 2008.
Advertising
costs
All
advertising costs incurred in the promotion of the Company’s products and
services are expensed as incurred. Advertising expenses were insignificant for
the three months ended March 31, 2010 and 2009.
Income
Taxes
The
Company accounts for income taxes in accordance with for the FASB ASC 740
“Income Taxes.” Under SFAS No. 109, the FASB ASC 740, deferred tax liabilities
or assets at the end of each period are determined using the tax rate expected
to be in effect when taxes are actually paid or recovered. Valuation
allowances are established when it is more likely than not that some or all of
the deferred tax assets not be realized. The AFSB ASC also provides guidance for
recognizing and measuring uncertain tax positions, as defined in SFAS
No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a threshold
condition that a tax position must meet for any of the benefit of the uncertain
tax position to be recognized in the financial statements. Guidance
is also provided regarding derecognition, classification and disclosure of these
uncertain tax positions.
Earnings
Per Common Share
The
Company computes net earnings per share in accordance with the FASB ASC 260,
“Earnings per Share”. Under the provisions of the FASB ASC 260, basic
net earnings per share is computed by dividing the net earnings available to
common shareholders for the period by the weighted average number of shares of
common stock outstanding during the period. The calculation of
diluted net earnings per share gives effect to common stock equivalents,
however, potential common stock in the diluted EPS computation are excluded in
net loss periods, as their effect is anti-dilutive.
Recent
Issued Accounting Guidance
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities) and
Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities
on purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance became effective for us with the reporting period
beginning January 1, 2010, except for the disclosure on the roll forward
activities for Level 3 fair value measurements, which will become effective for
us with the reporting period beginning July 1, 2011. Other than requiring
additional disclosures, adoption of this new guidance did not have a material
impact on our financial statements.
13
In
October 2009, the FASB issued guidance on revenue recognition that will become
effective for us beginning July 1, 2010, with earlier adoption permitted.
Under the new guidance on arrangements that include software elements, tangible
products that have software components that are essential to the functionality
of the tangible product will no longer be within the scope of the software
revenue recognition guidance, and software-enabled products will now be subject
to other relevant revenue recognition guidance. Additionally, the FASB issued
guidance on revenue arrangements with multiple deliverables that are outside the
scope of the software revenue recognition guidance. Under the new guidance, when
vendor specific objective evidence or third party evidence for deliverables in
an arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using
the relative selling price method. The new guidance includes new disclosure
requirements on how the application of the relative selling price method affects
the timing and amount of revenue recognition.
On
July 1, 2009, we adopted guidance issued by the FASB that changes the
accounting and reporting for non-controlling interests. Non-controlling
interests are to be reported as a component of equity separate from the parent’s
equity, and purchases or sales of equity interests that do not result in a
change in control are to be accounted for as equity transactions. In addition,
net income attributable to a non-controlling interest is to be included in net
income and, upon a loss of control, the interest sold, as well as any interest
retained, is to be recorded at fair value with any gain or loss recognized in
net income. Adoption of the new guidance did not have a material impact on our
financial statements.
In June
2009, the FASB issued guidance on the consolidation of variable interest
entities, which is effective for us beginning July 1, 2010. The new
guidance requires revised evaluations of whether entities represent variable
interest entities, ongoing assessments of control over such entities, and
additional disclosures for variable interests. We believe adoption of this new
guidance will not have a material impact on our financial
statements.
The
Company does not anticipate that the adoption of these statements will have a
material effect on the Company's financial condition and results of
operations.
NOTE
3 - OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Other
receivables
|
$ | 1,084,640 | $ | 675,801 | ||||
Deposits
|
158,567 | 3,661 | ||||||
Prepayments
|
14,020 | 7,951 | ||||||
$ | 1,257,227 | $ | 687,413 |
Other
receivables include deposits for operating leases and advances to employee for
traveling outlays.
NOTE
4 - INVENTORIES
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Computer
hardware and software
|
$ | 49,991 | $ | 23,784 | ||||
Work-in-progress
|
998,243 | 911,782 | ||||||
$ | 1,048,234 | $ | 935,566 |
All the
inventories were purchased for identified system integration
contracts.
14
Work-in-progress
includes payroll and other operating expenses associated with various contracts
in progress.
NOTE
5 – RELATED PARTY TRANSACTIONS
The
Company, from time to time, borrowed money from and made repayment to one major
stockholder who is also a management member of the Company. The
amounts due to this stockholder do not bear any interest and do not have clearly
defined terms of repayment.
As of
March 31, 2010 and December 31, 2009, the amounts due to this stockholder were
$513,970 and $415,078, respectively, representing advances from this stockholder
for our working capital.
NOTE
6 - PROPERTY, PLANT AND EQUIPMENT, NET
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Building
|
$ | 213,705 | $ | 213,705 | ||||
Computer
and office equipment
|
1,067,827 | 1,061,915 | ||||||
Motor
vehicles
|
211,698 | 211,698 | ||||||
1,493,230 | 1,487,318 | |||||||
Less:
Accumulated depreciation
|
(1,140,946 | ) | (1,095,647 | ) | ||||
$ | 352,284 | 391,671 |
The
building is located in Chengdu, PRC and was purchased on behalf of the Company
by Mr. Yi He, one of the stockholders and directors of the
Company. By a stockholders’ resolution passed on March 8, 1999, it
was ratified that the title to the building belonged to the
Company. In 2005, the title to the building was transferred to
Forlink Technologies (Chengdu) Limited.
NOTE
7 - LONG TERM INVESTMENTS
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Equity
investments
|
$ | 3,636,425 | $ | 3,766,876 | ||||
Cost
investments
|
940,148 | 940,260 | ||||||
$ | 4,576,573 | 4,707,136 |
In
December 2003, the Company invested $760,870 in a privately held PRC company,
All China Logistics Online Co., Ltd., for a 17.8% equity
interest. The Company has recorded the investment at cost because it
does not have the ability to exercise significant influence over the
investee.
On
October 24, 2005, the Company set up China Liquid Chemical Exchange Company
Limited (“CLCE”), a limited liability company in PRC, and shares the risk and
rewards up to the equity interest of 13.46%. The consideration was
made in the form of the Company-developed “For-Online Electronic Trading System”
without any cash outflow. Therefore, the Company recorded the
contribution of software at the lower of its carrying amount or fair value, and
accounted for under the equity method under the guidance of the FASB ASC
970-323. For the quarter ended March 31, 2010, our share of loss was
$3,924 (RMB 26,844) and during the quarter we received dividends of $107,980
(RMB 738,550) from CLCE, which has been recorded in the accompanying financial
statements.
15
On
October 3, 2006, the Company acquired 22.73% of registered capital in Guangxi
Caexpo International Trade and Logistics Co., Ltd. (“Guangxi Caexpo”) from
Statelink International Group, Ltd. (“Statelink”) Consideration paid to
Statelink for this acquisition included a cash payment of $2,557,545 (RMB
20,000,000) by BFHX and 13,000,000 shares of the Company’s restricted common
stock. The acquisition cost of the common shares issued to Statelink
is based on a per share price of $0.075, which is the average market price of
the Company’s common shares over a 10-day period before and after the terms of
the acquisition were agreed to. The overall acquisition cost of this
acquisition was $3,529,450. The Company recorded the investment using the equity
method.
On
October 12, 2006, the Company entered into a definitive agreement to acquire
12.5% of registered capital in Wuxi Stainless Steel Exchange Co., Ltd. (“Wuxi”),
a private held PRC company. In exchange for the 12.5% registered capital, the
Company was to deploy a proprietary, integrated software solution (“Software”),
estimated at RMB 1,000,000, by reference to the similar products sold to third
parties in 2006, to support Wuxi’s operations, plus RMB 250,000 cash payment to
Wuxi. In 2006, the Company contributed cash of $31,969 (RMB 250,000)
and the Software was deployed to Wuxi in December 2006. The
Company recorded the investment at cost because it does not have the ability to
exercise significant influence over Wuxi. On January 14, 2007, the Company
entered into a Share Transfer Agreement with a major shareholder of Wuxi to
transfer a 2.5% equity interest in Wuxi held by the Company to the major
shareholder for a cash payment of RMB 500,000. After this transfer,
the Company continues to hold a 10% equity interest in Wuxi.
On April 29, 2007, the Company invested
$138,158 in a privately held PRC company, Beijing GuoXin Forlink Internet
Technologies Limited (“BGXF”), for a 35% equity interest. The
Company’s investment was made through BFHX. The investment in BGXF is
accounted for under the equity method of the accounting due to the Company’s
significant influence over the operational and financial policies of
BGXF. On March 9, 2008, BGXF commenced operations. On October
14, 2008, BGXF increased its registered capital to RMB 4,285,700, and since we
did not invest additional funds into BGXF, the ratio of our holding was diluted
to a 24.5% equity interest.
On
September 17, 2007, the Company invested $99,734 in a privately held PRC
Company, Ningbo Bulk Commodities Exchange Corporation Limited (“NBBCE”) for a
25% equity interest. The Company’s investment was made through
BFHX. The Company recorded the investment at cost because it does not
have the ability to exercise significant influence over NBBCE. In
fact, NBBCE’s strategic and business decisions are dominated by another major
shareholder.
On March
20, 2008, Forlink invested $71,124 (RMB 500,000), through BFHX, in Shandong
LongDong Internet Technologies Limited (“SDLD”), a PRC limited liability
company, established on October 24, 2007, for a 5% equity
interest. SDLD, which commenced operations in December 2007, is in
the business of providing of providing primary products e-commerce
services. The purpose of the investment is to gain cash dividends
from SDLD.
NOTE
8 - OTHER PAYABLES AND ACCRUED EXPENSES
March 31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Other
payables
|
$ | 239,978 | $ | 221,972 | ||||
Accrued
salaries & wages
|
133,951 | 313,696 | ||||||
Other
accrued expenses
|
||||||||
$ | 373,929 | $ | 535,668 |
16
Other
payables include wages payable to employees, rental payable, and utilities
payable.
NOTE
9 – NON-CONTROLLING INTEREST
The
non-controlling interest balance of $137,745 represents equity value held by
minority shareholders of NNBCE.
NOTE
10 - INCOME TAX
According
to the relevant PRC tax rules and regulations, FTCL, recognized as New
Technology Enterprises operating within a New and High Technology Development
Zone, is entitled to an Enterprise Income Tax (“EIT”) rate of 15%.
Pursuant
to approval documents dated September 23, 1999 and August 2, 2000, respectively,
issued by the Beijing Tax Bureau and State Tax Bureau, FTCL was fully exempted
from EIT for fiscal years 1999, 2000, 2001 and 2002. FTCL received a 50% EIT
reduction at the rate of 7.5% for fiscal years 2003, 2004 and
2005. As of March 31, 2010, FTCL was entitled to an EIT rate of
15%.
Pursuant
to an approval document dated January 19, 2004 issued by the State Tax Bureau,
BFHX was fully exempted from EIT for fiscal years 2004, 2005 and
2006. As of March 31, 2010, BFHX was entitled to an EIT rate of
25%.
Hong Kong
profits tax is calculated at 17.5% on the estimated assessable profits of FTHK
for the period. The EIT rates for FTCD, BFKT and NNBCE range from 9% to
33%. No provision for EIT and Hong Kong profits tax were made for
FTCL, BFHX, FTCD, FTGX, NNBCE and FTHK as they have not gained taxable income
for the periods.
On
January 1, 2007, the Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,” an interpretation of FASB
Statement No. 109 (“FIN 48”). This Interpretation
provides guidance for recognizing and measuring uncertain tax positions, as
defined in SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
threshold condition that a tax position must meet for any of the benefits of the
uncertain tax position to be recognized in the financial
statements. Guidance is also provided regarding derecognition,
classification and disclosure of these uncertain tax positions. The
Company classified all interest and penalties related to tax uncertainties as
income tax expense. The Company’s liability for income taxes includes
the liability for unrecognized tax benefits, interest and penalties which relate
to tax years still subject to review by taxing authorities. Audit
periods remain open for review until the statute of limitations has
passed. The completion of review or the expiration of the statute of
limitations for a given audit period could result in an adjustment to our
liability for income taxes. Any such adjustment could be material to
the Company’s results of operations for any given quarterly or annual period
based, in part, upon the results of operations for the given
period. As of March 31, 2010, the Company does not have any liability
for uncertain tax positions. The adoption of FIN 48 did not have a
material impact on the Company’s results operations, financial position or
liquidity.
17
On March
16, 2007, the 5th Plenary Session of the 10th National People's Congress passed
the Corporate Income Tax Law of the PRC (the “New Corporate Income Tax Law"),
which took effect on January 1, 2008. Beginning on that date, the EIT rate was
to gradually increase to the standard rate of 25% over a five-year transition
period. However, the New Corporate Income Tax Law did not specify how
the existing preferential tax rate would gradually increase to the standard rate
of 25%. Also, under the New Corporate Income Tax Law, certain high
technology enterprises would continue to be entitled to a reduced tax rate of
15%. The Company was designated as a high technology enterprise under the New
Corporate Income Tax Law. The enactment of the New Corporate Income Tax Law is
not expected to have any financial effect on the amounts accrued in the balance
sheet in respect of current tax payable.
NOTE
11 - OTHER TAXES RECOVERABLE/(PAYABLE)
Other
taxes payable comprise mainly of the Valued-Added Tax (“VAT”) and Business Tax
(“BT”). The Company is subject to output VAT levied at the rate of 17% of its
operating revenue. The input VAT paid on purchases of materials and
other direct inputs can be used to offset the output VAT levied on operating
revenue to determine the net VAT payable or recoverable. BT is
charged at a rate of 5% on the revenue from other services.
As part
of the PRC government’s policy of encouraging software development in the PRC,
companies that fulfill certain criteria set by the relevant authorities, and
which develop their own software products and have the software products
registered with the relevant authorities in the PRC, are entitled to a refund of
VAT equivalent to the excess over 3% of revenue paid in the month when output
VAT exceeds input VAT (excluding export sales). The excess portion of the VAT is
refundable and is recorded by the Company on an accrual basis. The
VAT rebate included in other income was $512,899 and $81,672 for the three
months ended March 31, 2010 and 2009, respectively.
NOTE 12 – COMPREHENSIVE
INCOME/(LOSS)
The components of comprehensive
income/(loss) were as follows:
Three Months
Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
profit/(loss)
|
$ | 77,945 | $ | (262,305 | ) | |||
Foreign currency
translation adjustment
|
(353 | ) | (91,150 | ) | ||||
Comprehensive
income/(loss)
|
$ | 77,592 | $ | (353,455 | ) |
NOTE
13 - STOCK PLAN
On August
16, 2002, the Company established a plan of stock-based compensation incentives
for selected eligible participants of the Company and its affiliated
corporations. This plan is known as the “Forlink Software
Corporation, Inc. 2002 Stock Plan” (the “2002 Plan”). The total
number of shares of common stock reserved for issuance by Forlink either
directly as stock awards or underlying options granted under the 2002 Plan shall
not be more than 8,000,000. Under the terms of the 2002 Plan, options can be
issued to purchase shares of Forlink’s common stock. The Board of
Directors shall determine the terms and conditions of each option granted to
eligible participants, which terms shall be set forth in writing. The
terms and conditions so set by the Board of Directors may vary from one eligible
participant to another.
18
The
following table summarizes the activity on stock options under the 2002
Plan:
Number of
shares
|
Weighted
average
exercise price
|
|||||||
Granted
on September 7, 2004
|
3,315,000 | $ | 0.10 | |||||
Exercised
|
(15,000 |
)
|
$ | (0.10 | ) | |||
Forfeited
or Cancelled
|
0 | $ | 0.00 | |||||
Outstanding
at December 31, 2004
|
3,300,000 | $ | 0.10 | |||||
Exercised
|
(136,500 |
)
|
$ | (0.10 | ) | |||
Forfeited
or Cancelled
|
(132,500 |
)
|
$ | (0.10 | ) | |||
Outstanding
at December 31, 2005
|
3,031,000 | $ | 0.10 | |||||
Exercised
|
0 | $ | 0.00 | |||||
Forfeited
or Cancelled
|
(1,734,000 |
)
|
$ | (0.10 | ) | |||
Outstanding
at December 31, 2006
|
1,297,000 | $ | 0.10 | |||||
Exercised
|
(897,000 |
)
|
$ | (0.10 | ) | |||
Forfeited
or Cancelled
|
0 | $ | 0.00 | |||||
Outstanding
at December 31, 2007
|
400,000 | $ | 0.10 | |||||
Exercised
|
(200,000 |
)
|
$ | 0.00 | ||||
Forfeited
or Cancelled
|
(200,000 |
)
|
$ | 0.00 | ||||
Outstanding
at December 31, 2008
|
0 | $ | 0.00 | |||||
Exercised
|
0 | $ | 0.00 | |||||
Forfeited
or Cancelled
|
0 | $ | 0.00 | |||||
Outstanding
at March 31, 2010
|
0 | $ | 0.00 | |||||
Fully
vested and exercisable at March 31, 2010
|
0 | $ | 0.00 |
On
September 7, 2004, 3,315,000 options were granted to the Company’s employees to
purchase the Company’s shares of common stock, $0.001 par value, at an exercise
price of $0.10 per share. Of the 3,315,000 options, 800,000 options
with a 5-year vesting period were granted to an employee, and 2,515,000 options
with a 3-year vesting period were granted to selected employees. Of
the 2,515,000 options with the 3-year vesting period, 2,385,000 options were to
expire on December 30, 2006 (the “December 2006 Options”), while the remaining
130,000 options expired on June 30, 2007 (the “June 2007
Options”). The expiration date for 800,000 options with the 5-year
vesting period is June 30, 2009 (the “June 2009 Options”). On
September 7, 2004, January 1, 2005, January 1, 2006 and January 1, 2007, 854,500
(the “December 2006 Options”), 904,500, 1,156,000 (400,000 of “June 2009
Options”; 130,000 of “June 2007 Options”; and 626,000 of “December 2006
Options”) and 200,000 (the “June 2009 Options”) options were vested to employees
respectively. The market price of the stock as of September 7, 2004
and January 1, 2005 was $0.10 per share. In December 2006, the
Company extended the expiration date of the December 2006 Options by one month
to the end of January 2007, but there was no additional compensation expense as
the Company considered the amount was immaterial. On January 29,
2007, 367,000 options of the “December 2006 Options” and 400,000 of the “June
2009 options” were exercised. On July 6, 2007, 130,000 options of the
“June 2007 Options” were exercised. On July 15, 2008, 200,000 options of “June
2009 Options” were exercised.
The
following table summarizes the cumulative activities up to March 31, 2010 of the
options issued under the 2002 Plan with different expiration dates:
Granted
|
Exercised
|
Forfeited or
Cancelled
|
Outstanding
at March 31,
2010
|
|||||||
December
2006 Options
|
2,385,000
|
518,500
|
1,866,500
|
0
|
||||||
June
2007 Options
|
130,000
|
130,000
|
0
|
0
|
||||||
June
2009 Options
|
800,000
|
600,000
|
200,000
|
0
|
||||||
3,315,000
|
1,248,500
|
2,066,500
|
0
|
19
The
weighted average fair value of the December 2006 Options, the June 2007 Options
and the June 2009 Options granted on the date of grant, were $0.042, $0.046 and
$0.058 per option, respectively. At December 31, 2007, all future
compensation expenses were recognized.
There was
no aggregate intrinsic value of options outstanding and exercisable as of
December 31, 2007 and December 31, 2006. The aggregate intrinsic
value represents the intrinsic value, based on options with an exercise price
less than the market value of the Company’s stock on December 31, 2007 and
December 31, 2006, which would have been received by the option holders had
those option holders exercised those options at of that date.
The
Company calculated the fair value of each option award on the date of grant
using the Black-Scholes option pricing model. The following assumptions were
used for each respective option.
The Value of Options
|
||||||||
December
2006
Options
|
June 2007
Options
|
June 2009
Options
|
||||||
Risk-free
interest rate
|
2.17
|
%
|
2.28
|
%
|
2.66
|
%
|
||
Expected
lives (in years)
|
1.167
|
1.417
|
2.417
|
|||||
Dividend
yield
|
0
|
%
|
0
|
%
|
0
|
%
|
||
Expected
volatility
|
100
|
%
|
100
|
%
|
100
|
%
|
NOTE
14 - CONCENTRATION OF CUSTOMERS
During
the year, the following customers accounted for more than 10% of total
sales:
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Net sales derived
from:
|
||||||||
Customer A
|
530,352 | 446,013 | ||||||
Customer B
|
* | 264,451 | ||||||
Customer C
|
* | * | ||||||
Customer D
|
* | * | ||||||
Customer E
|
* | * | ||||||
% to total net sales from:
|
||||||||
Customer A
|
78 | % | 52 | % | ||||
Customer B
|
* | 31 | % | |||||
Customer C
|
* | * | ||||||
Customer
D
|
* | * | ||||||
Customer
E
|
* | * | ||||||
Account receivable
from:
|
||||||||
Customer A
|
375,435 | 682,199 | ||||||
Customer B
|
1,779,368 | * | ||||||
Customer C
|
* | 550,567 | ||||||
Customer
D
|
* | * | ||||||
Customer
E
|
* | * | ||||||
% to total accounts
receivable
from:
|
||||||||
Customer A
|
12 | % | 46 | % | ||||
Customer B
|
59 | % | * | |||||
Customer C
|
* | 37 | % | |||||
Customer
D
|
* | * | ||||||
Customer
E
|
* | * |
* less
than 10%
20
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
Statements contained herein that
are not historical facts
are forward-looking statements as that term is defined by the Private Securities
Litigation Reform Act of 1995. Although we believe that the expectations
reflected in such forward looking statements are reasonable, the forward
looking statements are subject to risks and
uncertainties that could cause actual results to differ from those projected. We
caution investors that any forward looking statements made by us are not
guarantees of future performance and that actual results may differ materially from those in the
forward-looking statements. Such risks and uncertainties include, without
limitation: well-established competitors who have substantially greater
financial resources and longer operating histories, regulatory delays or
denials, ability to compete as a company in a
highly competitive market, and access to sources of capital.
The following discussion and analysis
should be read in conjunction with our financial statements and notes thereto
included elsewhere in this Form 10-Q. Except for the historical information
contained herein, the discussion in this Form 10-Q contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. The
cautionary statements made in this Form 10-Q
should be read as being applicable to all related forward looking statements
wherever they appear in this Form 10-Q. The Company's actual results could
differ materially from those discussed here. We undertake no obligation
to update publicly any forward-looking statements for any reason even if new
information becomes available or other events occur in the future.
Overview
We are a leading provider of software
solutions and information technology services in China (the “PRC” or “China”). We focus on providing Enterprise Application Integration (EAI)
solutions for large companies in the telecom, finance, and logistics industries. In May 2004, we launched For-online,
which delivers enterprise applications and
services over the Internet to small and
medium-sized enterprises (SMEs) in China. Since its launch,
For-Online has become an important channel for delivering and distributing our
products and services to more customers. In August 2007, we launched
our integrated e-business application platform For-Online 4.0, and based on this
platform, we also released new versions of For-eMarket 3.0 in September 2007,
ForCRM in October 2007 and ForOA in October 2007. We released For-eMarketPlace
3.1 in August 2008. We released For-EAI 5.0 and For-Online 5.0
in
June 2009.
Revenues
Our business includes
Forlink’s “For-series” brand software system sales such as
ForOSS, ForRMS, For-Mail and their copyright licensing, and “For-series” related system integration, which
consists of hardware sales
and other related services rendered to customers. The following table shows our
revenue breakdown by business line:
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Sales of For-series
software
|
$ | 541,045 | $ | 410,890 | ||||
as a percentage of net sales
|
79 | % | 48 | % | ||||
For-series related system
integration
|
$ | 142,030 | $ | 446,013 | ||||
as a percentage of net
sales
|
21 | % | 52 | % |
As indicated in the foregoing table,
sales of For-series software increased by approximately 32% to $541,045 in the first quarter of 2010 from $410,890 in the comparable quarter of 2009. For-series related system
integration as a percentage of net sales decreased from $416,013 or 52% in the comparable quarter of
2009 to $142,030 or 21% in the first quarter of 2010. The gross margins for the three months ended March 31,
2010 and 2009 were 47% and 30%, respectively.
21
Generally, we offer our products and
services to our customers on a total-solutions basis. Most of the contracts we
undertake for our customers include revenue from hardware and software sales and
professional services.
Sources of Revenue
Hardware Revenue:
Revenues from sales of
products are mainly derived from sales of hardware. Normally, the
hardware that we procure is in connection with total-solutions basis
system integration
contracts.
Service Revenue:
Service revenue consists of
revenue for the professional services we provide to our customers for network
planning, design and systems integration, software development, modification and
installation, and related
training services.
Software License
Revenue: We generate revenue in the form of fees received from customers
to whom we issue licenses for the use of our software products over an agreed
period of time.
Cost of Revenue
Our cost of revenue includes hardware costs, software-related costs
and compensation and travel expenses for the professionals involved in the
relevant projects. Hardware costs consist primarily of third party
hardware costs. We recognize hardware costs in full upon delivery of the
hardware to our customers.
Software-related costs consist primarily of packaging and written manual
expenses for our proprietary software products and software license fees paid to
third-party software providers for the right to sublicense their products
to our customers as part of our solutions
offerings. The costs associated with designing and modifying our proprietary
software are classified as research and development expenses as such costs are
incurred.
Operating Expenses
Operating expenses are comprised of selling expenses, research and
development expenses and general and administrative
expenses.
Selling expenses include compensation
expenses for employees in our sales and marketing departments, third party
advertising expenses, as well as sales commissions and sales agency
fees.
Research and development expenses relate
to the development of new software and the modification of existing
software. We expense such costs as they are
incurred.
General and administrative expenses
include salaries
and wages in the management section, office expenses,
and traveling expenses.
Taxes
According to the relevant PRC tax rules
and regulations, FTCL, is recognized as New Technology
Enterprises operating within a New and High Technology Development Zone,
are entitled to an
Enterprise Income Tax (“EIT”) rate of 15%.
Pursuant
to approval documents dated September 23, 1999 and August 2, 2000 issued by the
Beijing Tax Bureau and the State Tax Bureau respectively, FTCL received full
exemption from EIT for fiscal years 1999 through 2002, and a 50% EIT reduction
at the rate of 7.5% for fiscal years 2003 through 2005. As of March
31, 2010, FTCL was entitled to an EIT rate of 15%.
22
Pursuant
to an approval document dated January 19, 2004 issued by the State Tax Bureau,
BFHX received full exemption from EIT for fiscal years 2004 through 2006. As of
March 31, 2010, BFHX was entitled to an EIT rate of 25%.
Hong Kong
profits tax is calculated at 17.5% on the estimated assessable profits of FTHK
for the period. The EIT rates for FTCD and NNBCE range from 9% to 33%.
Revenue from the sale of hardware
procured in China together with the related system integration is subject to a
17% value added tax
(“VAT”). However, companies that
develop their own software and have the software registered are generally entitled
to a VAT refund. If the net amount of the VAT payable exceeds 3% of
software sales, the excess portion of the VAT is refundable upon our application
to the tax authority. This policy is
effective until 2010. Changes in Chinese tax laws may adversely
affect our future operations.
Foreign
Exchange
Our functional currency is the U.S.
Dollar (“US$”) and our financial records are
maintained and the financial statements prepared in US$. The
functional currency of FTHK is the Hong Kong Dollar (“HK$”) and the financial records are
maintained and the financial statements prepared in HK$. The
functional currency of Slait, FTCL, BFHX and FTCD is the Renminbi (“RMB”) and their financial records are
maintained and the financial statements are prepared in
RMB.
Foreign currency transactions during
this reporting period are translated into each company’s denominated currency at the exchange
rates ruling at the transaction dates. Gains and losses resulting
from foreign currency
transactions are included in the consolidated statement of operations. Assets
and liabilities denominated in foreign currencies at the balance sheet date are
translated into each company’s denominated currency at year-end
exchange rates. All exchange differences are dealt with in the
consolidated statements of operations.
The
financial statements of our operations based outside of the United States have
been translated into US$ under the guidance of the Foreign Currency Matters
Topic of the FASB Accounting Standards Codification. We have
determined that the functional currency for each of the Company’s foreign
operations is its applicable local currency. When translating
functional currency financial statements into US$, period-end exchange rates are
applied to the consolidated balance sheets, while average period rates are
applied to consolidated statements of operations. Translation gains
and losses are recorded in translation reserve as a component of shareholders’
equity.
The value
of the RMB is subject to changes in China’s central government policies and to
international economic and political developments affecting supply and demand in
the China Foreign Exchange Trading System market. Since 1994, the
conversion of RMB into foreign currencies, including US$, has been based on
rates set by the People’s Bank of China, which are set daily based on the
previous day’s interbank foreign exchange market rates and current exchange
rates on the world financial markets. Since 1994, the official
exchange rate generally has been stable. In July 2005, the Chinese
government announced that it would no longer peg its currency exclusively to US$
but would switch to a managed floating exchange rate based on market supply and
demand with reference to a basket of currencies. This switch will
likely increase the volatility of RMB as compared to US$. The
exchange rate of RMB to US$ changed from RMB8.28 to RMB8.11 in late July
2005.
Exchange
rates among US$, HK$ and RMB had minimal fluctuations during the periods
presented. The rates ruling as of March 31, 2010 are US$1: HK$7.795:
RMB6.840.The weighted average rates ruling for the three months ended March 31,
2009 are US$1: HK$7.796: RMB6.840.
23
Critical
Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with
generally accepted accounting principles in the United States of
America. The preparation of those financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting
period. On an on-going basis, we evaluate our estimates and
judgments, including those related to revenues and cost of
revenues under customer contracts, bad debts, income taxes, investment in
affiliate, long-lived assets and goodwill. We base our estimates and
judgments on historical experience and on various other factors that
we believe are
reasonable. Actual results may differ from these estimates under
different assumptions or conditions. We believe the following
critical accounting policies affect the more significant judgments and estimates
used in the preparation of our consolidated financial
statements.
Revenue
Recognition
We
generally provide services under multiple element arrangements, which include
software license fees, hardware and software sales, provision of system
integration services including consulting, implementation, and software
maintenance. We evaluate revenue recognition on a
contract-by-contract basis as the terms of each arrangement vary. The
evaluation of the contractual arrangements often requires judgments and
estimates that affect the timing of revenue recognized in the statements of
operations. Specifically, we may be required to make judgments
about:
|
·
|
whether
the fees associated with our products and services are fixed or
determinable;
|
|
·
|
whether
collection of our fees is reasonably
assured;
|
|
·
|
whether
professional services are essential to the functionality of the related
software product;
|
|
·
|
whether
we have the ability to make reasonably dependable estimates in the
application of the percentage-of-completion method;
and
|
|
·
|
whether
we have verifiable objective evidence of fair value for our products and
services.
|
We
recognize revenues in accordance with the guidance of subtopic 985-605 of the
Accounting Standards Codification “Software Revenue Recognition,” which requires
that there be a signed contract evidencing an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectability is
probable.
Revenue
from non-software, multiple-element arrangements is recognized in accordance
with the GASB guidance of subtopic 605-25, Revenue of Multi-element
Arrangement.The Company recognizes revenue from the multiple-deliverables which
has value to the customer on a stand-alone basis. Deliverables in an
arrangement that do not meet the separation criteria in ASC 605-25 are treated
as one unit of accounting for purposes of revenue recognition.
Revenue
from provision of system integration services and other related services are
recognized when services are rendered in stages as separate identifiable phases
of a project are completed and accepted by customers.
Revenue
from software sales is recognized when the related products are delivered and
installed and collection of sales proceeds is deemed probable and persuasive
evidence of an arrangement exists.
Software
license revenue is recognized over the accounting periods contained in the terms
of the relevant agreements, commencing upon the delivery of the software
provided that (1) there is evidence of an arrangement, (2) the fee is fixed or
determinable and (3) collection of the fee is considered
probable. Under certain arrangements, the Company capitalizes related
direct costs consisting of third party software costs and direct software
implementation costs. These costs are amortized over the term of the
arrangement.
In the
case of maintenance revenue, vendor-specific objective evidence, or VSOE, of
fair value is based on substantive renewal prices, and such revenue is
recognized ratably over the maintenance period.
In the
case of consulting and implementation services revenue, VSOE is based on prices
from stand-alone sale transactions, and such revenue is recognized as services
are performed pursuant to paragraph ASC 985-605-25.
24
For
hardware transactions where software is incidental, the Company does
not apply separate accounting guidance to the hardware and software
elements. The Company applies the provisions of the FASB ASC 985-605-15
Software Revenue Recognition, Per this guidance, if the software is
considered not essential to the functionality of the hardware, then the hardware
is not considered “software related” and is excluded from the scope of ASC
985-605-15. Such sale of computer hardware is recognized as revenue
on the transfer of risks and rewards of ownership, which generally coincides
with the time when the goods are delivered to customers and title has
passed.
Remote
hosting services, where VSOE is based upon consistent pricing charged to
customers based on volumes and performance requirements on a stand-alone basis
and substantive renewal terms, are recognized ratably over the contract term as
the services are performed. The remote hosting arrangements generally
require the Company to perform one-time set-up activities and include a one-time
set-up fee. This one-time set-up fee is generally paid by the
customer at contract execution. The Company has determined that these
set-up activities do not constitute a separate unit of accounting, and
accordingly, the related set-up fees are recognized protractedly over the term
of the contract.
Income
Taxes
We
account for income taxes in accordance with for the FASB ASC 740 “Income Taxes.”
Under SFAS No. 109 the FASB ASC 740, deferred tax liabilities or assets at the
end of each period are determined using the tax rate expected to be in effect
when taxes are actually paid or recovered. Valuation allowances are
established when it is more likely than not that some or all of the deferred tax
assets will not be realized.
The AFSB
ASC also provides guidance for recognizing and measuring uncertain tax
positions, as defined in SFAS No. 109, Accounting for Income Taxes.
FIN 48 prescribes a threshold condition that a tax position must meet for any of
the benefit of the uncertain tax position to be recognized in the financial
statements. As of March 31, 2010, we do not have any liability for uncertain tax
positions. The adoption of FIN 48 did not have a material impact on
our results of operations, financial position or liquidity.
Allowance for Doubtful
Accounts
We record
an allowance for doubtful accounts based on specifically identified amounts that
the Company believes to be uncollectible. We have a limited number of
customers with individually large amounts due at any given balance sheet
date. Any unanticipated change in one of those customers’ credit
worthiness or other matters affecting the collectability of amounts due from
such customers could have a material effect on the results of operations in the
period in which such changes or events occur. After all attempts to
collect a receivable have failed, the receivable is written off against the
allowance.
Recent
Issued Accounting Guidance
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities) and
Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities
on purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance became effective for us with the reporting period
beginning January 1, 2010, except for the disclosure on the roll forward
activities for Level 3 fair value measurements, which will become effective for
us with the reporting period beginning July 1, 2011. Other than requiring
additional disclosures, adoption of this new guidance did not have a material
impact on our financial statements.
25
In
October 2009, the FASB issued guidance on revenue recognition that will become
effective for us beginning July 1, 2010, with earlier adoption permitted.
Under the new guidance on arrangements that include software elements, tangible
products that have software components that are essential to the functionality
of the tangible product will no longer be within the scope of the software
revenue recognition guidance, and software-enabled products will now be subject
to other relevant revenue recognition guidance. Additionally, the FASB issued
guidance on revenue arrangements with multiple deliverables that are outside the
scope of the software revenue recognition guidance. Under the new guidance, when
vendor specific objective evidence or third party evidence for deliverables in
an arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using
the relative selling price method. The new guidance includes new disclosure
requirements on how the application of the relative selling price method affects
the timing and amount of revenue recognition.
On
July 1, 2009, we adopted guidance issued by the FASB that changes the
accounting and reporting for non-controlling interests. Non-controlling
interests are to be reported as a component of equity separate from the parent’s
equity, and purchases or sales of equity interests that do not result in a
change in control are to be accounted for as equity transactions. In addition,
net income attributable to a non-controlling interest is to be included in net
income and, upon a loss of control, the interest sold, as well as any interest
retained, is to be recorded at fair value with any gain or loss recognized in
net income. Adoption of the new guidance did not have a material impact on our
financial statements.
In June
2009, the FASB issued guidance on the consolidation of variable interest
entities, which is effective for us beginning July 1, 2010. The new
guidance requires revised evaluations of whether entities represent variable
interest entities, ongoing assessments of control over such entities, and
additional disclosures for variable interests. We believe adoption of this new
guidance will not have a material impact on our financial
statements.
The
Company does not anticipate that the adoption of these statements will have a
material effect on the Company's financial condition and results of
operations.
Consolidated
Results of Operations for the Three Months Ended March 31, 2010 and
2009.
The
following table sets forth the results of our operations for the periods
indicated:
|
Three Months Ended
|
Three Months Ended
|
||||||
|
March 31, 2010
|
March 31, 2009
|
||||||
Net
Sales
|
$
|
683,075
|
$
|
856,903
|
||||
Cost
of Sales
|
(364,832
|
)
|
(596,395
|
)
|
||||
Gross
Profit
|
318,243
|
260,508
|
||||||
Selling
Expenses
|
(223,160
|
)
|
(292,052
|
)
|
||||
Research
and Development Expenses
|
(179,047
|
)
|
(113,403
|
)
|
||||
General
and Administrative Expenses
|
(341,512
|
)
|
(217,413
|
)
|
||||
Operating
Profit (Loss)
|
(425,476
|
)
|
(362,360
|
)
|
||||
Other
Income
|
512,899
|
81,672
|
||||||
Net
Profit (Loss)
|
77,946
|
(262,305
|
)
|
|||||
Gain/Loss
Per Share
|
0.02
|
(0.06
|
)
|
|||||
Basic
Weighted Average Shares Outstanding
|
4,651,173
|
4,651,173
|
||||||
Diluted
Weighted Average Shares Outstanding
|
4,651,173
|
4,651,173
|
Net
Sales
For the
three-month period ended March 31, 2010, our revenue was $683,075, a decrease of
approximately 20.3% from our revenue of $856,903 for the comparable period in
2009. The decrease was mainly due to the decrease of system integration
sales.
26
Cost of
Sales
Our cost
of sales was $364,832 in the three-month period ended March 31, 2010, compared
with $596,395 for the same period in 2009. This decrease was in line with a
decrease in net sales for the first quarter of 2010.
Gross
Profit
For the
three-month period ended March 31, 2010, gross profit was $318,243, representing
an increase of 22.2% against $260,508 for the comparable period in 2009. This
increase was in line with an increase in software sales for the quarter, which
has a higher gross profit ratio than system integration sales.
Operating
Expenses
Total
operating expenses were $743,719 in the three-month period ended March 31, 2010,
as compared to $622,868 for the comparable period in 2009, representing an
increase of 19.4%. The overall increase in operating expenses was
mainly attributable to increases in general and administrative expenses during
the period.
Selling
expenses were $223,160 in the three-month period ended March 31, 2010,
representing a decrease of 23.6% against $292,052 for the comparable period in
2009. This decrease was primarily due to our decreased advertising expenses and
sales efforts to market our ASP (Application Service Provider) services
“For-online,” our IT outsourcing services, as well as our EAI (Enterprise
Application Integration) services “For-eMarket”, “ForCRM” and
“ForOA”.
Research
and development expenses were $179,047 in the three-month period ended March 31,
2010, compared with $113,403 for the same period in 2009. The approximate 57.9%
increase was attributable to our efforts in new projects in the first quarter of
2010.
General
and administrative expenses were $341,512 in the three-month period ended March
31, 2010, as compared to $217,413 for the same period in 2009, an increase of
57.1%. The increase was primarily due to increased employee training fees and
increased office rent in the first quarter of 2010.
Operating Profit
(Loss)
We
recorded an operating loss $425,476 for the three-month period ended March 31,
2010 compared to an operating loss of $362,360 for the three-month period ended
March 31, 2009, representing an increase in operating loss of 17.4%. The
increase in operating loss for the first quarter of fiscal 2010 was due to our
increased operating expenses from $622,868 in the three-month period ended March
31, 2009 to $743,719 for the comparable period in 2010.
Other
Income
Our other
income is mainly derived from a value added tax (“VAT”) refund associated with
our software product sales. Software sales in China are subject to a
17% VAT. However, companies that develop their own software and have
the software registered are generally entitled to a refund of the
VAT. If the net amount of the VAT payable exceeds 3% of software
product sales, then the excess portion of the VAT is refundable to us upon our
application to tax authority. This policy is effective until 2010.
Our other income was $512,899 for the three-month period ended March 31, 2010,
as compared to $81,899 for the same period in 2009, representing an increase of
528% in other income. The significant increase was a result of
increase in VAT refund that we received from software product
sales.
27
Liquidity
and Capital Resources
For the
three-month period ended March 31, 2010, we recorded a net profit of $77,946, or
basic and diluted profit of $0.02 per share, compared to a net loss of $262,305,
or basic and diluted loss of $0.06 per share, for the same period of 2009. Our
capital requirements are primarily working capital requirements related to costs
of hardware for network solution projects and costs associated with the
expansion of our business. In order to minimize our working capital
requirements, we generally obtain from our hardware vendors payment terms that
are timed to permit us to receive payment from our customers for the hardware
before our payments to our hardware vendors are due. However, we
sometimes obtain less favorable payment terms from our customers, thereby
increasing our working capital requirements. We have historically
financed our working capital and other financing requirements through careful
management of our billing cycle and, to a limited extent, bank
loans.
Our
accounts receivable balance at March 31, 2010 was $3,007,101, as compared to
$2,434,557 at December 31, 2009. The increase of $572,444 was due to the receipt
of two accounts receivable from two of our major customers.
Our
inventory position at the end of the first quarter of fiscal 2010 was
$1,048,234, as compared to $935,566 at December 31, 2009. This increase was
mainly due to an increase in the number of projects that were not completed at
the end of the quarter and remain work-in-progress (WIP).
We ended
the first quarter of fiscal 2010 with a cash position of $1,206,815. We had a
negative operating cash flow of $1,103,962, primarily due to an increase of
approximate $544,075 in account receivables. The increase in account receivables
should have a positive impact on our future cash flow.
Although
our revenues and operating results for any period are not necessarily indicative
of future periods, we anticipate that our available funds and cash flows
generated from operations will be sufficient to meet our anticipated needs for
working capital, capital expenditures and business expansion through
2010. We may need to raise additional funds in the future, however,
in order to fund acquisitions, develop new or enhanced services or products,
respond to competitive pressures to compete successfully for larger projects
involving higher levels of hardware purchases, or if our business otherwise
grows more rapidly than we currently predict. If we do need to raise
additional funds, we expect to raise those funds through new issuances of shares
of our equity securities in one or more public offerings or private placements,
or through credit facilities extended by lending institutions.
Off-Balance
Sheet Arrangements
As of
March 31, 2010, we had not entered into any off-balance sheet arrangements with
any individuals or entities.
Contractual
Obligations
As of
March 31, 2010, we had commitments under non-cancelable operating leases
requiring annual minimum rental payments as follows:
Date
|
Rent
Payment Due
|
|||
April
1, 2009 to March 31, 2010
|
$ | 461,778 | ||
April
1, 2009 to March 31, 2011
|
- |
Related
Party Transactions
The
Company, from time to time, received from or made repayments to one major
stockholder who is also a management member of the Company. The amounts due
from/to this stockholder do not bear any interest and do not have clearly
defined terms of repayment.
28
As of
March 31, 2010 and December 31, 2009, the amounts due to this stockholder were
$513,970 and $415,078 respectively, representing advances from this
stockholder.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Under the
direction of our Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”), we evaluated our disclosure controls and procedures and internal
control over financial reporting. There are inherent limitations to
the effectiveness of any system of disclosure controls and procedures, including
the possibility of human error and the circumvention or overriding of the
controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives. Based upon our evaluation, our CEO and CFO concluded that
as of March 31, 2010, our disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the applicable rules and forms, and that it is accumulated and
communicated to our management to allow timely decisions regarding required
disclosure.
There was
no change in our internal control over financial reporting during the quarter
ended March 31, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
29
PART
II. OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
None
ITEM
1A. RISK FACTORS
RISK
FACTORS AFFECTING OUR OPERATING RESULTS AND COMMON STOCK
In
addition to the other information in this report, the following factors should
be considered in evaluating our business and our future prospects:
POLITICAL
AND ECONOMIC POLICIES OF THE CHINESE GOVERNMENT COULD AFFECT OUR INDUSTRY IN
GENERAL AND OUR COMPETITIVE POSITION IN PARTICULAR
Since the
establishment of the People's Republic of China in 1949, the Communist Party has
been the governing political party in the PRC. The highest bodies of leadership
are the Politburo of the Communist Party, the Central Committee and the National
People's Congress. The State Council, which is the highest institution of
government administration, reports to the National People's Congress and has
under its supervision various commissions, agencies and ministries, including
The Ministry of Information Industry, the telecommunications regulatory body of
the Chinese government. Since the late 1970s, the Chinese government has been
reforming the Chinese economic system. Although we believe that economic reform
and macroeconomic measures adopted by the Chinese government have had and will
continue to have a positive effect on economic development in China, there can
be no assurance that the economic reform strategy will not from time to time be
modified or revised. Such modifications or revisions, if any, could have a
material adverse effect on the overall economic growth of China and investment
in the Internet and the telecommunications industry in China. Such developments
could reduce, perhaps significantly, the demand for our products and services.
There is no guarantee that the Chinese government will not impose other economic
or regulatory controls that would have a material adverse effect on our
business. Furthermore, changes in political, economic and social conditions in
China, adjustments in policies of the Chinese government or changes in laws and
regulations could affect our industry in general and our competitive position in
particular.
THE
GROWTH OF OUR BUSINESS IS DEPENDENT ON GOVERNMENT TELECOMMUNICATIONS
INFRASTRUCTURE AND BUDGETARY POLICY, PARTICULARLY THE ALLOCATION OF FUNDS TO
SUSTAIN THE GROWTH OF THE TELECOMMUNICATIONS INDUSTRY IN CHINA
Virtually
all of our large customers are directly or indirectly owned or controlled by the
government of China. Accordingly, their business strategies, capital
expenditure budgets and spending plans are largely decided in accordance with
government policies, which, in turn, are determined on a centralized basis at
the highest level by the National Development and Reform Commission of China. As
a result, the growth of our business is heavily dependent on government policies
for telecommunications and Internet infrastructure. Insufficient government
allocation of funds to sustain the growth of China's telecommunications
industries in the future could reduce the demand for our products and services
and have a material adverse effect on our ability to grow our
business.
30
CURRENCY
EXCHANGE RATE RISK DUE TO FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN U.S. DOLLARS
AND RENMINBI
The
functional currency of our operations is Renminbi (“RMB”) and our financial
statements are expressed in U.S. dollars (“US$”). As a result, we are subject to
the effects of exchange rate fluctuations between these currencies. On January
1, 1994, a unitary exchange rate system was implemented in China and the
official bank exchange rate for translation of RMB to US$ was set to US$1 to
RMB8.28. However, in July 2005, the Chinese government announced that it would
no longer peg its currency exclusively to US$ but instead would switch to a
managed floating exchange rate based on market supply and demand with reference
to a basket of currencies determined by the People’s Bank of China. The exchange
rate of RMB to US$ changed from RMB8.28 to RMB8.11 in late July 2005, and the
exchange rate at March 31, 2010 is RMB6.85. Any future devaluation of the RMB
against the US$ may have an adverse effect on our reported net
income. As our operations are conducted in the PRC, substantially all
our revenues, expenses, assets and liabilities are denominated in
RMB. In general, our exposure to foreign exchange risks should be
limited. However, the value in our shares may be affected by the
foreign exchange rate between the US$ and the RMB because the value of our
business is effectively denominated in RMB, while our shares are traded inUS$.
Furthermore, a decline in the value of RMB could reduce the US$
equivalent of the value of the earnings from, and our investment in, our
subsidiaries in the PRC; while an increase in the value of the RMB may require
us to exchange more US$ into Renminbi to meet the working capital requirements
of our subsidiaries in China. Depreciation of the value of the US$
will also reduce the value of the cash we hold in US$, which we may use for
purposes of future acquisitions or other business expansion. We
actively monitor our exposure to these risks and adjust our cash position in the
RMB and the US$ when we believe such adjustments will reduce risks.
GENERAL
RISK OF FINANCING
In order
for the Company to meet its continuing cash requirements and to successfully
implement its growth strategy, the Company will need to rely on increased future
revenues and/or will require additional financing. In the event additional
financing is required, no assurances can be given that such financing will be
available in the amount required or, if available, that it can be on terms
satisfactory to the Company.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
None
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
None
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITYHOLDERS
None
ITEM
5. OTHER INFORMATION
None
31
ITEM
6. EXHIBITS
Exhibit No.
|
Description
|
|
3.1
|
Articles of Incorporation, as
amended and currently in effect. (Incorporated by reference to
Exhibit No. 3.1 of the Form 10-QSB for the quarter ended March 31,
2000, and filed on
May 13, 2000.)
|
|
3.2
|
Bylaws dated May 11,
2000. (Incorporated by reference to Exhibit No. 3.2 of the Form
10-QSB for the quarter ended March 31, 2000, and filed on May 13,
2000.)
|
|
3.3
|
Text
of Amendment to Bylaws of Forlink Software Corporation,
Inc. (Incorporated by reference to Exhibit 3.3 of the Current
Report on Form 8-K filed on January 18, 2007)
|
|
10.1
|
Forlink Software Corporation, Inc.
2002 Stock Plan dated August 16, 2002. (Incorporated by
reference to Exhibit 10.2 of the Company’s Registration Statement on Form
S-8 (file no. 333-100645) filed October 21,
2002.)
|
|
10.2
|
Transfer
of “Right to Invest” and Project Cooperation Agreement dated October 3,
2006, by and between the Company and Statelink International Group, Ltd.
(Incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K (file no. 000-18731) filed October 10,
2006.)
|
|
31.1
|
Certifications pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as
amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
|
31.2
|
Certifications pursuant to Rule
13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
|
32.1
|
Certifications pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
|
|
32.2
|
Certifications pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
32
In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
FORLINK SOFTWARE CORPORATION,
INC.
|
||
Date: May 12, 2010
|
By:
|
/s/ Yi
He
|
Yi He
|
||
Chief Executive
Officer
|
||
Date: May 12, 2010
|
By:
|
/s/ Hongkeung
Lam
|
Hongkeung
Lam
|
||
Chief Financial and Accounting
Officer
|
33