UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2007
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ____________ to ______________
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Commission
File Number 0-18731
FORLINK
SOFTWARE CORPORATION, INC.
(Exact
name of Registrant as specified in its charter)
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Nevada
(State
or other jurisdiction of
incorporation
or organization)
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87-0438458
(I.R.S.
Employer
Identification
No.)
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9F
Shenzhou Mansion, No. 31
ZhongGuanCun
South Road
Haidian
District, Beijing, P.R. China
(Address
of principal executive offices)
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N/A
(Zip
Code)
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(0086)
10 6811 8866
(Issuer's
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
None
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Name
of each exchange on which registered
None
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Securities
registered pursuant to Section 12(g) of the Act:
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Title
of Class
Common
Stock, $.001 par value
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Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 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 x
No o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and will not be contained, to the best
of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o
No x
The
issuer's revenues for its most recent fiscal year: $9,121,248
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant on March 11, 2008 was approximately
$2,477,129.
The per
share stock price for computational purposes was $1.40, based on the closing
sale price per share for the Registrant's common stock on the OTC Bulletin
Board
on March 11, 2008. This value is not intended to be a representation as to
the
value or worth of the Registrant's common stock. The number of non-affiliates
of
the Registrant has been calculated by subtracting the number of shares held
by
persons affiliated with the Registrant from the number of outstanding
shares.
The
number of shares of the Registrant's common stock, $.001 par value, outstanding
on March 11, 2008 was 4,641,098 shares.
Transitional
Business Disclosure Format (Check One). Yes o
No
x
TABLE
OF
CONTENTS
TO
ANNUAL
REPORT ON FORM 10-KSB
FOR
YEAR
ENDED DECEMBER 31, 2006
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Page
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PART
I
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Item
1.
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Description
of Business
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4
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Item
2.
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Description
of Property
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12
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Item
3.
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Legal
Proceedings
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13
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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13
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PART
II
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Item
5.
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Market
for Registrant's Common Equity and Related Stockholder Matters
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14
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Item
6.
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Management's
Discussion and Analysis or Plan of Operation
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15
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Item
7.
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Financial
Statements
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27
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Item
8.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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29
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Item
8A.
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Controls
and Procedures
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29
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Item
8B.
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Other
Information
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30
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PART
III
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Item
9.
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Directors,
Executive Officers, Promoters and Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange
Act
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31
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Item
10.
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Executive
Compensation
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33
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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35
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Item
12.
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Certain
Relationships and Related Transactions; Director
Independence
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36
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Item
13.
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Exhibits
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37
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Item
14.
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Principal
Accountant Fees and Services
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38
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Signatures
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39
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(REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK)
2
CAUTIONARY
NOTES REGARDING
FORWARD
LOOKING INFORMATION
Readers
of this document and any document incorporated by reference herein, are advised
that this document and documents incorporated by reference into this document
contain both statements of historical facts and forward looking statements.
Forward looking statements are subject to certain risks and uncertainties,
which
could cause actual results to differ materially for those indicated by the
forward-looking statements. Examples of forward looking statements include,
but
are not limited to (i) projections of revenues, income or loss, earning or
loss
per share, capital expenditures, dividends, capital structure and other
financial items, (ii) statements of the plans and objectives of the Company
or
its management or Board of Directors, including the introduction of new
products, or estimates or predictions of actions by customers, suppliers,
competitors or regulatory authorities, (iii) statements of future economic
performance, and (iv) statements of assumptions underlying other statements
and
statements about the Company or its business.
This
document and any documents incorporated by reference herein also identify
important factors which could cause actual results to differ materially from
those indicated by forward looking statements. These risks and uncertainties
include price competition, the decisions of customers, the actions of
competitors, the effects of government regulation, possible delays in the
introduction of new products and services, customer acceptance of products
and
services, the Company's ability to secure debt and/or equity financing on
reasonable terms, and other factors which are described herein and/or in
documents incorporated by reference herein.
The
cautionary statements made above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company. Forward looking statements are beyond the
ability of the Company to control and in many cases the Company cannot predict
what factors would cause results to differ materially from those indicated
by
the forward looking statements. Unless otherwise required by applicable law,
we
do not undertake, and we specifically disclaim any obligation, to update any
forward looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement.
3
PART
I
Item
1. Description
of Business.
Company
History and Recent Developments
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 People’s Republic of China
(“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”).
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. SLAIT
provides 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 have been gradually shifted to those of FTCL. On February 13, 2004, SLAIT
was officially dissolved in accordance with relevant PRC regulations. FTCL
is
the major operating company of Forlink in Beijing.
On
June
18, 2003, Forlink Technologies (Hong Kong) Limited (“FTHK”) was incorporated in
Hong Kong as a limited liability company. In December 2003, FTHK became a wholly
owned subsidiary of Forlink. FTHK is an investment holding company. Because
of
the favorable business environment in Hong Kong, we can simplify and speed
up
investment transactions through this subsidiary. Through FTHK, on December
18,
2003, we invested $760,870 in All China Logistics Online Co., Ltd. ("All China
Logistics"), a privately held PRC company and a leading provider of logistic
services in China, in exchange for a 17.8% equity interest. Through this
investment, we have become the second largest shareholder of All China Logistics
and its sole software solution provider. FTHK is also responsible for directly
importing from overseas companies certain hardware needed to integrate products,
which allows us to improve our hardware pass-through profit margin.
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.
4
In
compliance with China’s foreign investment restrictions on telecom value-added
services and other laws and regulations, we conduct our 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 has been fully paid
up by March 31, 2005. Mr. Yi He and Mr. Wei Li were entrusted as nominee owners
of BFHX to hold 70% and 30%, respectively, of the fully paid up capital of
BFHX
on behalf of Forlink as the primary beneficiary. BFHX is considered a Variable
Interest Entity ("VIE"), and because Forlink is the primary beneficiary,
Forlink's consolidated financial statements include BFHX. Upon the request
of
Forlink, Mr. Yi He and Mr. Wei Li are required to transfer their ownership
in
BFHX to Forlink or to designees of Forlink 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 Forlink. Mr. Wei Li is the administration
manager of FTCL.
Through
BFHX, on September 28, 2004, we invested $36,232 (RMB 300,000) in Huntington
Network Technologies (Beijing) Co., Ltd. (“HNT”), a privately held PRC company
that operated the Gmgame.com, an online gaming portal, in exchange for 30%
equity interests. This investment was intended to enable us to enter a fast
growing market and utilize our IT expertise to further diversify our revenues.
HNT was deregistered on December 18, 2007, however, and our investment was
impaired in 2005 in the amount of $37,516 (RMB 300,000).
On
March
20, 2005, Beijing Forlink Kuanshi Technologies Limited (“BFKT”) was established
as a limited liability company by BFHX and two individuals, Mr. Jianqiu Fang
and
Mr. Bizhao Zhong. BFHX, Mr. Fang and Mr. Zhong hold 70%, 10% and 20% of the
fully paid up capital of BFKT, respectively. KFKT was to provide software and
operation support to IPTV (Internet Protocol Television) operators, but the
company was dissolved on November 19, 2007. We recorded an investment loss
of
$3,792 after the dissolution of BFKT, with our total investment loss in BFKT
from its establishment to its dissolution in the amount of $16,932.
On
March
28, 2005, BFKT acquired 90% and 95% of shares of Qingdao Jiashi Technologies
Limited (“QJT”) and Xiamen Kuanshi Technologies Limited (“XKT”), respectively.
Both QJT and XKT were originally established by Mr. Yi He and Mr. Wei Li on
March 4, 2005 and March 7, 2005 respectively. Pursuant to an agreement reached
between BFHX and Mr. Wei Li, Mr. Wei Li was entrusted as nominee owner of QJT
and XKT to hold 10% and 5%, respectively, of the fully paid up capital of QCT
and XKT on behalf of BFHX as the primary beneficiary. QCT and XKT never
commenced operations since their respective dates of establishment, and both
companies were deregistered in late 2006. A loss on disposal of XKT and QJT
of
$1,195 was incurred. On November 19, 2007, BFKT was officially dissolved and
an
investment loss of $3,792 was recorded after dissolution of BFKT. Total
investment loss in BFKT was $16,932 from its establishment.
On
October 24, 2005, Forlink entered on a definitive agreement to acquire a 17.5%
equity interest from China Liquid Chemical Exchange Company Limited (“CLCE”), a
PRC limited liability company. Under the terms of the agreement, Forlink
deployed the “For-online Electronic Trading System”, a proprietary, integrated
software solution, to support CLCE’s operations, including, but not limited to,
online trading, online billing and payment, user authentication and customer
care, in exchange for the 17.5% equity interest. In early 2007, CLCE increased
its share capital to $1,708,526 (RMB 13,000,000). As we did not subscribe to
the
new shares, our shareholding of CLCE as at December 31 2007 had been diluted
to
13.46%. CLCE commenced operations fully in early 2007.
5
On
October 3, 2006, we entered into a Transfer of Right to Invest and Project
Cooperation Agreement (“Statelink Agreement”) with, and 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, from Statelink
International Group, Ltd., a company incorporated in the British Virgin Islands
(“Statelink”) for cash consideration of $2,557,545 (RMB 20,000,000) from BFHX
and stock consideration of 13,000,000 shares of our restricted common stock.
Thereafter, we also won a contract from Guangxi Caexpo to build an “Electronic
Trade and Logistics Information Platform and Call Center” (the “Project”). On
October 26, 2006, BFHX established Forlink Technologies (Guangxi) Limited
(“FTGX”), a PRC limited liability company and wholly owned subsidiary, to carry
out this contract. At the time of incorporation, BFHX injected RMB 20,000,000
(approximately US$2,557,545) as registered capital to FTGX. The Project was
completed in the forth quarter of 2007, with the relevant software deployed
and
the client has signed the initial inspection report. Although the Project has
been completed, FTGX will continue operating.
On
October 12, 2006, we 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. In addition, we have agreed to deploy a proprietary,
integrated software solution, estimated at RMB 1,000,000, to support Wuxi’s
operations, which was deployed in February 2007. On January 14, 2007, the
Company entered into an agreement with a major shareholder of Wuxi to transfer
2.5% of the Company’s interest in Wuxi to the major shareholder for cash payment
of RMB 500,000.
On
April
29, 2007, Forlink 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
Forlink’s significant influence over the operational and financial policies of
BGXF. BGXF commenced operations on March 9 2008.
On
July
12, 2007, Forlink invested in the form of cash through FTGX, $1,063,830 (RMB
8,000,000) in Nanning Bulk Commodities Exchange Corporation Limited (“NNBCE”), a
privately held PRC company established on April 29, 2007, for an 80% equity
interest. NNBCE became a subsidiary of FTGX. NNBCE, which commenced operations
on March 28, 2008, is in the business of providing logistical e-commerce
service.
On
September 5, 2007, Forlink invested $465,425 (3,500,000 RMB), 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. On the same date, 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 in GBSEE to NNBCE its designees at any time
for the amount of the fully paid up capital of GBSEE. 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 an
approximately 55% equity interest in GBSEE. GBSEE was established to provide
logistical e-commerce service, but it was dissolved on December 16, 2007 before
the commencement of any operation NNBCE received payback of its investment
of
$410,397 (3,000,000 RMB) in December 2007 and $66,211 (484,000 RMB) in February
2008, with a balance of $2,189 (16,000 RMB).
6
Forlink
and its subsidiaries are all operating companies. During the reporting period,
none of the group companies’ operations were discontinued or dissolved except
BFKT. Set forth below is a diagram illustrating our corporate structure as
of
December 31, 2007:
Subsequent
Events
On
December 24, 2007, our board of directors and the holders of a majority of
our
issued and outstanding capital stock adopted and approved resolutions to effect
a one-for-twenty (1-for-20) reverse stock split of the Company’s outstanding
shares of common stock (the “Reverse Split”). The Reverse Split became effective
upon the filing of the Certificate of Amendment to our Articles of Incorporation
on March 7, 2008.
Before
and immediately following the Reverse Split, the number of shares of the
Company’s common stock will be as follows (subject to slight adjustment for
rounding of fractional shares):
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Common
Stock Outstanding
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Authorized
Common Stock
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Pre
Reverse Split
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92,821,707
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200,000,000
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1
for 20 Reverse Split
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4,641,085
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200,000,000
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7
Overview
of Our Business
Forlink
is in the business of providing e-business application solutions and IT
outsourcing services. Through our subsidiaries, we offer our clients with
business information management consulting and planning, application software
design, agency and integrated application services for the third party’s
software and other online application services. We also offer the “For”-series
of software products. Our clients are mainly in the telecom and logistics
industries, as well as government agencies.
We
have
also invested in companies in logistics, finance and information technology
(IT)
industries. The application platforms used by these companies are supported
by
our integrated application systems, software and IT outsourcing services. Up
to
now, the e-business application platforms of the Company are used by
NNBCE,
CLCE, BGXF, Wuxi Stainless Steel Exchange Co., Ltd, NBBCE.
Our
headquarters are located in Beijing, with branch offices in Chengdu, Nanning,
Shanghai and Guangzhou. We also have a research and development (“R&D”)
center located in Chengdu.
Employees
As
of
December 31, 2007, we have 210 employees, of which 208 are full-time.
Approximately 145 of our full-time employees are software and information
technology specialists engaged in research and development, maintenance and
support activities. The remaining employees are sales, marketing and
administrative personnel. As an incentive, we have created an employee stock
option plan that includes vesting provisions designed to encourage long-term
employment.
Products
and Solutions
Our
application solutions are developed on Enterprise Application Integration (EAI)
platforms. Our current product offerings include:
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For-eMarket:
Forlink electronic trading market. This system helps vendor and vendee
spare time and money, promotes the goods providers to have more
opportunities to make a deal.
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ForCRM:
Forlink
Customer Relations Management System. This system emphasizes the
requirement of clients, proposes a sales model based on customers
and
helps enterprises to customize Customer Relations Management through
building the system menu and function pattern according to the requirement
of enterprises.
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ForOSS:
Our solution for Business & Operation Support Systems (BSS/OSS) for
e-business carriers and telecom carriers. It consists of software
products
designed to support existing and expanding business operations of
communications companies. ForOSS supports billing, customer care,
customer
relation management, accounting, decision support and other internal
functionalities.
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ForOA:
Forlink Office Assistance is an effective enterprise office system
and
information-shared platform, based on internet services.
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For-Online:
For-Online is an Enterprise Application Integration platform designed
to
deliver ASP (Application Service Provider) services over the internet.
The
applications that can be delivered over the internet include many
of
Forlink’s flagship products, such as ForOA,
ForCRM.
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8
Distribution
Methods of the Products and Services
We
mainly
sell our products and services directly to our customers. We also utilize
distribution partners to sell our products and services.
Research
and Development
We
are
committed to continuously researching, designing and developing information
technology solutions and software products that meet the needs of our customers.
Our Chengdu R&D center was established in February 1998. As of December 31,
2007, we had 57 employees at the Chengdu R&D Center. Our R&D expenses in
2007 and 2006 were $690,386 and $1,730,760,
respectively.
Status
of New Product or Service
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.
Market
Opportunities
Based
on
our extensive market research and industry insights, we believe that the major
market opportunities for our business include the following: enterprise
application integration (EAI); application services provider (ASP); software
and
IT outsourcing.
Our
Strategy
As
a
professional software-solutions and technology service company, our business
objective is to become a leading e-business application solutions and online
application services provider in China. Our operating strategy is to use shared
core technologies and management systems to identify potential clients, and
through consistent long-term technology supports, build tight strategic
partnerships with our clients.
The
key
aspects of our strategy include the following:
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Establish
a unified and standard software engineering and project management
system
to provide assurance for designing high-quality software products
and
services. As
an important milestone, we have achieved Level 3 (Managed Level of
Software Process Maturity) of Capability Maturity Model® Integration
(CMMI), which was certified by Software Engineering Institution.
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Establish
a unified e-business application platform and online services
platform.
We
provide supports for e-business application technologies and platforms
in
different industries, and strive to make available to our clients
high-quality IT outsourcing services that are cost-effective. To
that end,
we have made gradual improvements to the power and reliability of
our
For-Online platform since 2004, culminating with the launch in [date]
2007
of For-Online 4.0.
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·
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Participate
in our clients’ e-business application operations to become their
strategic partner.
We
have invested in several companies in logistics, finance, IT industries,
whose application platforms are supported by our integrated application
systems, software and IT outsourcing services. These
companies include NNBCE,
CLCE, BGXF, Wuxi Stainless Steel Exchange Co., Ltd,
NBBCE.
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9
Our
Competitive Strengths
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·
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Professional
Software Development and Services System.
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Our
professional software development and services system has substantially
strengthened our competitive advantages by ensuring that we are in compliance
with all relevant international standards and regulations for business. We
have
passed the ISO9001:2000 international quality assurance system certification
and
the CMMI (Capability Maturity Model Integration) Level 2 certification,
certifying that our software development and services system is in compliance
with international standards.
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Fifteen
Years of Experience in Industry Applications with Proven Solutions
and
Products.
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Forlink
has developed core application software products such as For-eMarket, ForCRM,
ForOSS and ForROA based on standardized application integration technologies.
Our customers, strategic partners and suppliers recognize our company as a
dependable provider of high quality services, solutions and products, and
frequently recommend us to their business contacts.
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Established
Customer
Relationships.
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Because
of our successful track record, we have established relationships with leading
companies in telecom, logistic, finance, government, and other industry
verticals in China. Our in-depth understanding of their requirements allows
us
to successfully deliver customized solutions. Moreover, we have strong customer
service and research and development teams based in China, which allows us
to
respond quickly and efficiently to the needs of our clients.
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A
Strong and Stable Management
Team.
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The
current management team has been with Forlink since we commenced business,
and
includes pioneers of application integration technologies (AIT) in China. The
backgrounds of the individuals in our management team offer a depth and breadth
of experience that is capable of covering all aspects relating to the control
and development of AIT systems. Beyond expertise in the field, their close
working relationships with major long-term clients demonstrate a proven ability
to sustain and cultivate a successful business.
Our
Strategic Partners
Strategic
partnerships are essential elements of our business model. At this time, we
have
four types of partners that contribute to the continuing success of our
business.
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·
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Product
Partners. These
partners provide products and solutions to be integrated in our solutions.
We are authorized resellers of Hewlett Packard (“HP”), Sun, EMC, Oracle
and CISCO systems. We were awarded by HP with the Excellent Sales
Achievement Prize in 1999 and the Best Co-operation Prize in
1999.
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·
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Technology
Development Partners.
These partners provide technology (through licensing or other
arrangements) for our solutions or for joint development. Our major
technology development partners include HP, Oracle, BEA, IONA, Redhat,
Turbolinux, and Redflag-linux.
|
|
·
|
Marketing
and Product Partners.
These partners provide products and/or technology to be bundled with
our
solutions and products for marketing purposes. Our marketing and
product
partners include HP, Intel, IBM, Sun, Compaq, Oracle, Informix, CA,
Lenovo, Founder, and Digital China.
|
10
|
·
|
Distribution
Partners.
These partners distribute our solutions and products to our customers.
Our
current distribution partner is Beijing Federal.
|
Competitive
Conditions
The
market for information technology services in China is rapidly growing and
changing. We compete primarily with domestic companies. Our principal
competitors in application integration services are Huawei and AsiaInfo. Our
principal competitors in the ASP field include UFSOFT, MYCRM, and HAN
Consulting. Our principal competitors in software outsourcing include Neusoft,
Dalian HaiHui, and China Software & Technology Corporation. All of these
companies are leading companies in the Chinese IT industry, and AsiaInfo is
also
a listed company on NASDAQ.
Government
Regulation
The
Chinese government has generally encouraged the development of the information
technology industry, and the products and services we offer are currently not
subject to extensive government regulations.
Dependence
on Major Customers
For
the
year ended December 31, 2007, approximately 71% of the Company's total net
revenues were generated by two customers, Beijing Mobile and Guangxi Caexpo.
The
loss of any and/or all of these customers could have a material adverse effect
on our business.
Our
largest customer has been Beijing Mobile Communication Company, which is a
subsidiary of China Mobile. Since 1998, we have been developing and maintaining
BOSS (Business Operation Support System) for the carrier. BOSS is an integrated
software platform and it is developed in stages to accommodate the carrier’s
increasing subscribers and service offerings. We completed phase one in 2002,
and phase two in 2006. We are currently developing and maintaining phase three
of BOSS.
During
the fiscal years ended December 31, 2005, 2006 and 2007 sales to Beijing Mobile
Communication Company were $4,122,370, $4,244,266 and $2,969,259 respectively,
and such sales accounted for, 89%, 70%, 61% and 33% of our revenue for these
periods, respectively.
Although
we are an important strategic IT partner of Beijing Mobile, we do not have
long-term contracts with the carrier. All of our agreements with the carrier
are
for short-term projects or sales of third-party hardware. While we feel that
our
significant relationships with Beijing Mobile will likely provide additional
sales agreements in the future, Beijing Mobile is not contractually bound to
purchase any products or services from us. The loss of this customer could
hurt
our business by reducing our revenues and profitability.
Our
second largest customer was Guangxi Caexpo. We won the contract in 2006 to
build
the Electronic
Trade and Logistics Information Platform and Call Center.
During
the fiscal years ended December 31, 2006 and 2007, sales to Guangxi Caexpo
were
$721,087 and $4,885,231, accounting for 10% and 54% of our revenue for these
periods, respectively.
Patents,
Intellectual Property, and Licensing
We
rely
on a combination of patents, copyrights, trademarks, trade secrets,
confidentiality agreements, and other contractual restrictions with employees
and third parties to establish and protect our proprietary rights. Despite
these
precautions, the measures we undertake may not prevent misappropriation or
infringement of our proprietary technology. These measures may not preclude
competitors from independently developing products with functionality or
features similar to our products.
11
As
of
December 31, 2007, we have been issued 56 patents in the PRC that are
currently in force. The normal expiration dates of our issued patents in the
PRC
range from 2026 to 2030. It is possible that we will not receive patents for
every application we file. Furthermore, our issued patents may not adequately
protect our technology from infringement or prevent others from claiming that
our products infringe the patents of those third parties. Our failure to protect
our intellectual property could materially harm our business. In addition,
our
competitors may independently develop similar or superior technology, duplicate
our products, or design around our patents. It is possible that litigation
may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets, or to determine the validity and scope of the
proprietary rights of others. Litigation could result in substantial costs
and
diversion of resources and could materially harm our business.
Some
of
our products are designed to include software or other intellectual property
licensed from third parties. While it may be necessary in the future to seek
or
renew licenses relating to various aspects of our products, we believe that
such
licenses generally could be obtained on commercially reasonable terms. However,
failure to obtain such licenses on commercially reasonable terms could
materially harm our business.
Environmental
Matters
None
SEC
Reports Available on Website
The
Company’s Annual Report on Form 10-KSB, Quarterly Reports on Form 10-QSB,
Current Reports on Form 8-K, and amendments to reports filed pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended,
are
available free of charge through our website (http://www.forlink.com) when
such
reports are available on the U.S. Securities and Exchange Commission
(“SEC”) website. The public may read and copy any materials filed by the
Company with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information on the operation of
the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains
an
Internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at
http://www.sec.gov. The contents of these websites are not incorporated into
this filing. Further, the Company’s references to the URLs for these websites
are intended to be inactive textual references only.
Item
2. Description of Property.
We
have
an office in Chengdu, PRC, which houses FTCD. The building is located
at
B-16B,
WangFuJing Business Mansion, No.5 HuaXingZheng Street, ChengDu, SiChuan
Province, 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 FTCD.
We
currently rent the premises, approximately 2,027 square meters, for our
headquarters at 9/F Shenzhou Mansion, No. 31 Zhongguancun Street, Haidian
District, Beijing, China. We have a renewable lease agreement for these premises
until March 29, 2009. The total rent from March 30, 2007 to March 29, 2009
is
$537,059 (RMB 4,086,432).
12
In
addition, we currently have three regional field support offices in the PRC,
namely, in Shanghai, Chengdu and Guangzhou. The leases for these offices are
as
follows:
|
Name
|
Rent
Period
|
|
|
Size
|
|
|
Annual
Rent
|
|||
|
Guangzhou
Office
|
08.2.12-09.2.11
|
92.19
|
$
|
17,853
(RMB 116,160)
|
||||||
|
|
||||||||||
|
Shanghai
Office
|
08.2.28-09.2.27
|
98.44
|
$
|
22,666
(RMB 172,466.88)
|
||||||
|
|
||||||||||
|
Chengdu
R&D Center
|
07.11.22-08.11.21
|
602.59
|
$
|
32,646
(RMB 248,400)
|
We
believe that the current facilities occupied by the Company and its subsidiaries
will be able to meet the Company’s operational needs for the coming
year.
Item
3. Legal
Proceedings.
The
Company is not a party to any legal proceedings and to the Company's knowledge,
no such proceedings are threatened or contemplated. At this time, the Company
has no bankruptcy, receivership, or similar proceedings pending.
Item
4. Submission
of Matter to a Vote of Security Holders.
On
December 24, 2007, our Board of Directors and the holders of a majority of
the
outstanding capital stock of the Company adopted and approved resolutions to
effect a one-for-twenty (1-for-20) reverse stock split of the Company’s
outstanding shares of common stock (the “Reverse Split”). The Reverse Split took
effective upon the filing of the Company’s Certificate of Amendment to its
Articles of Incorporation with the Nevada Secretary of State on March 7, 2008,
and in connection therewith, and our stock symbol has changed from “FRLK.OB” to
“FLSW.OB”. As a result of the Reverse Split, the total number of outstanding
shares of the Company’s common stock was reduced from 92,821,707 shares to
approximately 4,641,085 shares.
13
PART
II
Item
5. Market
for Registrant’s Common Equity and Related Stockholder
Matters.
Our
common stock, par value $0.001 per share, is currently trading on the Over
the
Counter Bulletin Board system under the symbol "FLSW". There is no assurance
that our common stock will continue to be quoted or that any liquidity exists
for the Company’s shareholders.
The
following table sets forth the range of high and low bid prices for the
Company's common stock for each quarterly period indicated, as reported by
the
“Businessweek Companies” website. Quotations reflect inter-dealer prices without
retail markup, markdown or commissions and may not represent actual
trades.
Common
Stock
|
Quarter
Ended
|
High
Bid
|
Low
Bid
|
|||||
|
December
31, 2007
|
$
|
0.11
|
$
|
0.07
|
|||
|
September
30, 2007
|
$
|
0.13
|
$
|
0.08
|
|||
|
June
30, 2007
|
$
|
0.15
|
$
|
0.08
|
|||
|
March
31, 2007
|
$
|
0.22
|
$
|
0.08
|
|||
|
December
31, 2006
|
$
|
0.22
|
$
|
0.07
|
|||
|
September
30, 2006
|
$
|
0.09
|
$
|
0.02
|
|||
|
June
30, 2006
|
$
|
0.07
|
$
|
0.02
|
|||
|
March
31, 2006
|
$
|
0.10
|
$
|
0.06
|
|||
Holders
As
of
March 14, 2007, there were 98,224,707 shares of the Company's common stock
outstanding held of record by approximately 550 persons (not including
beneficial owners who hold shares at broker/dealers in “street name”).
Dividends
The
Company has never paid cash dividends on its common stock and does not intend
to
do so in the foreseeable future. The Company currently intends to retain its
earnings for the operation and expansion of its business.
Sales
of Unregistered Securities
On
October 3, 2006, the Company issued a total of 13,000,000 shares of the
Company’s restricted common stock to Statelink International Group, Ltd.
(“Statelink”) as a part of the Company’s considerations pursuant to a
Transfer
of Right to Invest and Project Cooperation Agreement.
The
fair
market value of the Company’s common stock as of October 3, 2006 was $0.08 per
share. The issuance to Statelink was made pursuant to Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder.
Repurchases
of Equity Securities
The
Company did not repurchase any of its outstanding equity securities during
the
fourth quarter of the year ended December 31, 2007.
14
Item
6. Management’s Discussion and Analysis or Plan of
Operation
General
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 start-up 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-KSB.
Except for the historical information contained herein, the discussion in this
Form 10-KSB 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-KSB should be read
as
being applicable to all related forward looking statements wherever they appear
in this Form 10-KSB. 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. 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 is quickly becoming an important new 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
In
addition to our core business, we believe that there are opportunities for
us to
expand into new areas and to grow our business not only internally but through
acquisitions. During
fiscal 2007, we acquired equity stakes in three companies. On
April
29, 2007, we acquired 35% equity interest of Beijing GuoXin Forlink Internet
Technologies Limited (“BGXF”), a privately held PRC company, through our
subsidiary Beijing
Forlink Hua Xin Technology Co. Ltd (“BFHX”). BGXF,
an
Internet technology company, commenced operations in early March
2008.
On
July
12, 2007, we acquired 80% equity interest of Nanning Bulk Commodities Exchange
Corporation Limited (“NNBCE”), a privately held PRC company, through Forlink
Technologies (Guangxi) Limited (“FTGX”), the subsidiary of BFHX. NNBCE is
engaged in providing logistical e-commerce service but it has not commenced
operations since its date of incorporation.
On
September 12, 2007, we acquired 35% equity interest of Guangxi Bulk Sugar &
Ethanol Exchange Corporation Limited (“GBSEE”), a newly set up limited liability
company in Nanning, PRC, through NNBCE. We are also beneficiary of the 20%
equity interests of GBSEE being held by All China Logistics Online Co.,
Ltd., which we have 17.8% equity stake in. GBSEE
was
established to provide logistical e-commerce service but the company was
dissolved before it started its operations.
15
For
a
description of all of our acquisitions and other business activities since
1999,
please refer to the section titled “Company History and Recent Developments”
under Item 1 (Description of Business) in Part I of this Annual Report.
Revenues
Our
business includes Forlink brand "For-"series 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:
|
Year
Ended December 31,
|
|||||||
|
|
2007
|
2006
|
|||||
|
Sales
of For-series software
|
$
|
4,684,791
|
$
|
2,722,368
|
|||
|
as
a percentage of net sales
|
48
|
%
|
39
|
%
|
|||
|
For-series
related system integration
|
$
|
5,145,868
|
$
|
4,195,272
|
|||
|
as
a percentage of net sales
|
52
|
%
|
61
|
%
|
|||
As
indicated in the foregoing table, sales of For-series software as a percentage
of net sales increased from 39%
in
2006
to
48%
in
2007,
while
sales of
For-series related system integration as a percentage of net sales decreased
from 61%
in
2006
to
52%
in
2007.
These
changes were mainly attributable to our strategy of increasing software sales
and reducing low profit margin hardware projects.
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.
|
Costs
of Revenue
Our
costs
of revenue include 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.
16
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.
Taxes
According
to the relevant PRC tax rules and regulations, FTCL and BFHX, both of which
are
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 December, 31,
2007, 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 received full exemption from EIT for fiscal years 2004 through 2006. As
of
December 31, 2007, BFHX was entitled to an EIT rate of 7.5%.
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.
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 United
States Dollars (USD)
and our
financial records are maintained and the financial statements prepared in
USD.
The
functional currency of FTHK is Hong
Kong
Dollars (HKD)
and the
financial records are maintained and the financial statements prepared in
HKD.
The
functional currency of FTCL, BFHX, FTGX and FTCD is Renminbi (RMB) and the
financial records are maintained and the financial statements are prepared
in
RMB.
Foreign
currency transactions during the year 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.
17
The
financial statements of our operations based outside of the United States have
been translated into USD
in
accordance with SFAS 52. 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 USD,
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 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 USD, 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 will no longer
peg its currency exclusively to USD but will switch to a managed floating
exchange rate based on market supply and demand with reference to a basket
of
currencies yet to be named by the People’s Bank of China, which will likely
increase the volatility of RMB as compared to USD. The exchange rate of RMB
to
USD changed from RMB 8.28 to 8.11 in late July 2005.
The
following table shows the exchange rates and the weighted average rates ruling
for the years ended December 31, 2007 and 2006:
|
US$
|
HK$
|
RMB
|
|||||||||||
|
Exchange
rate as of December 31,
|
2007
|
1
|
7.84
|
7.32
|
|||||||||
|
2006
|
1
|
7.75
|
7.82
|
||||||||||
|
Weighted
average rates ruling for
|
2007
|
1
|
7.84
|
7.60
|
|||||||||
|
2006
|
1
|
7.75
|
7.98
|
||||||||||
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;
|
18
|
·
|
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 provisions of Statements of Position,
or SOP, No. 97-2, “Software Revenue Recognition”, as amended by SOP No. 98-9,
“Modification of SOP 97-2, Software Revenue Recognition, with respect to Certain
Transactions”, Staff Accounting Bulletin, or SAB, 104, “Revenue Recognition”.
SOP 97-2 and SAB 104 require among other matters, that there be a signed
contract evidencing an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collectibility is probable.
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.
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, and the revenues are recognized
as
services are performed pursuant to paragraph 65 of SOP 97-2.
For
hardware transactions where software is incidental, we do not apply separate
accounting guidance to the hardware and software elements. We apply the
provisions of EITF 03-05, “Applicability of AICPA Statement of Position 97-2,
Software Revenue Recognition, to Non-Software Deliverables in an Arrangement
Containing More-Than-Incidental Software” (EITF 03-05). Per EITF 03-05, 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 SOP 97-2. Such
sale
of computer hardware is recognized as revenue on the transfer of risks and
rewards of ownership, which coincides with the time when the goods are delivered
to customers and title has passed, pursuant to SAB 104.
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 determined that these set-up activities do not constitute
a separate unit of accounting, and accordingly, the related set-up fees are
recognized ratably over the term of the contract.
We
consider the applicability of EITF 00-3, “Application of AICPA Statement of SOP
97-2 to Arrangements That Include the Right to Use Software Stored on Another
Entity’s Hardware”, to the hosting services arrangements on a
contract-by-contract basis. If we determine that the customer does not have
the
contractual right to take possession of our software at any time during the
hosting period without significant penalty, SOP 97-2 does not apply to these
contracts in accordance with EITF 00-3. Accordingly, these contracts would
be
accounted for pursuant to SAB 104.
19
Income
Taxes
We
account for income taxes in accordance with SFAS No. 109 “Accounting for Income
Taxes”. Under SFAS No. 109, 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.
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 collectibility of amounts due from such customers, could
have a material affect 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.
Goodwill
SFAS
142,
Goodwill and Other Intangible Assets, requires that goodwill be tested for
impairment on an annual basis (December 31 for us) and between annual tests
if
an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying value. These events or
circumstances could include a significant change in the business climate, legal
factors, operating performance indicators, competition, sale or disposition
of a
significant portion of a company. Application of the goodwill impairment test
requires judgment, including the determination of the fair value of a company.
The fair value of a company is estimated using a discounted cash flow
methodology. This requires significant judgments including estimation of future
cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth for our business, the useful life over which cash
flows
will occur, and the determination of our weighted average cost of capital.
Changes in these estimates and assumptions could materially affect the
determination of fair value and/or goodwill impairment for a
company.
Recent
Accounting Pronouncements
In
February 2006, the FASB issued FAS 155, Accounting for Certain Hybrid
Financial
Instruments (FAS155), an amendment of FAS 140 and FAS 133. FAS155 permits the
Company to elect to measure any hybrid financial instrument at fair value (with
changes in fair value recognized in earnings) if the hybrid instrument contains
an embedded derivative that would otherwise be required to be bifurcated and
accounted for separately
under
FAS 133. The election to measure the hybrid instrument at fair value is made
on
an instrument-by-instrument basis and is irreversible. The Statement will be
effective for all instruments acquired, issued, or subject to a re-measurement
event occurring after the beginning of the Company’s fiscal year that begins
after September 15.2006, with earlier adoption permitted as of the beginning
of
the Company’s 2006 fiscal year, provided that financial statements for any
interim period of that fiscal year have not yet been issued. We do not expect
the adoption of FAS155 will have a material impact on our financial position
or
results of operations.
In
March
2006, the FASB issued FAS 156 Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
(FAS
156), an amendment to portions of FAS 133, FAS 140 and FTB 87-3. FAS 156
requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. It also
permits, but does not require, the subsequent measurement of servicing assets
and servicing liabilities at fair value. Derivative instruments used to mitigate
the risks inherent in servicing assets and servicing liabilities must be
accounted for at faire value. Under FAS 156 an election can also be made for
subsequent fair value measurement for servicing assets and servicing liabilities
by
class,
thus
simplifying the accounting and provide for income statement recognition of
potential offsetting changes in the fair value of servicing assets, servicing
liabilities and related derivative instruments. This Statement will be effective
beginning the first fiscal year that begins after September
15, 2006. We
do not
expect the adoption of FAS 156 will have a material impact on our financial
position or results of operations.
20
In
July
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes-an interpretation of FASB Statement No.
109(
FIN48).
This Interpretation provides guidance for recognizing and measuring uncertain
tax positions, as defined in SFAS No. 109, Accounting
for Income Taxed.
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 n the financial
statements. Guidance is also provided regarding derecognition, classification
and disclosure of these uncertain
tax positions.
FIN 48
is effective for fiscal years beginning after December 15,
2006.
We do
not expect that this Interpretation will have a material impact on our financial
position,
results
of operations or cash flows.
In
June
2006, the EITF reached consensus on and ratified EITF Issue 06-03,
How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement (EITF
06-03). The scope of this Issue includes any tax assessed by a governmental
authority that is directly imposed on a revenue-producing transaction between
a
seller and a customer and may include, but is not limited to, sales, use, value
added, and some excise taxes. The Task Force concluded that the presentation
of
taxes within the scope of the Issue on either a gross( (included
in revenues and costs ) or a net ( excluded from revenues ) basis is an
accounting policy decision that should be disclosed pursuant to Opinion 22.
In
addition, for any such taxes that are reported on a gross basis, a company
should disclose the amounts of those taxes in interim and annual financial
statements for each period for which an income statement is presented if those
amounts are significant. The disclosure of those taxes can be done on an
aggregate basis. The consensus in this Issue should be applied to financial
reports for interim and annual reporting periods beginning after December 15,
2006. We believe the adoption
of EITF
06-03 will not have a material impact on our method for recording and reporting
these types of taxes in our consolidated financial statements, as the Company’s
policy is to exclude all such taxes form revenue.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
SAB 108
provides guidance on how prior year misstatements should be taken into
consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year’s financial
statements are materially misstated. SAB
108
is effective for fiscal years ending on or after November 15, 2006. We adopted
the provision of SAB 108 in fiscal year 2006, which had no impact on our
financial statements.
In
September 2006, the FASB issued FAS 157, Fair Value Measurements (FAS 157).
FAS
157 defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions of FAS 157 are
effective for the fiscal year beginning after November 15, 2007. We are
currently evaluating the impact of the provisions of FAS 157.
In
September 2006, the FASB issued FAS 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans
(
FAS
158).
FAS 158 requires employers to fully recognize the obligations associated with
single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. The requirement set forth
in
FAS 158 that we recognize the funded status of a benefit plan, and the
disclosure requirements of FAS 158 are effective as of the end of the fiscal
year ending after December 15, 2006 for entities with publicly traded equity
securities. The requirement to measure plan assets and benefit obligations
as of
the date of the employer’s fiscal year-end statement of financial position is
effective for fiscal years ending after December 15, 2008. The adoption of
FAS
158 did not have any effect on our financial position at December 31,
2006.
21
On
February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities: Including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits all entities to elect to
measure many financial instruments and certain other items at fair value with
changes in fair value reported in earnings. SFAS 159 is effective as of the
beginning of the first fiscal year that begins after November 15, 2007, with
earlier adoption permitted.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51”.
The
objective of this Statement is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides
in
its consolidated financial statements by establishing accounting and reporting
standards. This Statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008 (that is,
January 1, 2009, for entities with calendar year-ends). Earlier adoption is
prohibited. The effective date of this Statement is the same as that of the
related Statement 141(R).
On
December 21, 2007, SEC issued Staff Accounting Bulletin (“SAB”) No. 110. This
staff accounting bulletin ("SAB") expresses the views of the staff regarding
the
use of a "simplified" method, as discussed in SAB No. 107 ("SAB 107"), in
developing an estimate of expected term of "plain vanilla" share options in
accordance with Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based
Payment.
In
particular, the staff indicated in SAB 107 that it will accept a company's
election to use the simplified method, regardless of whether the company has
sufficient information to make more refined estimates of expected term. At
the
time SAB 107 was issued, the staff believed that more detailed external
information about employee exercise behavior (e.g., employee exercise patterns
by industry and/or other categories of companies) would, over time, become
readily available to companies. Therefore, the staff stated in SAB 107 that
it
would not expect a company to use the simplified method for share option grants
after December 31, 2007. The staff understands that such detailed information
about employee exercise behavior may not be widely available by December 31,
2007. Accordingly, the staff will continue to accept, under certain
circumstances, the use of the simplified method beyond December 31,
2007.
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
Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006
Net
Sales
Our
net
sales increased
32% to $9,121,248 in 2007, from $6,917,640 in 2006. Sales of For-series software
increased 72%
to
$4,684,791 in 2007, from
$2,722,368 in 2006.
The
increase in net sales was mainly attributable to our strategy of increasing
software sales and reducing low profit margin hardware projects. Nevertheless,
sales of For-series related system integration still increased 23% to $5,145,869
in 2007 from $4,195,272 in 2006.
Cost
of Sales.
Our
cost
of sales increased 44%
to
$4,186,187 in 2007, from $2,914,754 in 2006.
The
increase was comparable with the increase of sales.
22
Gross
Profit.
Gross
profit increased
23% to $4,935,061 in 2007, from $4,002,886 in 2006. Gross profit margin
was
54% in
2007, compared with 58% in 2006.
Operating Expenses.
Total
operating expenses year-over-year were maintained at comparable levels, with
$3,907,523 in 2007 and $3,910,507 in 2006. This situation resulted largely
from
the offset of an increase in selling expenses versus a decrease in research
and
development expenses.
Selling
expenses increased 88% to $1,540,494 in 2007, from $818,146 in
2006.
This increase was primarily due to our increased advertising expenses and sales
efforts to market our fast growing For-Online application service provider
services, our IT outsourcing services, as well as our enterprise application
integration services.
Research
and development expenses decreased 60% to $690,386 in 2007, from $1,730,760
in
2006, as a result of the reorganization efforts in our R&D department as we
focused on reducing
costs and improving efficiency in 2007.
General
and administrative expenses increased
23% to $1,676,644 in 2007, from $1,361,601 in 2006. The increase
was
primarily due to
the
additional costs to meet new compliance requirements such as Sarbanes-Oxley
Act
compliance.
Operating
(Loss)/Profit
We
recorded an operating profit
of
$1,027,538 in 2007
as
compared to
an
operating profit of $92,279
in
2006, an increase of 1,012%. The increase
was
largely due to two
reasons. Firstly, the net
sales
increased by 32% from $6,917,640 in 2006 to $9,121,248 in 2007.
Secondly, the sale percentage of For-series software, which has a higher profit
margin than For-series related system integration, increased from 39% in 2006
to
48% in 2007.
Other
Income
Our
other
income decreased 32% to $143,321 in 2007, from $210,724 in 2006, as a result
of
decreased VAT refund. Our other income is derived entirely from VAT refund
associated with our software sales.
Net
(Loss)/Profit
We
recorded a net income
of
$1,508,389 in 2007, or basic and diluted profit of $0.02 per share, as compared
to net income
of
$305,497
in 2006, or basic and diluted loss
of
$0.00
per share.
Liquidity
and Capital Resources
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.
23
Our
accounts receivable balance at December 31, 2007 was $1,618,697, as compared
to
$1,886,251 at the end of 2006. The decrease is mainly attributable to better
collection from our two major clients: China Mobile and Guangxi Caexpo. The
balance of accounts receivable from China Mobile decreased to $80,933 at
December 31, 2007 from $736,654 at December 31, 2006; the balance of accounts
receivable from Guangxi Caexpo decreased to $361,203 at December 31, 2007 from
$842,062 at December 31, 2006.
Our
inventory position at the end of 2007 was $498,356, as compared to $34,182
at
the beginning of the year. At the end of 2007, we had several inventory items
in
the process of delivery to Guangxi Caexpo. This caused the 2007 year-end
inventory to
be
larger
than usual.
We
ended
the year with a cash position of $2,400,901. We had positive operating cash
flow
of $1,303,934, primarily due to net profit and increase in customer deposits.
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 2008.
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
December 31, 2007,
we have
not entered into any off-balance sheet arrangements with any individuals or
entities.
Contractual
Obligations
As
of
December 31, 2007,
we had
commitments under non-cancelable operating leases requiring annual minimum
rental payments as follows:
|
|
December
31,
|
|||
|
|
2007
|
|||
|
January
1, 2008 to December 31, 2008
|
$
|
351,289
|
||
|
January
1, 2009 to December 31, 2009
|
111,750
|
|||
|
January
1, 2008 to December 31, 2010
|
47,931
|
|||
|
January
1, 2010 to December 31, 2011
|
393
|
|||
|
|
||||
|
|
$
|
511,363
|
||
Related
Party Transactions
The
Company, from time to time, received from or made repayments to Mr.
Yi
He, a major stockholder who is also a member of our management. The amounts
due
from/to the stockholder do not bear any interest and do not have clearly defined
terms of repayment.
24
The
amounts due to stockholders as of December 31, 2007 and December 31, 2006,
in
the amount of $333,524 and $819,491, respectively, represented advances to
the
Company from Mr.
Yi
He.
To
comply
with PRC laws and regulations, Forlink conducts its Internet value-added
services in PRC via Beijing Forlink Hua Xin Technology Co. Ltd. (“BFHX”). BFHX
was established in PRC on September 19, 2003 as a limited liability company.
The
registered capital of BFHX is $120,733 (RMB 1,000,000) and the fully paid up
capital was $36,232 (RMB 300,000) as of December 31, 2004. In accordance with
a
directors’ resolution of Forlink passed on September 15, 2003, Mr. Yi He and Mr.
Xiaoxia Zhao were entrusted as nominee owners of BFHX to hold 70% and 30% of
the
fully paid up capital of BFHX, respectively, on behalf of Forlink and Forlink
is
the primary beneficiary. BFHX is considered a variable interest entity (“VIE”)
and because Forlink is the primary beneficiary, Forlink’s consolidated financial
statements include BFHX. Upon the request of Forlink, Mr. Yi He and Mr. Xiaoxia
Zhao are required to transfer their ownership in BFHX to Forlink or to designees
of Forlink at any time for the amount of the fully paid up capital of
BFHX.
In
accordance with a registered capital transfer agreement dated February 16,
2004,
and the owners’ resolutions of BFHX passed on February 16, 2004, Mr. Xiaoxia
Zhao transferred the fully paid up capital of BFHX of $10,870 (RMB 90,000)
to
Mr. Wei Li for $10,870. Mr. Yi He and Mr. Wei Li entered into agreements with
Forlink on November 8, 2003 and March 18, 2004, respectively, under which
agreements Mr. Yi He and Mr. Wei Li were entrusted as nominee owners of BFHX
to
hold 70% and 30%, respectively, of the fully paid up capital of BFHX on behalf
of Forlink. Forlink is the primary beneficiary of such agreements. Upon the
request of Forlink, Mr. Yi He and Mr. Wei Li are required to transfer their
ownership in BFHX to Forlink or to designees of Forlink at any time for the
amount of the fully paid up capital of BFHX.
The
capital of BFHX was funded by FTCL and recorded as interest-free loans to Mr.
Yi
He and Mr. Wei Li. These loans were eliminated with capital of BFHX during
consolidation. Mr. Yi He is an officer, director and a major stockholder of
Forlink. Mr. Xiaoxia Zhao is a former director and a major stockholder of
Forlink. Mr. Wei Li is the administration manager of FTCL.
The
sales
to All China, Guangxi Caexpo and BGXF in 2007 are $167,255, $4,878,812 and
$112,313 respectively. By the end of December 31, 2007, the accounts receivable
to All China, Guangxi Caexpo and BGXF are $237,264, $361,203 and $111,144
respectively.
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 reforms
and the 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.
25
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.
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 and our financial statements
are expressed in U.S. dollars. As a result, we are subject to the effects of
exchange rate fluctuations between these currencies. In
July
2005, the Chinese government announced that it would no longer peg its currency
exclusively to US dollar
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 USD
changed
from RMB 8.28 to
RMB
7.82 in
late December 2006.Any future devaluation of the Renminbi against the U.S.
dollars 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 Renminbi. 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 U.S. dollar and the Renminbi
because the value of our business is effectively denominated in Renminbi, while
our shares are traded in U.S. dollars. Furthermore, a decline in the value
of
Renminbi could reduce the U.S. dollar 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 Renminbi may require us to exchange more U.S. dollars into
Renminbi to meet the working capital requirements of our subsidiaries in China.
Depreciation of the value of the U.S. dollar will also reduce the value of
the
cash we hold in U.S. dollars, 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 Renminbi and the U.S. dollar
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.
26
Item
7. Financial
Statements.
The
information required by Item 7 and an index thereto commences on the next
page.
27
Forlink
Software Corporation, Inc.
Index
to Consolidated Financial Statements
|
|
|
Pages
|
|
|
|
|
|
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|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
F-1
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
F-2
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
F-3
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
|
|
F-4
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
F-5
|
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|
|
Notes
to Consolidated Financial Statements
|
|
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F-6
- F-23
|
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28
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
Forlink
Software Corporation, Inc.
We
have
audited the accompanying consolidated balance sheet of Forlink Software
Corporation Inc as of December 31, 2007, and the related consolidated statements
of income, stockholders’ equity and comprehensive income, and cash flows for the
year then ended. Forlink Software Corporation Inc’s management is responsible
for these financial statements. Our responsibility is to express an opinion
on
these financial statements based on our audit. The financial statements of
Forlink Software Corporation Inc as of December 31, 2006, were audited by other
auditors whose report dated March 25, 2007, expressed an unqualified opinion
on
those statements.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Forlink Software Corporation Inc
as
of December 31, 2007, and the results of its operations and its cash flows
for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.
|
/s/
Kenne Ruan, CPA, P.C.
|
|
|
Woodbridge,
Connecticut
|
|
|
March
14, 2008
|
|
F-1
Forlink
Software Corporation, Inc.
Consolidated
Balance Sheets
(Expressed
in US Dollars)
|
December
31,
|
December
31,
|
||||||
|
2007
|
2006
|
||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
2,400,901
|
$
|
427,195
|
|||
|
Accounts
receivable
|
1,618,697
|
1,886,251
|
|||||
|
Other
receivables, deposit and prepayments
|
530,431
|
242,888
|
|||||
|
Inventories
|
498,356
|
34,182
|
|||||
|
Deferred
Taxes Assets
|
384
|
||||||
|
Total
current assets
|
5,048,769
|
2,590,516
|
|||||
|
Property,
plant and equipment
|
659,826
|
728,710
|
|||||
|
Long
term investments
|
4,912,944
|
4,322,289
|
|||||
|
Goodwill
|
1,684,023
|
1,684,023
|
|||||
|
Total
assets
|
$
|
12,305,562
|
$
|
9,325,538
|
|||
|
Liabilities
and stockholders' equity
|
|||||||
|
Current
liabilities
|
|||||||
|
Short
term borrowings
|
-
|
-
|
|||||
|
Accounts
payable
|
$
|
1,598,507
|
$
|
155,204
|
|||
|
Amounts
due to stareholders
|
325,251
|
819,491
|
|||||
|
Customer
deposits
|
1,735,981
|
2,634,705
|
|||||
|
Other
payables and accrued expenses
|
303,366
|
549,424
|
|||||
|
Income
tax payable
|
1,540
|
-
|
|||||
|
Other
tax payable
|
860,498
|
187,436
|
|||||
|
Deferred
Taxes Debt
|
18,298
|
||||||
|
Total
current liabilities
|
$
|
4,843,441
|
$
|
4,346,260
|
|||
|
Commitments
and contingencies
|
|||||||
|
Minority
interest
|
$
|
269,772
|
$
|
-
|
|||
|
Stockholders'
equity
|
|||||||
|
Common
stock, par value $0.001 per share; 200,000,000 and 100,000,000 shares
authorized; 99,121,707and 98,224,707 shares issued and 92,821,707and
89924707 shares outstanding, respectively
|
$
|
99,122
|
$
|
98,225
|
|||
|
Treasury
stock
|
(163,800
|
)
|
(215,800
|
)
|
|||
|
Additional
paid-in capital
|
10,177,812
|
9,908,715
|
|||||
|
Accumulated
losses
|
(3,517,748
|
)
|
(5,026,137
|
)
|
|||
|
Accumulated
other comprehensive income
|
596,964
|
214,275
|
|||||
|
Total
stockholders' equity
|
$
|
7,192,350
|
$
|
4,979,278
|
|||
|
Total
liabilities and stockholders' equity
|
$
|
12,035,791
|
$
|
9,325,538
|
|||
See
accompanying notes to consolidated financial statements.
F-2
Forlink
Software Corporation, Inc.
Consolidated
Statements of Operations
(Expressed
in US Dollars)
|
Year
ended
December
31,
2007
|
Year
ended
December
31,
2006
|
||||||
|
Net
sales
|
$
|
9,121,248
|
$
|
6,917,640
|
|||
|
Cost
of sales
|
(4,186,187
|
)
|
(2,914,754
|
)
|
|||
|
Gross
profit
|
4,935,061
|
4,002,886
|
|||||
|
Selling
expenses
|
(1,540,494
|
)
|
(818,146
|
)
|
|||
|
Research
and development expenses
|
(690,386
|
)
|
(1,730,760
|
)
|
|||
|
General
and administrative expenses
|
(1,676,644
|
)
|
(1,361,601
|
)
|
|||
|
Operating
profit / (loss)
|
1,027,538
|
92,379
|
|||||
|
Investment
income
|
349,284
|
-
|
|||||
|
Loss
on disposal of subsidiaries
|
(3,792
|
)
|
(1,195
|
)
|
|||
|
Interest
income
|
32,149
|
3,589
|
|||||
|
Interest
expenses
|
(24,699
|
)
|
-
|
||||
|
Other
income, net
|
143,321
|
210,724
|
|||||
|
Profit
before income taxes
|
1,523,801
|
305,497
|
|||||
|
Income
tax
|
(18,737
|
)
|
-
|
||||
|
Consolidated
profit
|
1,505,064
|
305,497
|
|||||
|
Net
loss attributable to minority interest
|
(3,325
|
)
|
-
|
||||
|
Net
consolidated profit
|
$
|
1,508,389
|
$
|
305,497
|
|||
|
Gain/Loss
per share
|
$
|
0.02
|
$
|
-
|
|||
|
Weighted
average common shares outstanding -
|
|||||||
|
basic
and diluted
|
$
|
92,252,786
|
$
|
80,130,186
|
|||
See
accompanying notes to consolidated financial statements.
F-3
Forlink
Software Corporation, Inc.
Consolidated
Statement of Stockholders’ Equity
(Expressed
in US Dollars)
|
Common
Stock
|
Accumulated
|
Retained
|
|||||||||||||||||||||||||||||
|
Number
of
Share
Issued
|
Number
of
Share
Outstanding
|
Number
of
Treasury
Stock
|
Amount
|
Treasury
Stock
|
Additional
Paid-in
Capital
|
other
comprehensive income
|
Profits/
(Accumulated
Losses)
|
Total
Stockholders’
Equity
|
Comprehensive
Income/
(Losses)
|
||||||||||||||||||||||
|
Balance,
December 31, 2005
|
85,224,707
|
76,924,707
|
8,300,000
|
$
|
85,225
|
$
|
(215,800
|
)
|
$
|
8,949,810
|
$
|
78,605
|
$
|
(5,331,634
|
)
|
$
|
3,566,206
|
$
|
|||||||||||||
|
Shares
issued
|
13,000,000
|
13,000,000
|
-
|
13,000
|
-
|
958,905
|
-
|
-
|
971,905
|
||||||||||||||||||||||
|
Net
profit for the year
|
305,497
|
305,497
|
305,497
|
||||||||||||||||||||||||||||
|
Translation
reserve
|
135,670
|
-
|
135,670
|
135,670
|
|||||||||||||||||||||||||||
|
Comprehensive
income
|
$
|
441,167
|
|||||||||||||||||||||||||||||
|
Balance,
December 31, 2006
|
$
|
98,224,707
|
$
|
89,924,707
|
$
|
8,300,000
|
$
|
98,225
|
$
|
(215,800
|
)
|
$
|
9,908,715
|
$
|
214,275
|
$
|
(5,026,137
|
)
|
$
|
4,979,278
|
|||||||||||
|
Shares
issued
|
897,000
|
2,897,000
|
(2,000,000
|
)
|
897
|
52,000
|
269,097
|
321,994
|
|||||||||||||||||||||||
|
Net
profit for the year
|
1,508,389
|
1,508,389
|
1,508,389
|
||||||||||||||||||||||||||||
|
Translation
reserve
|
382,689
|
382,689
|
382,689
|
||||||||||||||||||||||||||||
|
Comprehensive
income
|
$
|
1,891,078
|
|||||||||||||||||||||||||||||
|
Balance,
December 31, 2007
|
$
|
99,121,707
|
$
|
92,821,707
|
$
|
6,300,000
|
$
|
99,122
|
$
|
(163,800
|
)
|
$
|
10,177,812
|
$
|
596,964
|
$
|
(3,517,748
|
)
|
$
|
7,192,350
|
|||||||||||
See
accompanying notes to consolidated financial statements.
F-4
Forlink
Software Corporation, Inc.
Consolidated
Statements of Cash Flows
(Decrease)/Increase
in Cash and Cash Equivalents
(Expressed
in US Dollars)
|
Year
Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Cash
flows from operating activities
|
|||||||
|
Net
income
|
1,508,389
|
305,497
|
|||||
|
Adjustment
to reconcile net income to net cash provided by (used in) operating
activities:
|
|||||||
|
Proceeds
from transferred of treasury stock
|
232,294
|
||||||
|
Depreciation
of property, plant and equipment
|
213,495
|
205,000
|
|||||
|
Loss
on disposal of property, plant and equipment
|
(38,814
|
)
|
8,047
|
||||
|
Loss
from equity method investee
|
(228,326
|
)
|
|||||
|
Loss
on disposal from subsidiaries
|
(29,103
|
)
|
1,195
|
||||
|
dividend
from cost method investee
|
(88,063
|
)
|
|||||
|
effect
of Deferred Taxes
|
17,914
|
||||||
|
Charge
in:
|
|||||||
|
Account
Receivables
|
396,396
|
(962,900
|
)
|
||||
|
Other
receivables, deposits & prepayments
|
(270,952
|
)
|
285,975
|
||||
|
Inventories
|
(461,839
|
)
|
231,879
|
||||
|
Account
Payable
|
1,432,702
|
(639,597
|
)
|
||||
|
Amounts
due to stockholders
|
(550,216
|
)
|
|||||
|
Customers
deposits
|
(1,078,690
|
)
|
1,960,011
|
||||
|
Other
payables & accrued expenes
|
(283,587
|
)
|
244,105
|
||||
|
Income
tax payable
|
1,540
|
||||||
|
Other
taxes payable / recoverable
|
660,259
|
213,084
|
|||||
|
et
cash used in operating activities
|
1,433,398
|
1,852,296
|
|||||
|
Cash
flows from investing activities
|
|||||||
|
Acquisition
of property, plant & equipments
|
12,551
|
(30,945
|
)
|
||||
|
Disposal
of subsidiary
|
478,142
|
(1,195
|
)
|
||||
|
Cash
payment associated with long term investments
|
(724,044
|
)
|
(2,589,514
|
)
|
|||
|
Cash
dividend from cost method investee
|
88,063
|
||||||
|
Cash
Received from disposal property, plant& equipments
|
6,030
|
||||||
|
Net
cash used in investing activities
|
(139,258
|
)
|
(2,621,654
|
)
|
|||
|
Cash
flow from financing activities
|
|||||||
|
Proceeds
from short term borrowings
|
(246,609
|
)
|
|||||
|
(Advances
to) / Repayments from stockholders
|
660,230
|
||||||
|
Proceeds
from issuance of common stock under Plan 2002
|
897
|
||||||
|
Increase
in treasury stock
|
52,000
|
||||||
|
Decerase
in additional paid in capital
|
269,097
|
||||||
|
Capital
contribution from minority interest
|
269,772
|
|
|||||
|
Net
cash generated from financing activities
|
591,766
|
413,621
|
|||||
|
Effect
of exchange rate changes on cash and cash
equivalents
|
87,800
|
193,151
|
|||||
|
Net
increase (decrease) in cash and cash equivalents
|
1,973,706
|
(162,586
|
)
|
||||
|
Cash
and cash equivalents at the beginning of year
|
427,195
|
589,781
|
|||||
|
Cash
and cash equivalents at the end of year
|
2,400,901
|
427,195
|
|||||
|
Supplementtal
disclosure of cash flow information
|
|||||||
|
Income
tax paid
|
$
|
6,527
|
$
|
-
|
|||
|
Interest
paid
|
$
|
-
|
$
|
-
|
|||
See
accompanying notes to consolidated financial statements.
F-5
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 People’s Republic of China
(“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”).
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. SLAIT
provides 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 have been gradually shifted to those of FTCL. On February 13, 2004, SLAIT
was officially dissolved in accordance with relevant PRC regulations. FTCL
is
the major operating company of Forlink in Beijing.
On
June
18, 2003, Forlink Technologies (Hong Kong) Limited (“FTHK”) was incorporated in
Hong Kong as a limited liability company. In December 2003, FTHK became a wholly
owned subsidiary of Forlink. FTHK is an investment holding company. Because
of
the favorable business environment in Hong Kong, we can simplify and speed
up
investment transactions through this subsidiary. Through FTHK, on December
18,
2003, we invested $760,870 in All China Logistics Online Co., Ltd. ("All China
Logistics"), a privately held PRC company and a leading provider of logistic
services in China, in exchange for a 17.8% equity interest. Through this
investment, we have become the second largest shareholder of All China Logistics
and its sole software solution provider. FTHK is also responsible for directly
importing from overseas companies certain hardware needed to integrate products,
which allows us to improve our hardware pass-through profit margin.
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. The main business is 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.
In
compliance with China’s foreign investment restrictions on telecom value-added
services and other laws and regulations, we conduct our 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 has been fully paid
up by March 31, 2005. Mr. Yi He and Mr. Wei Li were entrusted as nominee owners
of BFHX to hold 70% and 30%, respectively, of the fully paid up capital of
BFHX
on behalf of Forlink as the primary beneficiary. BFHX is considered a Variable
Interest Entity ("VIE"), and because Forlink is the primary beneficiary,
Forlink's consolidated financial statements include BFHX. Upon the request
of
Forlink, Mr. Yi He and Mr. Wei Li are required to transfer their ownership
in
BFHX to Forlink or to designees of Forlink 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 Forlink. Mr. Wei Li is the administration
manager of FTCL.
F-6
Through
BFHX, on September 28, 2004, we invested $36,232 (RMB 300,000) in Huntington
Network Technologies (Beijing) Co., Ltd. (“HNT”), a privately held PRC company
that operated the Gmgame.com, an online gaming portal, in exchange for 30%
equity interests. This investment was intended to enable us to enter a fast
growing market and utilize our IT expertise to further diversify our revenues.
HNT was deregistered in December 2007, however, and our investment was impaired
in 2005 in the amount of $37,516 (RMB 300,000).
On
March
20, 2005, Beijing Forlink Kuanshi Technologies Limited (“BFKT”) was established
as a limited liability company by BFHX and two individuals, Mr. Jianqiu Fang
and
Mr. Bizhao Zhong. BFHX, Mr. Fang and Mr. Zhong hold 70%, 10% and 20% of the
fully paid up capital of BFKT, respectively. KFKT was to provide software and
operation support to IPTV (Internet Protocol Television) operators, but the
company was dissolved on November 19, 2007. We recorded an investment loss
of
$3,792 after the dissolution of BFKT, with our total investment loss in BFKT
from its establishment to its dissolution in the amount of $16,932.
On
March
28, 2005, BFKT acquired 90% and 95% of shares of Qingdao Jiashi Technologies
Limited (“QJT”) and Xiamen Kuanshi Technologies Limited (“XKT”), respectively.
Both QJT and XKT were originally established by Mr. Yi He and Mr. Wei Li on
March 4, 2005 and March 7, 2005 respectively. Pursuant to an agreement reached
between BFHX and Mr. Wei Li, Mr. Wei Li was entrusted as nominee owner of QJT
and XKT to hold 10% and 5%, respectively, of the fully paid up capital of QCT
and XKT on behalf of BFHX as the primary beneficiary. QCT and XKT never
commenced operations since their respective dates of establishment, and both
companies were deregistered in late 2006. A loss on disposal of XKT and QJT
of
$1,195 was incurred. On November 19, 2007, BFKT was officially dissolved and
an
investment loss of $3,792 was recorded after dissolution of BFKT. Total
investment loss in BFKT was $16,932 from its establishment.
On
October 24, 2005, Forlink entered on a definitive agreement to acquire a 17.5%
equity interest from China Liquid Chemical Exchange Company Limited (“CLCE”), a
PRC limited liability company. Under the terms of the agreement, Forlink
deployed the “For-online Electronic Trading System”, a proprietary, integrated
software solution, to support CLCE’s operations, including, but not limited to,
online trading, online billing and payment, user authentication and customer
care, in exchange for the 17.5% equity interest. In early 2007, CLCE increased
its share capital to $1,708,526 (RMB 13,000,000). As we did not subscribe to
the
new shares, our shareholding of CLCE as at December 31 2007 had been diluted
to
13.46%. CLCE commenced operations fully in early 2007.
On
October 3, 2006, we entered into a Transfer of Right to Invest and Project
Cooperation Agreement (“Statelink Agreement”) with, and 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, from Statelink
International Group, Ltd., a company incorporated in the British Virgin Islands
(“Statelink”) for cash consideration of $2,557,545 (RMB 20,000,000) from BFHX
and stock consideration of 13,000,000 shares of our restricted common stock.
Thereafter, we also won a contract from Guangxi Caexpo to build an “Electronic
Trade and Logistics Information Platform and Call Center” (the “Project”). On
October 26, 2006, BFHX established Forlink Technologies (Guangxi) Limited
(“FTGX”), a PRC limited liability company and wholly owned subsidiary, to carry
out this contract. At the time of incorporation, BFHX injected RMB 20,000,000
(approximately US$2,557,545) as registered capital to FTGX. FTGX will continue
operating after the completion of the project.
On
October 12, 2006, we 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. In addition, we have agreed to deploy a proprietary,
integrated software solution, estimated at RMB 1,000,000, to support Wuxi’s
operations, which was deployed in February 2007. On January 14, 2007, the
Company entered into an agreement with a major shareholder of Wuxi to transfer
2.5% of the Company’s interest in Wuxi to the major shareholder for cash payment
of RMB 500,000.
On
April
29, 2007, Forlink 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
Forlink’s significant influence over the operational and financial policies of
BGXF. BGXF commenced operations on March 9 2008.
F-7
On
July
12, 2007, Forlink invested in the form of cash 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. NNBCE became a
subsidiary of FTGX. NNBCE, set up on April 29, 2007, will be engaged in
providing logistical e-commerce service once the company commences
operations.
On
September 5, 2007, Forlink invested $465,425 (3,500,000 RMB), 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. On the same date, 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 in GBSEE to NNBCE its designees at any time
for the amount of the fully paid up capital of GBSEE. 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 an
approximately 55% equity interest in GBSEE GBSEE was established to provide
logistical e-commerce service, but it was dissolved on December 16, 2007 before
the commencement of any operation NNBCE received payback of its investment
of
$410,397 (3,000,000 RMB) in December 2007 and $66,211 (484,000 RMB) in February
2008, with a balance of $2,189 (16,000 RMB).
Forlink
and its subsidiaries are all operating companies.
Forlink,
its subsidiaries, the VIE and the corporate joint venture are collectively
referred to as “the Company” hereafter.
The
principal activities of the Company are the development and sale of network
software systems and the provision of enterprise application system integration
services in the PRC. The Company is also engaged in the sale of computer
hardware. Set
forth
below is a diagram illustrating our corporate structure as of December 31,
2007:
F-8
NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis
of Accounting and Principles of Consolidation
The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America that include
the
financial statements of Forlink and its subsidiaries, namely, FTCL, FTHK, BFHX,
FTCD, FTGX, and NNBCE. All inter-company transactions and balances have been
eliminated.
Minority
interests at the balance sheet date, being the portion of the net assets of
subsidiaries attributable to equity interests that are not owned by Forlink,
whether directly or indirectly through subsidiaries, are presented in the
consolidated balance sheet separately from liabilities and the shareholders’
equity. Minority interests in the results of the Company for the years are
also
separately presented in the income statement.
Use
of Estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Foreign
Currency Translation and Transactions
The
functional currency of Forlink is US$ and the financial records are maintained
and the financial statements prepared in US$. The functional currency of FTHK
is
HK$ and its financial records are maintained, and its financial statements
prepared, in HK$. The functional currency of FTCL, BFHX, FTCD, FTGX, and NNBCE
is Renminbi (RMB) and their financial records are maintained, and their
financial statements are prepared, in RMB.
Foreign
currency transactions during the period are translated into each company’s
denominated currency at the exchange rates at the transaction dates. Gain and
loss resulting from foreign currency transactions are included in the
consolidated statement of operations. Assets and liabilities denominated in
foreign currencies at the balance sheet date are translated into each company’s
denominated currency at the yearend exchange rates. All exchange differences
are
dealt with in the consolidated statements of operations.
The
financial statements of the Company’s operations based outside of the United
States have been translated into US$ in accordance with SFAS 52. 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$, yearend 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 USD, 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 USD 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
USD.
The exchange rate of RMB to USD changed from RMB8.28 to RMB8.11 in late July
2005.
The
exchange rates used as of December 31, 2007 and 2006 are US$1:HK$7.84:RMB7.32,
and US$1:HK$7.75:RMB7.82, respectively. The weighted average rates ruling for
the years ended December 31, 2007 and 2006 are US$1:HK$7.84:RMB7.60, and re
US$1:HK$7.75:RMB7.98, respectively.
F-9
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 USD would consequently have an adverse effect on the
financial performance and asset values of the Company when measured in terms
of
USD. 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 USD, 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 collectibility of amounts due from such customers, could
have a material affect 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:
|
|
Estimated
useful life
(in
years)
|
|
|
|
|
|
|
Building
|
20
|
|
|
Computer
equipment
|
5
|
|
|
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.
F-10
Computer
Software Development Costs
In
accordance with SFAS No. 86 “Accounting for the Cost of Computer Software to be
Sold, Leased or Otherwise Marketed” 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 8.
Fair
Values of Financial Instruments
The
carrying amounts of financial instruments (cash and cash equivalents,
investments, accounts receivable and accounts payable) approximate their fair
values as of December 31, 2007 and 2006 because of the relatively short-term
maturity of these instruments.
Goodwill
SFAS
142,
Goodwill and Other Intangible Assets, requires that goodwill be tested for
impairment on an annual basis (December 31 for us) and between annual tests
if
an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying value. These events or
circumstances could include a significant change in the business climate, legal
factors, operating performance indicators, competition, sale or disposition
of a
significant portion of a company. Application of the goodwill impairment test
requires judgment, including the determination of the fair value of a company.
The fair value of a company is estimated using a discounted cash flow
methodology. This requires significant judgments including estimation of future
cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth for our business, the useful life over which cash
flows
will occur, and the determination of our weighted average cost of capital.
Changes in these estimates and assumptions could materially affect the
determination of fair value and/or goodwill impairment for a
company.
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
|
F-11
|
·
|
whether
we have verifiable objective evidence of fair value for our products
and
services.
|
The
Company recognizes revenues in accordance with the provisions of Statements
of
Position, or SOP, No. 97-2, “Software Revenue Recognition,” as amended by SOP
No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with respect
to Certain Transactions,” Staff Accounting Bulletin, or SAB, 104, “Revenue
Recognition.” SOP 97-2 and SAB 104 require among other matters, that there be a
signed contract evidencing an arrangement exists, delivery has occurred, the
fee
is fixed or determinable, and collectibility is probable.
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 Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple
Deliverables” (“EITF No. 00-21”). Under EITF 00-21, 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 EITF 00-21 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 rateably 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 are performed pursuant to paragraph 65 of SOP 97-2.
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 EITF 03-05, “Applicability
of AICPA Statement of Position 97-2, Software Revenue Recognition, to
Non-Software Deliverables in an Arrangement Containing More-Than-Incidental
Software” (EITF 03-05). Per EITF 03-05, 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 SOP 97-2. 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, pursuant to SAB 104.
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 rateably 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 rateably over the term of the contract.
The
Company is considering the applicability of EITF 00-3, “Application of AICPA
Statement of SOP 97-2 to Arrangements That Include the Right to Use Software
Stored on Another Entity’s Hardware,” to the hosting services arrangements on a
contract-by-contract basis. If the Company determines that the customer does
not
have the contractual right to take possession of the Company’s software at any
time during the hosting period without significant penalty, SOP 97-2 would
not
apply to these contracts in accordance with EITF 00-3. Accordingly, these
contracts would be accounted for pursuant to SAP 104.
Stock
Based Compensation
Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards 123(R),
Share-Based
Payment
(SFAS
123(R)), using the modified prospective application transition method. Before
we
adopted SFAS 123(R), we accounted for share-based compensation in accordance
with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees.
F-12
SFAS
123(R) 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 SFAS
123(R) 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.
SFAS
123(R) 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 Statement No. 123(R), and there were no
changes in valuation methodologies or assumptions compared to those used by
the
Company prior to January 1, 2006.
In
November 2005, the FASB issued FSP No. 123(R)-3, “Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards.” The
Company adopted the alternative transition method provided in the FSP for
calculating the tax effects of share-based compensation pursuant to FAS 123(R)
in the fourth quarter of fiscal 2006. The alternative transition method includes
simplified methods to establish the beginning balance of the Additional Paid-in
Capital (“APIC”) pool related to the tax effects of employee share-based
compensation, and to determine the subsequent impact on the APIC pool and
Consolidated Statements of Cash Flows of the tax effects of employee share-based
compensation awards that are outstanding upon adoption of FAS 123(R). The
adoption did not have a material impact on the Company’s results of operations
and financial position.
In
February 2006, the FASB issued FASB Staff Position No. FAS 123(R)-4,
“Classification of Options and Similar Instruments Issued as Employee
Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent
Event.” This position amended SFAS 123(R) to incorporate that a cash settlement
feature that can be exercised only upon the occurrence of a contingent event
that is outside the employee’s control does not meet certain conditions in SFAS
123(R) until it becomes probable that the event will occur. The guidance in
this
FASB Staff Position was required to be applied upon initial adoption of
Statement No. 123(R). The Company does not have any option grants that
allow for cash settlement.
The
Company did not adopt any new share-based compensation plans in 2007. 897,000
stock options issued under the Company’s 2002 Stock Plan were exercised during
the year 2007.
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
2007 and 2006.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109 “Accounting
for Income Taxes.” Under SFAS No. 109, 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.
In
July,
2006, the 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
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.
F-13
Earnings
Per Common Share
The
Company computes net earnings per share in accordance with SFAS No. 128,
“Earnings per Share” and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Under
the provisions of SFAS No. 128 and SAB 98, 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
Accounting Pronouncements
.
In
September 2006, the FASB issued FAS 157, Fair
Value Measurements
(FAS
157). FAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. The provisions of FAS 157 are
effective for the fiscal year beginning after November 15, 2007.
On
February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities: Including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits all entities to elect to
measure many financial instruments and certain other items at fair value with
changes in fair value reported in earnings. SFAS 159 is effective as of the
beginning of the first fiscal year that begins after November 15, 2007, with
earlier adoption permitted.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51”.
The
objective of this Statement is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides
in
its consolidated financial statements by establishing accounting and reporting
standards. This Statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008 (that is,
January 1, 2009, for entities with calendar year-ends). Earlier adoption is
prohibited. The effective date of this Statement is the same as that of the
related Statement 141(R).
On
December 21, 2007, SEC issued Staff Accounting Bulletin (“SAB”) No. 110. This
staff accounting bulletin ("SAB") expresses the views of the staff regarding
the
use of a "simplified" method, as discussed in SAB No. 107 ("SAB 107"), in
developing an estimate of expected term of "plain vanilla" share options in
accordance with Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based
Payment.
In
particular, the staff indicated in SAB 107 that it will accept a company's
election to use the simplified method, regardless of whether the company has
sufficient information to make more refined estimates of expected term. At
the
time SAB 107 was issued, the staff believed that more detailed external
information about employee exercise behavior (e.g., employee exercise patterns
by industry and/or other categories of companies) would, over time, become
readily available to companies. Therefore, the staff stated in SAB 107 that
it
would not expect a company to use the simplified method for share option grants
after December 31, 2007. The staff understands that such detailed information
about employee exercise behavior may not be widely available by December 31,
2007. Accordingly, the staff will continue to accept, under certain
circumstances, the use of the simplified method beyond December 31,
2007.
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 - ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL
ACCOUNTS
Accounts
receivable are customer obligations due under normal trade terms. The Company
performs continuing credit evaluations of the customers’ financial conditions
and the Company generally does not require collateral.
Senior
management reviews accounts receivable from time to time to determine if any
receivables will potentially be uncollectible. The Company included any accounts
receivable balances that are determined to be uncollectible in the allowance
for
doubtful accounts. After all attempts to collect a receivable have failed,
the
receivable is written off against the allowance. Based on the information
available to the Company, $48,033 (2006: $48,033) for doubtful accounts as
of
December 31, 2007 is required.
F-14
NOTE
4 - OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS
|
|
December
31,
|
December
31,
|
|||||
|
|
2007
|
2006
|
|||||
|
|
|
|
|||||
|
Other
receivables
|
$
|
711,571
|
$
|
98,807
|
|||
|
Deposits
|
73,275
|
137,779
|
|||||
|
Prepayments
|
59,071
|
6,302
|
|||||
|
|
|||||||
|
|
$
|
843,917
|
$
|
242,888
|
|||
NOTE
5 - INVENTORIES
|
|
December
31,
|
December
31,
|
|||||
|
|
2007
|
2006
|
|||||
|
|
|
|
|||||
|
Computer
hardware and software
|
$
|
29,765
|
$
|
34,182
|
|||
|
Work-in-progress
|
468,591
|
-
|
|||||
|
|
|||||||
|
|
$
|
498,356
|
$
|
34,182
|
|||
All
the
inventories were purchased for identified system integration
contracts.
Work-in-progress
includes payroll and other operating expenses associated with various contracts
in progress.
NOTE
6 - RELATED PARTY
The
Company has had and expects to have transactions in the ordinary course of
business with many of its stockholders, directors, senior officers and other
affiliates (and their associates) on substantially the same terms as those
prevailing for comparable transactions with others. Listed below is a summary
of
material relationships or transactions with the Company’s stockholders,
directors, senior officers and other affiliates:
Amounts
due to stockholders
The
Company, from time to time, received from or made repayment to one major
stockholder who is also a member of management of the Company. The amounts
due
to stockholders do not bear any interest and do not have clearly defined terms
of repayment.
As
of
December 31, 2007 and 2006, the amounts due to stockholders represented advances
from stockholders of $333,524 and 819,491, respectively.
F-15
Related
Party Transactions
|
Sales
|
|
Receivable
|
|
Customer
Deposit
|
|
||||||||||||||
|
Related
party
|
|
Year
Ended Dec 31,
|
|
As
of Dec 31,
|
|
As
of Dec 31,
|
|||||||||||||
|
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
All
China
|
$
|
167,255
|
$
|
721,087
|
$
|
237,264
|
$
|
842,062
|
$
|
-
|
$
|
-
|
|||||||
|
Guangxi
Caexpo
|
4,878,812
|
466,165
|
361,203
|
-
|
-
|
1,847,486
|
|||||||||||||
|
BGXF
|
112,313
|
-
|
111,144
|
-
|
-
|
||||||||||||||
|
GBSEE
|
-
|
-
|
68,306
|
-
|
-
|
-
|
|||||||||||||
|
Total
|
$
|
5,158,380
|
$
|
1,187,252
|
$
|
777,917
|
$
|
842,062
|
$
|
$1,847,486
|
|||||||||
NOTE
7 - PROPERTY, PLANT AND EQUIPMENT, NET
|
|
December
31,
|
December
31,
|
|||||
|
|
2007
|
2006
|
|||||
|
|
|
|
|||||
|
Building
|
$
|
214,173
|
$
|
186,817
|
|||
|
Computer
and office equipment
|
1,188,353
|
1,052,659
|
|||||
|
Motor
vehicles
|
170,999
|
181,622
|
|||||
|
|
1,573,525
|
1,421,098
|
|||||
|
Less:
Accumulated depreciation
|
(913,699
|
)
|
(692,388
|
)
|
|||
|
|
$
|
659,826
|
728,710
|
||||
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
8 - LONG TERM INVESTMENTS
|
|
December
31,
|
December
31,
|
|||||
|
|
2007
|
2006
|
|||||
|
|
|
|
|||||
|
Equity
investments
|
$
|
353,776
|
$
|
-
|
|||
|
Cost
investments
|
4,476,934
|
4,322,289
|
|||||
|
|
|||||||
|
|
$
|
4,830,710
|
4,322,289
|
||||
F-16
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.
In
October 2004, the Company invested $36,232 in a privately held PRC company,
Huntington Network Technologies (Beijing) Co., Ltd. (“HNTB”), for a 30% equity
interest. The investment was made through the Company’s subsidiary, BFHX. The
investment in HNTB is accounted for under the equity method of accounting due
to
the Company’s significant influence over the operational and financial policies
of HNTB. For the year ended December 31, 2007 and year ended December 31, 2006,
the Company did not receive any distributions from HNTB’s net results, as the
investment was impaired in full in 2005 of $37,516 and the company was
deregistered.
On
October 24, 2005, the Company set up China Liquid Chemical Exchange Company
Limited, a limited liability company in PRC, and shares the risk and rewards
up
to the equity interest of 17.5%. The consideration is made in 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 SOP 78-9. As of December 31, 2007 and 2006, the Company’s share of
the joint venture’s profit (loss) was $212,385 and ($1,816), respectively.
On
October 3, 2006, the Company acquired 22.73% of registered capital in Guangxi
Caexpo International Trade and Logistics Co., Ltd. (“Guangxi Caexpo”), a private
held PRC company, from Statelink International Group, Ltd., a company
incorporated in the British Virgin Islands (“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 at cost because it does not have the ability
to exercise significant influence over Guangxi Caexpo; in fact, Guangxi Caexpo’s
strategic and business decisions are dominated by other major
shareholders.
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), but the
software has not yet been deployed to Wuxi as of December 31, 2007. 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 2.5%
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 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.
As of
December 31, 2007, BGXF did not commence operations.
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.
NOTE
9 - GOODWILL
Goodwill
represents the excess of the acquisition cost of Beijing Slait Science &
Technology Development Limited Co. (“Slait”) over the estimated fair value of
net assets acquired as of August 27, 2001 as described in Note 1.
F-17
The
acquisition was completed after June 30, 2001, and no amortization of goodwill
was necessary in accordance with SFAS No. 142 “Goodwill and other Intangible
Assets.”
However,
in the quarter ended June 30, 2002, the closing trading price of the Company’s
common stock had fallen to $0.05 per share, which indicated that there might
be
a potential impairment of goodwill since January 1, 2002. Therefore, the Company
performed an additional impairment test as of June 30, 2002. As a result of
the
impairment test performed, which was based on the fair value of the Company
as
determined by the trading price of the Company’s common stock, an impairment of
$5,308,760 was recorded in the quarter ended June 30, 2002. As the closing
trading price of the Company’s common stock as of December 31, 2002 had fallen
to $0.04 per share, a total impairment of $6,966,546 was recorded for the year
ended December 31, 2002.
Since
December 31, 2003, the Company completed the annual impairment test at December
31 of each year. Based on the result of the first step of the test, the Company
believes that there was no further impairment of goodwill as of December 31,
2003, 2004, 2005, 2006, and 2007.
NOTE
10 - OTHER PAYABLES AND ACCRUED EXPENSES
|
|
December
31,
|
December
31,
|
|||||
|
|
2007
|
2006
|
|||||
|
|
|
|
|||||
|
Other
payables
|
$
|
161,846
|
$
|
352,796
|
|||
|
Accrued
salaries & wages
|
141,073
|
152,632
|
|||||
|
Other
accrued expenses
|
447
|
43,996
|
|||||
|
|
|||||||
|
|
$
|
303,366
|
$
|
549,424
|
|||
NOTE
11 - MINORITY INTEREST
The
minority interest balance of $269,772 represents cash provided by minority
shareholders of NNBCE.
NOTE
12 - INCOME TAX
According
to the relevant PRC tax rules and regulations, FTCL and BFHX, 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 State Tax Bureau respectively, 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
December 31, 2007, 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
December 31, 2007, BFHX was entitled to an EIT rate of 7.5%.
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.
F-18
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 December 31, 2007, 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.
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 will take effect on January 1, 2008. Beginning on that date, the EIT
rate
is expected to gradually increase to the standard rate of 25% over a five-year
transition period. However, the New Corporate Income Tax Law does not specify
how the existing preferential tax rate will gradually increase to the standard
rate of 25%. Also, under the New Corporate Income Tax Law, certain high
technology enterprises will continue to be entitled to a reduced tax rate of
15%. However, the implementation rules regarding the preferential tax policies
(e.g. the details on how the taxpayer can qualify as a high-tech enterprise
under the New Corporate Income Tax Law) have yet to be made public.
Consequently, the Company is not able to make an estimate of the expected
financial effect of the New Corporate Income Tax Law on its deferred tax assets
and liabilities. The expected financial effect, if any, will be reflected in
the
Company's 2007 annual financial statements. 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.
Reconciliation
between the provision for income taxes computed by applying the statutory tax
rate in Mainland China to income before income taxes and the actual provision
for income taxes is as follows:
|
YE
2007
|
|
YE
2006
|
|
||||
|
|
|
USD
|
|
USD
|
|||
|
Provision
of income taxes at statutory tax rate of 15%
|
227,725
|
45,825
|
|||||
|
Tax
holidays and concessions
|
(18,214
|
)
|
(88,754
|
)
|
|||
|
Effect
of different tax rate of a subsidiary operating in Hong
Kong
|
(11,115
|
)
|
(1,917
|
)
|
|||
|
Permanent
difference
|
7,066
|
(11,397
|
)
|
||||
|
Increase
in valuation allowance
|
(186,816
|
)
|
55,961
|
||||
|
Others
|
91
|
283
|
|||||
|
Effective
tax
|
18,737
|
-
|
|||||
NOTE
13 - 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 $98,692 and $210,329 for the years ended December
31, 2007 and 2006, respectively.
NOTE
14 - COMMITMENTS AND CONTINGENCIES
Operating
Lease Commitment
During
the years ended December 31, 2007 and 2006, the Company incurred lease expenses
amounting to $489,583 and $545,850 respectively. As of December 31, 2007 and
2006, the Company had commitments under non-cancelable operating leases,
requiring annual minimum rentals as follows:
|
|
December
31,
|
December
31,
|
|||||
|
|
2007
|
2006
|
|||||
|
January
1, 2007 to December 31, 2007
|
$
|
-
|
$
|
164,309
|
|||
|
January
1, 2008 to December 31, 2008
|
351,289
|
3,227
|
|||||
|
January
1, 2009 to December 31, 2009
|
111,750
|
-
|
|||||
|
January
1, 2008 to December 31, 2010
|
47,931
|
||||||
|
January
1, 2010 to December 31, 2011
|
393
|
||||||
|
|
|||||||
|
|
$
|
511,363
|
$
|
167,536
|
|||
NOTE
15 - 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.
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
|
||||
|
|
|||||||
|
Fully
vested and exercisable at December 31, 2007
|
200,000
|
$
|
0.10
|
||||
F-19
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 was 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 of the December 2006 Options, 400,000 of the June
2009
Options, 130,000 of the June 2007 Options, 626,000 of the December 2006 Options
and 200,000 of the June 2009 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.
The
following table summarizes the cumulative activities up to December 31, 2007
of
the options issued under the 2002 Plan with different expiration
dates:
|
|
Granted
|
Exercised
|
Forfeited
or
Cancelled
|
Outstanding
at
December
31, 2007
|
|||||||||
|
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
|
400,000
|
0
|
400,000
|
|||||||||
|
|
3,315,000
|
1,048,500
|
1,866,500
|
400,000
|
|||||||||
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
|
%
|
||||
F-20
NOTE
16 - CONCENTRATION OF CUSTOMERS
During
the year, the following customers accounted for more than 10% of total
sales:
|
Years
Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Net
sales derived from -
Customer A
|
2,969,259
|
4,244,266
|
|||||
|
|
|||||||
|
-
Customer B
|
4,885,231
|
721,087
|
|||||
|
|
|||||||
|
-
Customer C
|
*
|
*
|
|||||
|
|
|||||||
|
%
to total net sales -
Customer A
|
33
|
%
|
61
|
%
|
|||
|
|
|||||||
|
-
Customer B
|
54
|
%
|
10
|
%
|
|||
|
|
|||||||
|
-
Customer C
|
*
|
*
|
|||||
|
|
|||||||
|
Account
receivable from - Customer A
|
80,933
|
736,654
|
|||||
|
|
|||||||
|
-
Customer B
|
361,203
|
842,062
|
|||||
|
|
|||||||
|
-
Customer C
|
515,119
|
*
|
|||||
|
|
|||||||
|
%
to total accounts receivable - Customer A
|
*
|
39
|
%
|
||||
|
|
|||||||
|
-
Customer B
|
23
|
%
|
45
|
%
|
|||
|
-
Customer C
|
33
|
%
|
*
|
||||
*
less
than 10%
F-21
Note
17 - SUBSEQUENT EVENT
On
December 24, 2007, our Board of Directors and the holders of a majority of
the
outstanding capital stock of the Company adopted and approved resolutions to
effect a one-for-twenty (1-for-20) reverse stock split of the Company’s
outstanding shares of common stock (the “Reverse Split”). The Reverse Split took
effective upon the filing of the Company’s Certificate of Amendment to its
Articles of Incorporation with the Nevada Secretary of State on March 7, 2008,
and in connection therewith, and our stock symbol has changed from “FRLK.OB” to
“FLSW.OB”.
Immediately
before and following the Reverse Split, the number of shares of the Company’s
common stock was as follows (subject to slight adjustment for rounding of
fractional shares):
|
|
Common
Stock Outstanding
|
Authorized
Common
Stock
|
|||||
|
Pre
Reverse Split
|
92,821,707
|
200,000,000
|
|||||
|
1
for 20 Reverse Split
|
4,641,085
|
200,000,000
|
|||||
F-22
Item
8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
As
reported in a Form 8-K Current Report filed with the Commission on January
16,
2008, the Company changed its independent accountants from BDO McCabe Lo
Limited, Certified Public Accountants (“BDO”) to Kenne Ruan, CPA, P.C.,
effective January 16, 2006.
Item
8A.
Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
Our
management evaluated our disclosure controls and procedures (as defined in
Rule
13a-15(e) or Rule 15a-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) and internal control over financial reporting. The
evaluation was conducted under the supervision and with the participation of
our
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the
effectiveness of the design and operation of our disclosure controls and
procedures (“Disclosure Controls”) as of the end of the period covered by this
report pursuant to Rule 13a-15 of the Exchange Act. Based on this Evaluation,
our CEO and CFO concluded that our Disclosure Controls were effective as of
the
end of the period covered by this report. In addition, no change in internal
control over financial reporting occurred during the year ended December 31,
2007, that has materially affected, or is reasonably likely to materially
affect, such internal control over financial reporting. It should be noted
that
any system of controls is based in part upon certain assumptions designed to
obtain reasonable (and not absolute) assurance as to its effectiveness, and
there can be no assurance that any design will succeed in achieving its stated
goals. Notwithstanding this caution, the CEO and CFO have reasonable assurance
that the disclosure controls and procedures were effective as of December 31,
2007.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. The Company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States of America.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with internal control policies or procedures may deteriorate.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2007. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal
Control - Integrated Framework.
Management’s assessment included evaluating the design of the Company’s internal
control over financial reporting and testing of the operational effectiveness
of
the Company’s internal control over financial reporting. Based on our
assessment, we concluded that, as of December 31, 2007, the Company’s internal
control over financial reporting was effective based on the criteria issued
by
COSO in Internal
Control - Integrated Framework.
This
report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.
29
Item
8B. Other Information.
None.
30
PART
III
Item
9. Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(A) of the Exchange
Act.
As
of
December 31, 2007 and as of the date of the filing of this report, the directors
and executive officers of the Company, their ages, positions in the Company,
the
dates of their initial election or appointment as director or executive officer,
and the expiration of the terms as directors (if applicable) were as
follows:
|
Name
|
Age
|
Position
|
Since
|
|||
|
Yi
He
|
41
|
Chief
Executive Officer, Chairman of the Board of Directors
|
August
2001
|
|||
|
Hongkeung
Lam
|
55
|
Chief
Financial Officer, Chief Accounting Officer, Secretary and
Director
|
August
2001
|
|||
|
Guoliang
Tian
|
68
|
Director
|
May
2003
|
|||
|
Yu
Fang
|
61
|
Director
|
May
2003
|
|||
|
Zhenying
Sun
|
51
|
Director
|
November
2006
|
The
Company's directors hold office until their successors are elected and
qualified. The Company's officers are appointed annually by the Board of
Directors and serve at the pleasure of the Board.
Yi
He
has been
a director of the Company since August 2001, and the Chief Executive Officer
since May 2003. Mr. He is the founder of Beijing SLAIT Science & Technology
Development Limited Co., where he served as Chairman and President from January
1998 to August of 2001. From March 1993 to January 1998, Mr. He was the
President of Beijing Sunny Computer System Engineering Co. Mr. He has a Master
Degree in Computer Science from Peking University.
Hongkeung
Lam
has been
the Chief Financial Officer, Chief Accounting Officer, Secretary and a director
of the Company since August 2001. From July 2000 to August 2001, Mr. Lam was
the
Chairman of Beijing Hi Sun In Soft Information Technology Ltd. From June 1998
to
June 2000, Mr. Lam was the Chairman and President of Beijing Jinshili
Information Technology Ltd. From 1992 to February 1998, Mr. Lam was the Manager
of Beijing office of Taiwan Acer Computer (Far East) Co.
Guoliang
Tian
has been
a director of the Company since May 2003. Currently, Mr. Tian is a professor
with the Institute of Remote Sensing Applications at the Chinese Academy of
Sciences, where he has been employed since 1986, and he is in charge of the
study of natural disaster monitoring and assessment. His areas of expertise
and
studies involve the use of remote sensing data to research and monitor
geographic and atmospheric changes. He has published 105 papers and 4 books.
In
1965, Mr. Tian received a degree in physics from Jilin University of China.
Yu
Fang
has been
a director of the Company since May 2003. Currently Mr. Fang is a professor
at
Peking University, where he has been employed since 1987. He has served as
the
Vice Director of the Institute of Remote Sensing and Geographic Information
System at Peking University since 2001. From 1982 until 2000, he worked in
the
Department of Computer Science & Technology at Peking University, and served
as Vice Chairman of the Department of Computer Science & Technology at
Peking University from 1987 to 1999. His areas of expertise and studies are
software engineering, geographic information systems, management information
systems, and parallel processing and distribution systems. He has written 68
articles and 5 books. In 1982, Mr. Fang received a Masters Degree in Computer
Science at Peking University after graduating from the Department of Mathematics
at Peking University in 1968.
31
Zhenying
Sun
has been
a director of the Company since November 2006. Ms. Sun is currently the
President of New West International, Inc., a real estate development and trading
company, and she has held this position since 2001. Ms. Sun is also a director
of Statelink International Group, Inc. From 2003 until the present, Ms. Sun
has
also served as the Finance Director of Nanning New West Property &
Investment Ltd. Ms. Sun graduated with a degree in accounting from Beijing
Xicheng Finance & Trade School in 1990. Ms. Sun also graduated with a degree
in accounting from the Machine Industry Management Staff College, which she
attended from 1990 to 1992.
Audit
Committee and Audit Committee Financial Expert Disclosure
The
Company does not have a separately designated standing audit committee at this
time because it is not required to do so. Accordingly, the Company does not
have
an audit committee financial expert.
Code
of Ethics
On
August
3, 2004, the Board of Directors established a written code of ethics that
applies to the Company’s senior executive and financial officers. A copy of the
code of ethics is posted on the Corporation’s web-site at
www.forlink.com.
Compliance
With Section 16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Securities Exchange Act of 1934 requires the Company's officers
and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (“SEC”). Officers,
directors, and greater than 10% shareholders are required by SEC regulation
to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on its review of copies of such reports received or written
representations from certain reporting persons, the Company believes that,
during the year ended December 31, 2007,
all
Section 16(a) filing requirements applicable to its officers, directors and
ten
percent shareholders were in compliance with SEC regulations.
32
Item
10. Executive
Compensation.
The
following summary compensation table sets forth the aggregate compensation
awarded to, earned by, or paid to the chief executive officer, and other
executive officers whose annual compensation exceeded $100,000, for the fiscal
year ended December 31, 2007 and 2006:
|
SUMMARY
COMPENSATION TABLE
|
||||||||||||||||||||||||||||
|
Name
and Principal Position
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
Nonqualified
Deferred Compensation Earnings
($)
|
|
All
Other Compensation
($)
|
|
Total
($)
|
|||||||||||
| Yi He, Chief Executive |
2007
|
108,105
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
108,105
|
|||||||||||||||||||
|
Officer
and Director1
|
2006
|
18,566
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
18,566
|
|||||||||||||||||||
| 1 |
Yi
He became the Company’s Chief Executive Officer on May 15, 2003. Mr. He is
not compensated for his services as a director of the Company.
|
Outstanding
Equity Awards at Fiscal Year-End Table
|
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
||||||||||||||||||||||||||||
|
OPTION
AWARD
|
STOCK
AWARD
|
|||||||||||||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexercised Options
(Exercisable)
(#)
|
|
Number
of Securities Underlying Unexercised Options
(Unexercisable)
(#)
|
|
Equity
Incentive Plan Awards: Number
of Securities Underlying Unexercised Unearned Options
(#)
|
|
Option
Exercise Price
($)
|
|
Option
Exercise Date
|
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)
|
|
Equity
Incentive Plan Awards
Number
of Unearned Shares, Units or Other Rights That Have Not
Vested
(#)
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested
|
|||||||||||
|
Yi
He
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||||||||
Employment
Contracts
There
are
no formal employment agreements with any of the Company’s executive
officers.
Compensation
of Directors
The
Company paid no compensation to its directors for any services provided as
a
director during the year ended December 31, 2007. There are no other formal
or
informal understandings or arrangements relating to compensation; however,
the
directors may be reimbursed for all reasonable expenses incurred by them in
conducting the Company’s business. These expenses would include out-of-pocket
expenses for such items as travel, telephone, and postage. For the fiscal year
2007, none of the directors received reimbursement payments from the Company.
33
Employee
Benefit and Consulting Services Compensation Plans
As
of
December 31, 2007, the Company had one Employee Benefit and Consulting Services
Compensation Plans in effect:
On
August
16, 2002, the Company adopted an employee benefit and consulting services
compensation plan entitled the Forlink Software Corporation, Inc. 2002 Stock
Plan. The plan covers up to 8,000,000 shares of common stock. The plan has
not
previously been approved by security holders.
Under
each plan, the Company may issue common stock and/or options to purchase common
stock to certain officers, directors and employees and consultants of the
Company and its subsidiaries. The purpose of each plan is to promote the best
interests of the Company and its shareholders by providing a means of non-cash
remuneration to eligible participants who contribute to operating progress
and
earning power of the Company. Each plan is administered by the Company’s Board
of Directors or a committee thereof which has the discretion to determine from
time to time the eligible participants to receive an award; the number of shares
of stock issuable directly or to be granted pursuant to option; the price at
which the option may be exercised or the price per share in cash or cancellation
of fees or other payment which the Company or its subsidiaries is liable if
a
direct issue of stock and all other terms on which each option shall be granted.
34
Item
11. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The
number of shares beneficially owned by each director or executive officer is
determined under rules of the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under the SEC rules,
beneficial ownership includes any shares as to which the individual has the
sole
or shared voting power or investment power. In addition, beneficial ownership
includes any shares that the individual has the right to acquire within 60
days.
Unless otherwise indicated, each person listed below has sole investment and
voting power (or shares such powers with his or her spouse). In certain
instances, the number of shares listed includes (in addition to shares owned
directly), shares held by the spouse or children of the person, or by a trust
or
estate of which the person is a trustee or an executor or in which the person
may have a beneficial interest.
|
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of Beneficial Ownership3
|
Percentage
Owned
Beneficially5
|
|||||||
|
Common
Stock
|
Yi
He1
|
1,290,001
|
27.8
|
%
|
||||||
|
Common
Stock
|
Hongkeung
Lam1
|
525,000
|
11.3
|
%
|
||||||
|
Common
Stock
|
Guoliang
Tian1
|
-0-
|
—
|
|||||||
|
Common
Stock
|
Yu
Fang1
|
-0-
|
—
|
|||||||
|
Common
Stock
|
Zhenying
Sun1
|
650,000
|
4 |
14.0
|
%
|
|||||
|
Common
Stock
|
Jing
Zeng2
|
288,000
|
6.2
|
%
|
||||||
|
Common
Stock
|
Statelink
International Group, Ltd.2
|
650,000
|
4 |
14.0
|
%
|
|||||
|
Common
Stock
|
All
officers and directors of the Company as a group (five
persons)
|
|
2,465,001
|
53.1
|
%
|
|||||
1
An
officer and/or director of the Company. The address for each officer and
director is in care of the Company at 9/F Shenzhou Mansion, No. 31 Zhongguancun
Street, Haidian District, Beijing, China.
2
A
beneficial owner of more than five percent of the Company’s common stock. The
address for each beneficial owner is in care of the Company at 9/F Shenzhou
Mansion, No. 31 Zhongguancun Street, Haidian District, Beijing,
China.
3
Unless
otherwise indicated, all shares are directly owned and investing power is held
by the persons named in the table.
4
These
shares of Common Stock are held directly by Statelink International Group,
Ltd.,
of which Ms. Sun is the controlling person and has both voting and dispositive
power over these shares.
5
Based
upon 4,641,098 shares of Common Stock outstanding as of March 11, 2008.
35
Equity
Compensation Plan Information
The
following information concerning the Company’s equity compensation plan is as of
the end of the year ended December 31, 2007:
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
(a)
|
Weighted-average
exercise price of options, warrants and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|||||||
|
Equity
compensation plans approved by security holders
|
N/A
|
N/A
|
N/A
|
|||||||
|
Equity
compensation plans not approved by security holders
|
1,297,000
|
$
|
0.10
|
4,685,000
|
||||||
|
Total
|
1,297,000
|
$
|
0.10
|
4,685,000
|
||||||
As
of
December 31, 2007, the Company had two Employee Benefit and Consulting Services
Compensation Plans in effect:
On
August
16, 2002, the Company adopted an employee benefit and consulting services
compensation plan entitled the Forlink Software Corporation, Inc. 2002 Stock
Plan. The plan covers up to 8,000,000 shares of common stock. The plan has
not
previously been approved by security holders.
Under
each plan, the Company may issue common stock and/or options to purchase common
stock to certain officers, directors and employees and consultants of the
Company and its subsidiaries. The purpose of each plan is to promote the best
interests of the Company and its shareholders by providing a means of non-cash
remuneration to eligible participants who contribute to operating progress
and
earning power of the Company. Each plan is administered by the Company’s Board
of Directors or a committee thereof which has the discretion to determine from
time to time the eligible participants to receive an award; the number of shares
of stock issuable directly or to be granted pursuant to option; the price at
which the option may be exercised or the price per share in cash or cancellation
of fees or other payment which the Company or its subsidiaries is liable if
a
direct issue of stock and all other terms on which each option shall be granted.
Item
12. Certain
Relationships and Related Transactions, and Director
Independence.
Transactions
with Related Person
The
Company, from time to time, received from or made repayments to Mr.
Yi
He, who is a major stockholder and a member of our management. The amounts
due
from/to stockholders do not bear any interest and do not have clearly defined
terms of repayment. The
amounts due from stockholders as of December 31, 2007 and December 31, 2006,
represented travel advances to Mr. Yi He. The
amounts due to stockholders as of December 31, 2007 and December 31, 2006,
represented advances from stockholders.
36
As
a
result of the entry of a Transfer of Right to Invest and Project Cooperation
Agreement with the Company on October 3, 2006, Statelink International Group,
Ltd. acquired 13,000,000 shares of the Company’s restricted common stock, or
13.2% of the Company’s issued and outstanding common stock as of December 31,
2006.
Other
than the transactions described above, we have not entered into any transactions
with our officers, directors, persons nominated for these positions, beneficial
owners of 5% or more of our common stock, or family members of these persons
wherein the amount involved in the transaction or a series of similar
transactions exceeded $120,000.
Director
Independence
The
Company has determined that the following directors are independent under the
independence standards of NASDAQ Marketplace Rule 4200(a)(15): Guoliang Tian,
Yu
Fang and Zhengying Sun. In determining independence, the Board reviews and
seeks
to determine whether directors have any material relationship with the Company,
direct or indirect, which would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director. The Board reviews
business, professional, charitable and familial relationships of the independent
directors in determining independence.
Item
13. Exhibits.
|
Exhibit
Number
|
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 Company’s Form 8-K filed on January 18,
2007)
|
|
|
10.1
|
Forlink
Software Corporation, Inc. Stock Plan dated June 1, 2000. (Incorporated
by
reference to Exhibit 10.1 of the Company’s Registration Statement on Form
S-8 (file no. 333-41700) filed July 19, 2000.)
|
|
|
10.2
|
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.)
|
|
|
10.3
|
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.)
|
|
|
21.1
|
List
of Subsidiaries.
|
37
|
31.1
|
Section
302 Certification by the Corporation’s Chief Executive Officer. (Filed
herewith.)
|
|
|
31.2
|
Section
302 Certification by the Corporation’s Chief Financial Officer. (Filed
herewith.)
|
|
|
32.1
|
Section
906 Certification by the Corporation’s Chief Executive Officer. (Filed
herewith.)
|
|
|
32.2
|
Section
906 Certification by the Corporation’s Chief Financial Officer. (Filed
herewith.)
|
Item
14. Principal Accountant Fees and Services.
Change
of Auditor
The
Company’s preceding principal independent auditor was BDO McCabe Lo Limited,
Certified Public Accountants (“BDO”). BDO performed the audit for the fiscal
year ended December 31, 2006 and it reviewed the Company’s unaudited financial
statements through the quarter ended September 30, 2007. BDO was dismissed
as
the Company’s principal independent auditor effective January 16, 2008. On
January 16, 2008, we engaged Kenne Ruan, CPA, P.C. (“Kenne Ruan”) to audit the
Company’s financial statements for the fiscal year ended December 31, 2007. The
following are the services provided and the amount billed.
Audit
Fees
The
aggregate fees billed for professional services rendered by BDO for reviews
of
the financial statements included in our quarterly reports on Form 10-QSB during
fiscal year 2007 were $32,400. The aggregate fees billed for professional
services rendered by Kenne Ruan for the audit of our 2007 annual financial
statements and the reviews of the financial statements included in our quarterly
reports on Form 10-QSB for fiscal year 2007 were $82,400.
Audit-Related
Fees
There
were no other fees billed by Kenne Ruan during the last two fiscal years for
assurance and related services that were reasonably related to the performance
of the audit or review of the Company’s financial statements and not reported
under “Audit Fees” above.
Tax
Fees
There
were no aggregate fees billed for professional services rendered by Kenne Ruan
for tax compliance services in fiscal years 2007 and 2006.
All
Other Fees
There
were no other fees billed by BDO during the last two fiscal years for products
and services provided by BDO.
Pre-Approval
Policy and Procedures
The
Company’s Board of Directors reviews and approves audit and permissible
non-audit services performed by Kenne Ruan, as well as the fees charged by
Kenne
Ruan for such services. In its review of non-audit service fees and its
appointment of Kenne Ruan as the Company’s independent accountants, the Board of
Directors considered whether the provision of such services is compatible with
maintaining Kenne Ruan’s independence. All of the services provided and fees
charged by Kenne Ruan were pre-approved by the Board of Directors.
[SIGNATURES
PAGE FOLLOWS]
38
SIGNATURES
In
accordance with Section 13 or 15(d) 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.
(Registrant)
|
||
| |
|
|
| Date: March 31, 2008 | By: | /s/ Yi He |
|
Yi
He
Chief
Executive Officer
|
||
| Date: March 31, 2008 | By: | /s/ Hongkeung Lam |
|
Hongkeung
Lam
Chief
Financial and Accounting
Officer
|
||
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
| By: | /s/ Yi He | |
|
Yi
He, Director
|
||
| Date: March 31, 2008 | ||
| By: | /s/ Hongkeung Lam | |
|
Hongkeung
Lam, Director
|
||
| Date: March 31, 2008 | ||
| By: | /s/ Guoliang Tian | |
|
Guoliang
Tian, Director
|
||
| Date: March 31, 2008 | ||
| By: | /s/ Yu Fang | |
|
Yu
Fang, Director
|
||
| Date: March 31, 2008 | ||
| By: | /s/ Zhenying Sun | |
|
Zhenying
Sun, Director
|
||
| Date: March 31, 2008 | ||
39