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FORLINK SOFTWARE CORP INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Edgar Glimpses Via Acquire Media NewsEdge)
Statements contained herein that are not historical facts are forward-looking
statements as that term is defined by the Private Securities Litigation Reform
Act of 1995. Although we believe that the expectations reflected in such forward
looking statements are reasonable, the forward looking statements are subject to
risks and uncertainties that could cause actual results to differ from those
projected. We caution investors that any forward looking statements made by us
are not guarantees of future performance and that actual results may differ
materially from those in the forward-looking statements. Such risks and
uncertainties include, without limitation: well-established competitors who have
substantially greater financial resources and longer operating histories,
regulatory delays or denials, ability to compete as a company in a highly
competitive market, and access to sources of capital.
The following discussion and analysis should be read in conjunction with our
financial statements and notes thereto included elsewhere in this Form 10-Q.
Except for the historical information contained herein, the discussion in this
Form 10-Q contains certain forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. The cautionary statements made in this Form 10-Q should be read as
being applicable to all related forward looking statements wherever they appear
in this Form 10-Q. The Company's actual results could differ materially from
those discussed here. We undertake no obligation to update publicly any
forward-looking statements for any reason even if new information becomes
available or other events occur in the future.
Overview
We are a provider of software solutions and information technology services in
China (the "PRC" or "China"). We focus on providing Enterprise Application
Integration (EAI) solutions for large companies in the telecom, finance, and
logistics industries. In May 2004, we launched For-online, which delivers
enterprise applications and services over the Internet to small and medium-sized
enterprises (SMEs) in China. Since its launch, For-Online has become an
important channel for delivering and distributing our products and services to
more customers. In August 2007, we launched our integrated e-business
application platform For-Online 4.0, and based on this platform, we also
released new versions of For-eMarket 3.0 in September 2007, ForCRM in October
2007 and ForOA in October 2007. We released For-eMarketPlace 3.1 in August 2008.
We released For-EAI 5.0 and For-Online 5.0 in June 2009. We released For-eTrade
V1.0 and For-WMS V2.0 in January 2011 and SMS Gateway Management Platform V2.0
in November 2011.
Revenues
Our business includes Forlink's "For-series" brand software system sales such as
ForOSS, ForRMS, For-Mail and their copyright licensing, and "For-series" related
system integration, which consists of hardware sales and other related services
rendered to customers. The following table shows our revenue breakdown by
business line:
Three Months Ended
September 30,
2012 2011
Sales of For-series software $ 666,649 $ 1,224,456
as a percentage of net sales 100 % 100 %
For-series related system integration $ 3,318 $ 3,571
as a percentage of net sales 0 % 0 %
21
As indicated in the foregoing table, sales of For-series software decreased by
45% to $666,649 in the third quarter of 2012 from $1,224,456 in the comparable
quarter of 2011. For-series related system integration as a percentage of net
sales decreased from $3,571 or 0% in the comparable quarter of 2011 to $3,318 or
0% in the third quarter of 2012. The gross margins for the three months ended
September 30, 2012 and 2011 were 64% and 28%, respectively.
Generally, we offer our products and services to our customers on a
total-solutions basis. Most of the contracts we undertake for our customers
include revenue from hardware and software sales and professional services.
Sources of Revenue
Hardware Revenue: Revenues from sales of products are mainly derived from sales
of hardware. Normally, the hardware that we procure is in connection with
total-solutions basis system integration contracts.
Service Revenue: Service revenue consists of revenue for the professional
services we provide to our customers for network planning, design and systems
integration, software development, modification and installation, and related
training services.
Software License Revenue: We generate revenue in the form of fees received from
customers to whom we issue licenses for the use of our software products over an
agreed period of time.
Cost of Revenue
Our cost of revenue includes hardware costs, software-related costs and
compensation and travel expenses for the professionals involved in the relevant
projects. Hardware costs consist primarily of third party hardware costs. We
recognize hardware costs in full upon delivery of the hardware to our customers.
Software-related costs consist primarily of packaging and written manual
expenses for our proprietary software products and software license fees paid to
third-party software providers for the right to sublicense their products to our
customers as part of our solutions offerings. The costs associated with
designing and modifying our proprietary software are classified as research and
development expenses as such costs are incurred.
Operating Expenses
Operating expenses are comprised of selling expenses, research and development
expenses and general and administrative expenses.
Selling expenses include compensation expenses for employees in our sales and
marketing departments, third party advertising expenses, as well as sales
commissions and sales agency fees.
Research and development expenses relate to the development of new software and
the modification of existing software. We expense such costs as they are
incurred.
General and administrative expenses include salaries and wages in the management
section, office expenses, and traveling expenses.
Taxes
According to the relevant PRC tax rules and regulations, FTCL, is recognized as
New Technology Enterprises operating within a New and High Technology
Development Zone, are entitled to an Enterprise Income Tax ("EIT") rate of 15%.
Pursuant to approval documents dated September 23, 1999 and August 2, 2000
issued by the Beijing Tax Bureau and the State Tax Bureau respectively, FTCL
received full exemption from EIT for fiscal years 1999 through 2002, and a 50%
EIT reduction at the rate of 7.5% for fiscal years 2003 through 2005. As of
September 30, 2012, FTCL was entitled to an EIT rate of 15%.
22
Pursuant to an approval document dated January 19, 2004 issued by the State Tax
Bureau, BFHX received full exemption from EIT for fiscal years 2004 through
2006. As of September 30, 2012, BFHX was entitled to an EIT rate of 25%.
Hong Kong profits tax is calculated at 16.5% on the estimated assessable profits
of FTHK for the period. The EIT rates for FTCD and NNBCE range from 9% to 33%.
Revenue from the sale of hardware procured in China together with the related
system integration is subject to a 17% value added tax ("VAT"). However,
companies that develop their own software and have the software registered are
generally entitled to a VAT refund. If the net amount of the VAT payable exceeds
3% of software sales, the excess portion of the VAT is refundable upon our
application to the tax authority. This policy is effective until 2012. Changes
in Chinese tax laws may adversely affect our future operations.
Foreign Exchange
Our functional currency is the U.S. Dollar ("US$"), and our financial records
are maintained and financial statements prepared in US$. The functional currency
of FTHK is the Hong Kong Dollar ("HK$") and the financial records are maintained
and the financial statements prepared in HK$. The functional currency of Slait,
FTCL, BFHX and FTCD is the Renminbi ("RMB") and their financial records are
maintained and the financial statements are prepared in RMB.
Foreign currency transactions during this reporting period are translated into
each company's denominated currency at the exchange rates ruling at the
transaction dates. Gains and losses resulting from foreign currency transactions
are included in the consolidated statement of operations. Assets and liabilities
denominated in foreign currencies at the balance sheet date are translated into
each company's denominated currency at year-end exchange rates. All exchange
differences are dealt with in the consolidated statements of operations.
The financial statements of our operations based outside of the United States
have been translated into US$ under the guidance of the Foreign Currency Matters
Topic of the FASB Accounting Standards Codification. We have determined that the
functional currency for each of the Company's foreign operations is its
applicable local currency. When translating functional currency financial
statements into US$, period-end exchange rates are applied to the consolidated
balance sheets, while average period rates are applied to consolidated
statements of operations. Translation gains and losses are recorded in
translation reserve as a component of shareholders' equity.
Exchange rates among US$, HK$ and RMB had minimal fluctuations during the
periods presented. The applicable rates as of September 30, 2012 are US$1:
HK$7.785: RMB6.297.The weighted average rates applicable for the three months
ended September 30, 2012 are US$1: HK$7.788: RMB6.336.
September 30, 2012
Applicable Rates $1 US = 7.785 HK 1 US = 6.297 RMB
Weighted Average Rates : Three Months Ended
September 30, 2012 $1 US = 7.788 HK 1 US = 6.336 RMB
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.
23
Revenue Recognition
We generally provide services under multiple element arrangements, which include
software license fees, hardware and software sales and system integration
services including consulting, implementation, and software maintenance. We
evaluate revenue recognition on a contract-by-contract basis as the terms of
each arrangement vary. The evaluation of the contractual arrangements often
requires judgments and estimates that affect the timing of revenue recognized in
the statements of operations. Specifically, we may be required to make judgments
about:
· whether the fees associated with our products and services are fixed or
determinable;
· whether collection of our fees is reasonably assured;
· whether professional services are essential to the functionality of the related
software product;
· whether we have the ability to make reasonably dependable estimates in the
application of the percentage-of-completion method; and
· whether we have verifiable objective evidence of fair value for our products
and services.
We recognize revenues in accordance with the provisions of ASC 985, "Software
Revenue Recognition." ASC 985 requires among other matters, that there be a
signed contract evidencing an arrangement exists, delivery has occurred, the fee
is fixed or determinable, and collectability 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 ASC 605-25, "Revenue Arrangements with Multiple Deliverables".
Under ASC 605-25, the Company recognizes revenue from the multiple-deliverables
that have value to the customer on a stand-alone basis. Deliverables in an
arrangement that do not meet the separation criteria in ASC 605-25 are treated
as one unit of accounting for purposes of revenue recognition.
In the case of maintenance revenues, vendor-specific objective evidence, or
VSOE, of fair value is based on substantive renewal prices, and the revenues are
recognized ratably over the maintenance period.
In the case of consulting and implementation services revenues, where VSOE is
based on prices from stand-alone sale transactions, the revenues are recognized
as services that are performed pursuant to ASC 985-605-25.
For hardware transactions where software is incidental, the Company does not
apply separate accounting guidance to the hardware and software elements. The
Company applies the provisions of ASC 985-605-15. Per ASC 985-605-15, if the
software is considered not essential to the functionality of the hardware, then
the hardware is not considered "software related" and is excluded from the scope
of ASC 985-605-15. Such sale of computer hardware is recognized as revenue on
the transfer of risks and rewards of ownership, which generally coincides with
the time when the goods are delivered to customers and title has passed.
Remote hosting services, where VSOE is based upon consistent pricing charged to
customers based on volumes and performance requirements on a stand-alone basis
and substantive renewal terms, are recognized ratably over the contract term as
the services are performed. The remote hosting arrangements generally require
the Company to perform one-time set-up activities and include a one-time set-up
fee. This one-time set-up fee is generally paid by the customer at the time of
contract execution. The Company has determined that these set-up activities do
not constitute a separate unit of accounting, and accordingly, the related
set-up fees are recognized protractedly over the term of the contract.
24
The Company is considering the applicability of ASC 985-605-55, "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, ASC
985-605 would not apply to these contracts in accordance with ASC 985-605-55.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740 "Accounting for
Income Taxes." Under ASC 740, deferred tax liabilities or assets at the end of
each period are determined using the tax rate expected to be in effect when
taxes are actually paid or recovered. Valuation allowances are established when
it is more likely than not that some or all of the deferred tax assets notbe
realized.
In July, 2006, the FASB ASC 740-10-25, "Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109." This Interpretation
provides guidance for recognizing and measuring uncertain tax positions, as
defined in ASC 740, "Accounting for Income Taxes." ASC 740-10-25 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.
Allowance for Doubtful Accounts
We record an allowance for doubtful accounts based on specifically identified
amounts that the Company believes to be uncollectible. We have a limited number
of customers with individually large amounts due at any given balance sheet
date. Any unanticipated change in one of those customers' credit worthiness or
other matters affecting the collectability of amounts due from such customers
could have a material effect on the results of operations in the period in which
such changes or events occur. After all attempts to collect a receivable have
failed, the receivable is written off against the allowance.
Recent Issued Accounting Guidance
In May 2011, the FASB issued an authoritative pronouncement on fair value
measurement. The guidance is the result of joint efforts by the FASB and the
International Accounting Standards Board to develop a single, converged fair
value framework. The guidance is largely consistent with existing fair value
measurement principles in GAAP. The guidance expands the existing disclosure
requirements for fair value measurements and makes other amendments. The
guidance is to be applied prospectively and is effective for interim and annual
periods beginning after December 15, 2011 for public entities. Early application
by public entities is not permitted. The adoption of this guidance to have a
significant effect on our consolidated financial statements. In June 2011, the
FASB issued an authoritative pronouncement to require an entity to present the
total of comprehensive income, the components of net income, and the components
of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. In both
choices, an entity is required to present each component of net income along
with total net income, each component of other comprehensive income along with a
total for other comprehensive income, and a total amount for comprehensive
income. The guidance eliminates the option to present the components of other
comprehensive income as part of the statement of changes in stockholders'
equity. The guidance does not change the items that must be reported in other
comprehensive income or when an item of other comprehensive income must be
reclassified to net income. The guidance should be applied retrospectively. For
public entities, the guidance is effective for fiscal years and interim periods
within those years, beginning after December 15, 2011. Early adoption is
permitted. In December 2011, the FASB issued an authoritative pronouncement
related to deferral of the effective date for amendments to the presentation of
reclassifications of items out of accumulated other comprehensive income. This
guidance allows the FASB to redeliberate whether to present on the face of the
financial statements the effects of reclassifications out of accumulated other
comprehensive income on the components of net income and other comprehensive
income for all periods presented. While the FASB is considering the operational
concerns about the presentation requirements for reclassification adjustments
and the needs of financial statement users for additional information about
reclassification adjustments, entities should continue to report
reclassifications out of accumulated other comprehensive income consistent with
the presentation requirements in effect before the pronouncement update was
issued in June 2011. We do not expect the adoption of this guidance to have a
significant effect on our consolidated financial statements.
25
In September 2011, the FASB issued an authoritative pronouncement related to
testing goodwill for impairment. The guidance is intended to simplify how
entities, both public and nonpublic, test goodwill for impairment. The guidance
permits an entity to first assess qualitative factors to determine whether it is
"more likely than not" that the fair value of a reporting unit is less than its
carrying amount as a basis for determining whether it is necessary to perform
the two-step goodwill impairment test. The guidance is effective for annual and
interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011. Early adoption is permitted, including for annual and interim
goodwill impairment tests performed as of a date before September 15, 2011 if a
public entity's financial statements for the most recent annual or interim
period have not yet been issued. We do not expect the adoption of this
pronouncement to have a significant effect on our consolidated financial
statements.
In December 2011, the FASB has issued an authoritative pronouncement related to
Disclosures about Offsetting Assets and Liabilities. The guidance requires an
entity to disclose information about offsetting and related arrangements to
enable users of its financial statements to understand the effect of those
arrangements on its financial position. An entity is required to apply the
amendments for annual reporting periods beginning on or after January 1, 2013,
and interim periods within those annual periods. An entity should provide the
disclosures required by those amendments retrospectively for all comparative
periods presented. We are in the process of evaluating the effect of adoption of
this guidance on our consolidated financial statements.
Consolidated Results of Operations for the Three Months Ended September 30, 2012
and 2011.
The following table sets forth the results of our operations for the periods
indicated:
Three Months Ended Three Months Ended
September 30, 2012 September 30, 2011Net Sales $ 669,967 $ 1,228,027
Cost of Sales (431,786 ) (344,568 )
Gross Profit 238,181 883,459
Selling Expenses (180,061 ) (197,029 )
Research and Development Expenses (222,165 ) (109,794 )
General and Administrative Expenses (377,566 ) (335,519 )
Operating Profit (Loss) (779,792 ) (642,342 )
Other Income - 151
Net Profit (Loss) (521,188 ) 241,386
Gain/Loss Per Share (0.11 ) 0.05
Basic Weighted Average Shares Outstanding 4,651,173 4,651,173
Diluted Weighted Average Shares Outstanding 4,651,173 4,651,173
26
Net Sales
For the three-month period ended September 30, 2012 our revenue was $669,967, a
decrease of approximately 45% from our revenue of $1,228,027 for the comparable
period in 2011. The decrease was mainly due to a decrease in software sales. In
July 2012, the China State Council (the "Council") issued amendments to the
current rules and regulations applicable to China's electronic and online
trading markets. The amendments restricted the bulk-commodities forward-trade
exchange markets, which has directly led to an overall decrease in the demand
for electronic trading software. Although we experienced a decrease in net sales
for the three-month period ended September 30, 2012, we have entered into new
sales contracts and we believe that as a result, our net sales may improve
somewhat over the next couple quarters.
Cost of Sales
Our cost of sales was $431,786 for the three-month period ended September 30,
2012, compared with $344,568 for the same period in 2011. This increase was in
line with increased costs associated with one of our projects.
Gross Profit
For the three-month period ended September 30, 2012, gross profit was $238,181,
representing a decrease of 73% against $883,459 for the comparable period in
2011. This decrease was in line with a decrease in software sales for the
quarter.
Operating Expenses
Total operating expenses were $779,792 for the three-month period ended
September 30, 2012, as compared to $642,342 for the comparable period in 2011,
representing an increase of 21%. The overall increase in operating expenses was
mainly attributable to increases in research and development expenses during the
period.
Selling expenses were $180,061 for the three-month period ended September 30,
2012, representing a decrease of 9% against $197,029 for the comparable period
in 2011. This decrease was primarily due to the decreased number of employees in
our sales department.
Research and development expenses were $222,165 for the three-month period ended
September 30, 2012, compared with $109,794 for the same period in 2011. The
approximate 102% increase was attributable to our efforts in new projects in the
third quarter of 2012.
General and administrative expenses were $377,566 for the three-month period
ended September 30, 2012, as compared to $335,519 for the same period in 2011,
an increase of 13%. The increase was primarily due to office equipment expenses
in the third quarter of 2012.
Operating Profit (Loss)
We recorded an operating loss ($541,611) for the three-month period ended
September 30, 2012 compared to an operating profit of $241,117 for the
three-month period ended September 30, 2011, representing a decrease in
operating profit of 325%. The decrease in operating profit for the third quarter
of fiscal 2012 was due to our decreased gross profit from $883,459 in the
three-month period ended September 30, 2011 to $238,181 for the comparable
period in 2012 and increased operating expenses from $642,342 in the three-month
period ended September 30, 2011 to 779,792 for the comparable period in 2012.
27
Other Income
Our other income is mainly derived from a value added tax ("VAT") refund
associated with our software product sales. Software sales in China are subject
to a 17% VAT. However, companies that develop their own software and have the
software registered are generally entitled to a refund of the VAT. If the net
amount of the VAT payable exceeds 3% of software product sales, then the excess
portion of the VAT is refundable to us upon our application to tax authority.
This policy is effective through 2012. Our other income was zero for the
three-month period ended September 30, 2012, as compared to $151 for the same
period in 2011, representing a decrease of 100% in other income. The significant
decrease was the result of a decrease in VAT refunds that we received from
software product sales.
Consolidated Results of Operations for the Nine Months Ended September 30, 2012
and 2011.
The following table sets forth the results of our operations for the periods
indicated:
Nine Months Ended Nine Months Ended
September 30, 2012 September 30, 2011Net Sales $ 2,173,084 $ 3,022,423
Cost of Sales (1,134,486 ) (1,318,727 )
Gross Profit 1,038,598 1,703,696
Selling Expenses (541,030 ) (729,484 )
Research and Development Expenses (713,984 ) (507,838 )
General and Administrative Expenses (1,022,163 ) (904,917 )
Operating Profit (Loss) (1,238,579 ) (438,543 )
Other Income 8,812 25,423
Net Profit (Loss) (1,287,305 ) (423,435 )
Gain/Loss Per Share (0.14 ) (0.09 )
Basic Weighted Average Shares Outstanding 4,651,173 4,651,173
Diluted Weighted Average Shares Outstanding 4,651,173 4,651,173
Net Sales
For the nine-month period ended September 30, 2012, our revenue was $2,173,084,
a decrease of 28% from our revenue of $3,022,423 for the comparable period in
2011. This decrease in revenue for the nine-month period ended September 30,
2012 compared to the same period ended September 30, 2011 was mainly due to a
decrease in sales of For-series software. In July 2012, the Council issued
amendments to the current rules and regulations applicable to China's electronic
and online trading markets. The amendments restricted the bulk-commodities
forward-trade exchange markets, which has directly led to an overall decrease in
the demand for electronic trading software.
Cost of Sales
Our cost of sales was $1,134,486 in the nine-month period ended September 30,
2012, representing a decrease of 14% from $1,318,727 for the comparable period
in 2011. The decrease in our cost of sales was in line with our overall netsales.
Gross Profit
For the nine-month period ended September 30, 2012, gross profit was $1,038,598,
representing a decrease of 39% from $1,703,696 for the comparable period in
2011. This decrease in our gross profit was in line with a decrease in both the
sales of For-series software and the sales of system integration.
Operating Expenses
Total operating expenses were $2,277,177 in the nine-month period ended
September 30, 2012 compared with $2,142,239 for the nine-month period ended
September 30, 2011, representing steady. The steady in operating expenses in the
first three quarters, of 2012 was mainly attributable to increase in general and
administrative expenses, accompanied with a decrease in selling expenses during
the period.
28
Selling expenses were $541,030 in the nine-month period ended September 30, 2012
representing a decrease of 26% from $729,484 for the comparable period in 2011.
This decrease was primarily due to a decreased marketing fee during the
nine-month period ended September 30, 2011.
Research and development expenses were $713,984 in the nine-month period ended
September 30, 2012 compared with $507,838 in the nine month period ended
September 30, 2011, representing an increase of 41%. The increase in R&D
expenses was due to our increased capital input on research and developmentfor
internal projects.
General and administrative expenses were $1,022,163 in the nine-month period
ended September 30, 2012 compared with $904,917 for the comparable period ended
September 30, 2011, representing an increase of 13%. The increase was primarily
due to office equipment expenses in our Chengdu R&D center.
Operating Profit (Loss)
We recorded an operating loss ($1,238,579) for the nine-month period ended
September 30, 2012, representing an increased loss of 182% from an operating
loss of ($438,543) for the comparable period in 2012. The increase in operating
loss for the first nine months of fiscal 2012 was due to our decreased gross
profit from $1,703,696 in the nine-month period ended September 30, 2011 to
$1,038,598 for the comparable period in 2012 and increased operating expenses
from $2,142,239 in the nine-month period ended September 30, 2011 to 2,277,177
for the comparable period in 2012.
Other Income
Our other income was $8,812 for the nine-month period ended September 30, 2012,
representing a decrease of 65% as compared to $25,423 for the comparable period
in 2011. The decrease was due to a decrease in VAT refunds we received during
the nine-month period ended September 30, 2012.
Liquidity and Capital Resources
For the nine-month period ended September 30, 2012, we recorded a net loss of
$1,287,305, or basic and diluted loss of $0.14 per share, compared to a net loss
of $423,435 or basic and diluted loss of $0.09 per share, for the same period of
2011. Our capital requirements are primarily working capital requirements
related to costs of hardware for network solution projects and costs associated
with the expansion of our business. In order to minimize our working capital
requirements, we generally obtain from our hardware vendors payment terms that
are timed to permit us to receive payment from our customers for the hardware
before our payments to our hardware vendors are due. However, we sometimes
obtain less favorable payment terms from our customers, thereby increasing our
working capital requirements. We have historically financed our working capital
and other financing requirements through careful management of our billing cycle
and, to a limited extent, bank loans.
Our accounts receivable balance at September 30, 2012 was $346,751, as compared
to $203,910 at December 31, 2011. The increase of $142,841 was due to the
receipt of one accounts receivable from one of our major customers.
Our inventory position at the end of the third quarter of fiscal 2012 was
$1,436,689, as compared to $1,157,934 at December 31, 2011. This increase was
mainly due to an increase in the number of projects that were not completed at
the end of the quarter and remain work-in-progress (WIP).
We ended the third quarter of fiscal 2012 with a cash position of $223,143. We
had a negative operating cash flow of $913,993, primarily due to a net loss of
($521,188) in the third quarter of 2012.
29
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 2012.
In June 2012, we signed a bank loan finance contract with China Mingsheng Bank
Ltd. We received a credit of RMB 2,000,000 to meet our working capital. As of
the end of September 30, 2012, the balance of our bank loan was RMB 2,000,000.
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 September 30, 2012, we had not entered into any off-balance sheet
arrangements with any individuals or entities.
Contractual Obligations
As of September 30, 2012, we had commitments under non-cancelable operating
leases requiring annual minimum rental payments as follows:
Date Rent Payment Due
October 1, 2012 to September 30, 2013 $ 283,330
October 1, 2013 to September 30, 2014 $ 15,101
Related Party Transactions
The Company, from time to time, received from or made repayments to one major
stockholder, Mr. He Yi, who is also a management member of the Company. The
amounts due from/to this stockholder do not bear any interest and do not have
clearly defined terms of repayment.
As of September 30, 2012 and December 31, 2011, the amounts due to Mr. He Yi
were $375,043 and $260,470, respectively, representing advances from this
stockholder.
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IP Communications 
Mobile 
Green 
Satellite 
Robotics 
