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U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

þQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2012

 

¨Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  For the transition period from_________ to________.

 

Commission File Number 000-18731

 

Forlink Software Corporation, Inc.

 

(Exact name of small business issuer as specified in its charter)

 

Nevada 98-0398666
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)

 

 

Shenzhou Mansion 9F, ZhongGuanCun South Street, No. 31,

Haidian District, Beijing, China 100081

(Address of principal executive offices and zip code)

 

01186-10 6811 8866

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨

 

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

 

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

 

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

 

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

 

On November 9, 2012, we had 4,651,173 shares of common stock issued and outstanding.

 

 
 

 

FORLINK SOFTWARE CORPORATION, INC.

 

FORM 10-Q

 

INDEX

 

  Page
Number
   
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS ii
   
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited) 1
     
  Consolidated Balance Sheet as of September 30, 2012 2
     
  Consolidated Statements of Operations 3
     
  Consolidated Statements of Cash Flows 4
     
  Notes to the Consolidated Financial Statements as of September 30, 2012  
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation 21
     
Item 4. Controls and Procedures 30
     
PART II. OTHER INFORMATION  
     
Item 6. Exhibits 31
     
SIGNATURES   32

  

i
 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This document contains certain statements of a forward-looking nature. Such forward-looking statements, including but not limited to growth and strategies, future operating and financial results, financial expectations and current business indicators, are based upon current information and expectations and are subject to change based on factors beyond the control of the Company. Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “will,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update this forward-looking information. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this Quarterly Report on Form 10-Q (“Form 10-Q”). No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.

 

ii
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS.

 

The information required by Item 1 begins on the next page.

 

1
 

 

Forlink Software Corporation, Inc.

Consolidated Balance Sheets

(Expressed in US Dollars)

 

   September 30,   December 31, 
   2012   2011 
   (unaudited)     
ASSETS          
           
Current assets          
           
Cash and cash equivalents  $223,143   $1,692,449 
Accounts receivable   346,751    203,910 
Other receivables, deposits and prepayments (Note 3)   453,345    530,018 
Loan receivable   0    0 
Inventories (Note 4)   1,436,689    1,157,934 
Deferred taxes assets   101,865    66,001 
           
Total current assets   2,561,793    3,650,312 
           
Property, plant and equipment (Note 6)   211,576    262,340 
Long term investments (Note 7)   1,360,931    1,074,531 
           
Total assets  $4,134,300   $4,987,183 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities          
Short term borrowings  $317,632   $317,496 
Accounts payable   82,947    56,311 
Amounts due to stockholders (Note 5)   375,043    260,470 
Customer deposits   2,194,077    1,811,937 
Other payables and accrued expenses (Note 8)   523,711    451,464 
Income tax payable   0    0 
Other tax payable   0    0 
Deferred taxes debt   0    0 
           
Total current liabilities  $3,493,410   $2,897,678 
           
Stockholders’ equity          
Common stock, par value $0.001 per share; 200,000,000 and 200,000,000 shares authorized; 4,966,173 and 4,966,173 shares issued and 4,651,173 and 4,651,173 shares outstanding, respectively  $99,322   $99,322 
Treasury stock   (163,800)   (163,800)
Additional paid-in capital   10,040,675    10,195,693 
Accumulated losses   (10,775,964)   (9,488,659)
Accumulated other comprehensive income   1,440,657    1,397,824 
Non-controlling interest        49,125 
Total stockholders’ equity  $640,890   $2,089,505 
           
Total liabilities and stockholders’ equity  $4,134,300   $4,987,183 

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

2
 

 

Forlink Software Corporation, Inc.

Consolidated Statements of Operations

(unaudited)

 

(Expressed in US Dollars)

   Three Months ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
                 
Net sales  $669,967    1,228,027    2,173,084    3,022,423 
Cost of sales   (431,786)   (344,568)   (1,134,486)   (1,318,727)
                     
Gross profit   238,181    883,459    1,038,598    1,703,696 
                     
Selling expenses   (180,061)   (197,029)   (541,030)   (729,484)
Research and development expenses   (222,165)   (109,794)   (713,984)   (507,838)
General and administrative expenses   (377,566)   (335,519)   (1,022,163)   (904,917)
                     
Total operating expenses   (779,792)   (642,342)   (2,277,177)   (2,142,239)
                     
Operating profit/(loss)  $(541,611)   241,117    (1,238,579)   (438,543)
                     
Loss from equity method investee   -    (6,975)   -    (41,010)
Income from cost method investee   -    -    -    - 
Interest income   682    1,219    2,024    4,934 
Interest expenses   (6,562)   -    (16,263)   - 
Impairment of assets   142    -    (78,910)   - 
                     
Other income/(loss), net   -    151    8,812    25,423 
                     
Profit / (Loss) before tax  $(547,349)   235,512    (1,322,916)   (449,196)
                     
Income tax   26,161    (5,288)   35,611    (9,049)
Non-controlling interest   -    (11,162)   -    (34,810)
                     
Net profit/(loss)  $(521,188)   241,386    (1,287,305)   (423,435)
                     
Profit/(loss) per share   (0.11)   0.05    (0.14)   (0.09)
                     
Weighted average common shares outstanding -basic and diluted   4,651,173    4,651,173    4,651,173    4,651,173 

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

3
 

 

Forlink Software Corporation, Inc.

Consolidated Statements of Cash Flows

Increase in Cash and Cash Equivalents

(unaudited)

 

(Expressed in US Dollars)

   Nine Months Ended 
   September 30, 
   2012   2011 
Cash flows from operating activities          
Net profit/(loss)  $(1,287,305)  $(423,435)
Adjustments to reconcile net profit/(loss) to net cash provided by/(used in) operating activities Non-controlling interest   -    (34,810)
(Gain)/loss from write-off of property, plant and equipment          
Depreciation of property, plant and equipment   79,861    93,538 
Interest expenses   -    - 
(Income)/Loss from equity method investee   -    41,010 
Impairment of assets   78,910    - 
Effect of deferred taxes   (35,836)   3,920 
           
Change in:          
Accounts receivables   (142,754)   (404,832)
Other receivables, deposits and prepayments   76,900    (160,117)
Inventories   (278,258)   (364,602)
Accounts payable   26,612    (445,293)
Amounts due to stockholders   114,461    (390,197)
Customer deposits   381,363    35,895 
Other payables and accrued expenses   72,053    (119,197)
Income tax payable   -    9,049 
Other taxes payable   -    (22,301)
           
Net cash provided by/(used in) operating activities   (913,993)   (2,181,372)
           
Cash flows from investing activities          
Purchase of long term investment   (365,276)   - 
Buyout of Non-controlling interest   (204,231)   - 
Acquisition of property, plant and equipment   (30,400)   (32,259)
Proceeds from disposal of long term investment   -    14,995 
Dividend from investee   -    - 
Loan to another company   -    - 
           
Net cash used in investing activities   (599,907)   (17,264)
           
Cash flows from financing activities          
Proceeds from short term borrowings   -    - 
(Repayments to)/advances from stockholders   -    - 
Proceeds from issuances of common stock under Plan 2002   -    - 
           
Net cash provided by financing activities   -    - 
           
Effect of exchange rate changes   44,594    112,880 
           
Net increase/(decrease) in cash and cash equivalents   (1,469,306)   (2,085,756)
           
Cash and cash equivalents at beginning of period   1,692,449    3,580,269 
           
Cash and cash equivalents at end of period  $223,143   $1,494,513 
           
Supplemental disclosure of cash flow information          
Income tax paid  $-   $5,208 
Interest paid  $16,263   $- 

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

4
 

 

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Forlink Software Corporation, Inc. (the “Company” or the “Registrant” or “Forlink”), is a Nevada corporation which was originally incorporated on January 7, 1986 as “Why Not?, Inc.” under the laws of the State of Utah and subsequently reorganized under the laws of Nevada on December 30, 1993. From 1996 until 1999, the Company continued as an unfunded venture in search of a suitable business acquisition or business combination.

 

On November 3, 1999, we 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 PRC, under the terms of which BFSTC gained control of the Company. Pursuant to the Plan of Reorganization, we acquired 100% of the registered and fully paid-up capital of BFSTC in exchange for 20,000,000 shares of the Company's authorized, but unissued, common stock. BFSTC is engaged in the provision of computer software consultancy and engineering services and the development and sale of computer software in the PRC. As a part of its computer consultancy and engineering services, BFSTC is also engaged in the sale of computer hardware. In June 2001, BFSTC changed its name to Forlink Technologies Co. Ltd. (“FTCL”). FTCL is our major operating subsidiary in China.

 

In August 2001, we acquired Beijing Slait Science & Technology Development Limited Co. (“SLAIT”) pursuant to a Plan of Reorganization dated January 11, 2001. We issued 59,430,000 shares of our common stock to SLAIT’s original owners in exchange for 100% of the outstanding equity of SLAIT. As a result of the share exchange, the former 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. We also agreed to transfer 1,085,000 Renminbi (“RMB”) (approximately US$131,039) to the former owners of SLAIT. A change in control occurred in which all but one of the officers and directors of the Company resigned and two former directors (also former owners) of SLAIT became officers and directors of the Company. Prior to its dissolution in 2004, SLAIT provided application system integration technology and specializes in large volume transaction processing software for networks such as mobile phone billing and band operation. Subsequent to our acquisition, the principal activities of SLAIT were gradually shifted to those of FTCL. On February 13, 2004, SLAIT was officially dissolved in accordance with relevant PRC regulations.

 

On June 18, 2003, Forlink Technologies (Hong Kong) Limited (“FTHK”) was incorporated in Hong Kong Special Administrative Region as a limited liability company. In December 2003, FTHK became a wholly owned subsidiary of Forlink. FTHK is an investment holding company. 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 for product integration, which allows us to improve our hardware pass-through profit margin. On August 2008, FTHK transferred all its ownership of All China Logistics to FTHX.

 

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.

 

5
 

 

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 was fully paid up as of March 31, 2005. Mr. Yi He and Mr. Wei Li have been entrusted as nominee owners of BFHX to hold 70% and 30%, respectively, of the fully paid up capital of BFHX on behalf of Forlink as the primary beneficiary. BFHX is considered a Variable Interest Entity ("VIE"), and because we are the primary beneficiary, our consolidated financial statements include BFHX. Upon the request of the Company, Mr. Yi He and Mr. Wei Li are required to transfer their ownership in BFHX to us or our designee at any time for the amount of the fully paid registered capital of BFHX. Mr. Yi He is the Chief Executive Officer, a director and a major stockholder of the Company. Mr. Wei Li is the administration manager of FTCL.

 

On October 24, 2005, we entered into 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 for the new shares, our shareholding of CLCE was diluted and as of December 31 2008 was 13.46%. CLCE commenced operations fully in early 2007. CLCE paused its operations as of December 31, 2011. The value of the investment was $0 at the end of 2011.

 

On October 3, 2006, we entered into a Transfer of Right to Invest and Project Cooperation Agreement (“Statelink Agreement”) with Statelink International Group, Ltd., a British Virgin Islands company (“Statelink”), pursuant to which we acquired 22.73% registered capital in Guangxi Caexpo International Trade and Logistics Co., Ltd. (“Guangxi Caexpo”), a PRC limited liability company in the businesses of real estate development, advertising and computer distribution, for cash consideration of $2,557,545 (RMB 20,000,000) from BFHX and stock consideration of 13,000,000 shares of 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 fourth quarter of 2007, and with the successful deployment of the relevant software, the client signed the final inspection report in January 2009. On August 20, 2010, the Company transferred all its ownership interests in Guangxi Caexpo to Guangxi Sanqi Investment Co., Ltd for the amount of Guangxi Caexpo’s 22.73% fully paid capital. The Company received a cash payment of $3,024,355 (RMB 20,000,000).

 

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 agreed to deploy a proprietary, integrated software solution, estimated at RMB 1,000,000, to support Wuxi Exchange’s operations. The software was deployed in February 2007. On January 14, 2007, the Company entered into an agreement with a major shareholder of Wuxi Exchange pursuant to which the Company transferred 2.5% of the Company’s interest in Wuxi Exchange to this major shareholder for a cash payment of RMB 500,000. On February 2, 2012, Wuxi Exchange increased its registered capital to RMB 50,000,000, and since we invested additional funds into Wuxi Exchange, the ratio of our holding was still as a 10% equity interest.

 

6
 

 

On January 25, 2007, our board of directors and the majority holders of the Company’s common stock jointly approved an amendment to our Articles of Incorporation by written consent, to increase the number of authorized shares of common stock from 100,000,000 to 200,000,000. The Certificate of Amendment to our Articles of Incorporation to effect the increase of the number of our authorized common shares was filed with Nevada’s Secretary of State on April 4, 2007.

 

On April 29, 2007, we invested, through BFHX, $138,158 (RMB 1,050,000) in Beijing GuoXin Forlink Internet Technologies Limited (“BGXF”), a privately held PRC company that operates a finance study website, for a 35% equity interest. The investment in BGXF is accounted for under the equity method of accounting due to the Company’s significant influence over the operational and financial policies of BGXF. BGXF commenced operations on March 9 2008. On October 14, 2008, BGXF increased its registered capital to RMB 4,285,700, and since we did not invest additional funds into BGXF, the ratio of our holding was diluted to a 24.5% equity interest. On March 15, 2011, the Company transferred all its ownership interests in BGXF to Beijing Guo Xin XinChuang Investment Co., Ltd for the amount of BGXF’s 24.5% fully paid capital. The Company received a cash payment of RMB 95,741.

 

On July 12, 2007, we invested through FTGX, $1,063,830 (RMB 8,000,000) in Nanning Bulk Commodities Exchange Corporation Limited (“NNBCE”), a privately held PRC company, for an 80% equity interest. NNBCE became a subsidiary of FTGX. NNBCE, established on April 29, 2007, commenced operations on March 28, 2008, and provides logistical e-commerce service. On February 2, 2012, FTGX purchased 10% equity interest (RMB 1,000,000) in NNBCE from Guangxi Caexpo; the ratio of FTGX’s holding was changed into a 90% equity interest.

 

On September 5, 2007, we invested through NNBCE, $465,425 (RMB 3,500,000) 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 to hold 20% of the fully paid up capital of GBSEE on behalf of NNBCE as the primary beneficiary. Upon the request of NNBCE, All China Logistics is required to transfer its ownership interests in GBSEE to NNBCE or its designees at any time for the amount of the 20% fully paid up capital. In accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46R “Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51” (“FIN 46R”), NNBCE is deemed to hold the primary beneficial interest of the 55% equity interest in GBSEE. GBSEE was established to provide logistical e-commerce service, but it was dissolved on December 16, 2007 before it commenced any operations, and NNBCE received payments back of its investment in GBSEE of $410,397 (RMB 3,000,000) in December 2007; $66,211 (RMB 484,000) in February 2008, and $2,189 (RMB 16,000) in September 2008.

 

On December 24, 2007, our board of directors and the majority holders of the Company’s common stock jointly approved an amendment to our Articles of Incorporation by written consent, to effect a 1-for-20 reverse stock split. The Certificate of Amendment to our Articles of Incorporation to effect the reverse split was filed with Nevada’s Secretary of State on February 21, 2008.

 

On March 20, 2008, Forlink invested $71,124 (RMB 500,000), through BFHX, in Shandong LongDong Internet Technologies Limited (“SDLD”), a PRC limited liability company, established on October 24, 2007, for a 5% equity interest. SDLD, which commenced operations in December 2007, is in the business of providing of providing primary products e-commerce services. The purpose of the investment is to gain cash dividends from SDLD.

 

On February 8, 2010, the Company transferred all its ownership interests in FTCL to BFHX for the amount of FTCL’s 100% fully paid capital.

 

On October 8, 2010, the Company invested $151,213 (RMB 1,000,000), through BFHX, in Shanghai Shipping Freight Exchange Co., LTD (“SSFE”), a PRC limited liability company, established on October 8, 2010, for a 5% equity interest. SSFE began to commence its operations on March 25, 2011.

 

7
 

 

Forlink, its subsidiaries and VIE (hereinafter collectively referred to as the “Company”), are all operating companies. Set forth below is a diagram illustrating the Company’s corporate structure as of September 30, 2012:

 

8
 

 

 

9
 

 

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Accounting and Principles of Consolidation

 

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America that include the financial statements of Forlink and its subsidiaries and VIE, namely, FTCL, FTHK, BFHX, FTCD, FTGX, and NNBCE. All inter-entity transactions and balances have been eliminated.

 

Non-controlling 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 as a separate line in the section of shareholders’ equity. Non-controlling interests in the results of the Company for the years are also separately presented in the income statement.

 

Use of Estimates

 

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Foreign Currency Translation and Transactions

 

The functional currency of Forlink is the US Dollar (“US$”) and the financial records are maintained and the financial statements prepared in US$. The functional currency of FTHK is the HK Dollar (“HK$”) and its financial records are maintained, and its financial statements prepared, in HK$. The functional currency of FTCL, BFHX, FTCD, FTGX, and NNBCE is the Renminbi (“RMB”) and their financial records are maintained, and their financial statements are prepared, in RMB.

 

Foreign currency transactions during the period are translated into each company’s denominated currency at the exchange rates at the transaction dates. Gain and loss resulting from foreign currency transactions are included in the consolidated statement of operations. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated into each company’s denominated currency at the yearend exchange rates. All exchange differences are dealt with in the consolidated statements of operations.

 

The financial statements of the Company’s operations based outside of the United States have been translated into US$ under the guidance of the FASB Accounting Standards Codification (ASC) Topic 830 “Foreign Currency Matters.” Management has determined that the functional currency for each of the Company’s foreign operations is its applicable local currency. When translating functional currency financial statements into US$, year-end exchange rates are applied to the consolidated balance sheets, while average period rates are applied to consolidated statements of operations. Translation gains and losses are recorded in translation reserve as a component of stockholders’ equity.

 

The value of the RMB is subject to changes in China’s central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. Since 1994, the conversion of RMB into foreign currencies, including US$, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s inter-bank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate generally has been stable. In July 2005, the Chinese government announced that it will no longer peg its currency exclusively to US$ but will switch to a managed floating exchange rate based on market supply and demand with reference to a basket of currencies which will likely increase the volatility of RMB as compared to US$. The exchange rate of RMB to US$ changed from RMB8.28 to RMB8.11 in late July 2005.

 

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The exchange rates used as of September 30, 2012 and December 31, 2011 are US$1:HK$7.79:RMB6.30, and US$1:HK$7.80:RMB6.30, respectively. The weighted average rates ruling for the periods ended September 30, 2012 and September 30, 2011 are US$1:HK$7.79:RMB6.34, and US$1:HK$7.79:RMB6.44, respectively.

 

Foreign Currency Risk

 

The RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.

 

The PRC subsidiaries conduct their business substantially in the PRC, and their financial performance and position are measured in terms of RMB. Any devaluation of the RMB against the US$ would consequently have an adverse effect on the financial performance and asset values of the Company when measured in terms of US$. The PRC subsidiaries’ products are primarily procured, sold and delivered in the PRC for RMB. Thus, their revenues and profits are predominantly denominated in RMB. Should the RMB devalue against US$, such devaluation could have a material adverse effect on the Company’s profits and the foreign currency equivalent of such profits repatriated by the PRC entities to the Company.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash in hand and all highly liquid investments with an original maturity of three months or less.

 

Allowance for Doubtful Accounts

 

We record an allowance for doubtful accounts based on specifically identified amounts that the Company believes to be uncollectible. We have a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customers’ credit worthiness or other matters affecting the collectability of amounts due from such customers could have a material effect on the results of operations in the period in which such changes or events occur. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

 

Inventories

 

Inventories are stated at the lower of cost or market. For inventory used in system integration services, cost is calculated using the specific identification method. For the sale of computer hardware, cost is calculated using first-in, first-out method. Cost includes all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition. Market value is determined by reference to the sales proceeds of items sold in the ordinary course of business after the balance sheet date or to management estimates based on prevailing market conditions.

 

Property, Plant, Equipment and Depreciation

 

Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method to allocate the cost of depreciable assets over the estimated useful lives of the assets as follows:

 

   Estimated useful life
(in years)
 
     
Building   20 
Computer equipment   3 
Office equipment   5 
Motor vehicle   10 

 

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Major improvements of property, plant and equipment are capitalized, while expenditures for repair and maintenance and minor renewals and betterments are charged directly to the statements of operations as incurred. When assets are disposed of, the related cost and accumulated depreciation thereon are removed from the accounts and any resulting gain or loss is included in the statement of operations.

 

Computer Software Development Costs

 

Software development costs are expensed as incurred until technological feasibility in the form of a working model has been established. Deferred software development costs will be amortized over the estimated economic life of the software once the product is available for general release to customers. For the current software products, the Company determined that technological feasibility was reached at the point in time it was available for general distribution. Therefore, no costs were capitalized.

 

Long term investments

 

The Company’s long term investments consist of (1) equity investments which are accounted for in accordance with the equity method and (2) cost investments which are accounted for under the cost method. Under the equity method, each such investment is reported at cost plus the Company’s proportionate share of the income or loss or other changes in stockholders’ equity of each such investee since its acquisition. The consolidated results of operations include such proportionate share of income or loss. See Note 7.

 

Fair Values of Financial Instruments

 

The carrying amounts of financial instruments (cash and cash equivalents, investments, accounts receivable and accounts payable) approximate their fair values as of September 30, 2012 and December 31, 2011 because of the relatively short-term maturity of these instruments.

 

Revenue Recognition

 

The Company generally provides services under multiple element arrangements, which include software license fees, hardware and software sales, and the provision of system integration services including consulting, implementation, and software maintenance. The Company evaluates revenue recognition on a contract-by-contract basis as the terms of each arrangement vary. The evaluation of the contractual arrangements often requires judgments and estimates that affect the timing of revenue recognized in the statements of operations. Specifically, the Company may be required to make judgments about:

 

·whether the fees associated with our products and services are fixed or determinable;
·whether collection of our fees is reasonably assured;
·whether professional services are essential to the functionality of the related software product;
·whether we have the ability to make reasonably dependable estimates in the application of the percentage-of-completion method; and
·whether we have verifiable objective evidence of fair value for our products and services.

 

The Company recognizes revenues in accordance with the 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.

 

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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.

 

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.

 

Stock Based Compensation

 

Effective January 1, 2006, we adopted “Statement of Financial Accounting Standards ASC 718, Share-Based Payment,” using the modified prospective application transition method. Before we adopted ASC 718, we accounted for share-based compensation in accordance with “Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.”

 

ASC 718 requires the Company to record the cost of stock options and other equity-based compensation in its income statement based upon the estimated fair value of those rewards. The Company elected to use the modified prospective method for adoption, which requires compensation expense to be recorded for all unvested stock options and other equity-based compensation beginning in the first quarter of adoption. Accordingly, prior periods have not been restated to reflect stock based compensation. On January 1, 2006, the Company adopted ASC 718 using the modified prospective method, and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements because most of the Company’s outstanding stock options were vested as of December 31, 2005 and the unvested portion of the stock options was considered immaterial.

 

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ASC 718 also requires the Company to estimate forfeitures in calculating the expense relating to share-based compensation as opposed to recognizing forfeitures as an expense reduction as they incur. The adjustment to apply estimated forfeitures to previously share-based compensation was considered immaterial by the Company and as such was not classified as a cumulative effect of a change in accounting principle. As of January 1, 2006, the Company had no unrecognized compensation cost remaining associated with existing stock option grants. Also, the Company made no modifications to outstanding stock option grants prior to the adoption of ASC 718, 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 ASC 718 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 ASC 718. 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 ASC 718-10-35, “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 ASC 718 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 ASC 718 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 ASC 718. 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 2012. 200,000 stock options issued under the Company’s 2002 Stock Plan were exercised during the year 2008.

 

Advertising costs

 

All advertising costs incurred in the promotion of the Company’s products and services are expensed as incurred. Advertising expenses were insignificant for the three months ended September 30, 2012 and 2011.

 

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 not be 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.

 

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Earnings Per Common Share

 

The Company computes net earnings per share in accordance with ASC 260, “Earnings per Share” and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of ASC 260 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 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.

 

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

 

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NOTE 3 - OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS

 

   September 30,   December 31, 
   2012   2011 
         
Other receivables  $299,966   $487,330 
Deposits   37,276    8,247 
Prepayments   116,103    34,441 
           
   $453,345   $530,018 

 

Other receivables include deposits for operating leases and advances to employee for traveling outlays.

 

NOTE 4 - INVENTORIES

 

   September 30,   December 31, 
   2012   2011 
           
Computer hardware and software  $103,131   $90,851 
Work-in-progress   1,333,558    1,067,083 
           
   $1,436,689   $1,157,934 

 

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 5 – RELATED PARTY TRANSACTIONS

 

The Company, from time to time, borrowed money from and made repayment to one major stockholder who is also a management member of the Company. The amounts due to this stockholder do not bear any interest and do not have clearly defined terms of repayment.

 

As of September 30, 2012 and December 31, 2011, the amounts due to this stockholder were $375,043 and $260,470, respectively, representing advances from this stockholder for our working capital.

 

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET

 

   September 30,   December 31, 
   2012   2011 
           
Building  $180,137   $180,137 
Computer and office equipment   1,095,999    1,066,908 
Motor vehicles   149,657    149,657 
    1,425,793    1,396,702 
Less: Accumulated depreciation   (1,214,217)   (1,134,362)
           
   $211,576    262,340 

 

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The building is located in Chengdu, PRC and was purchased on behalf of the Company by Mr. Yi He, one of the stockholders, directors and officers of the Company. By a stockholders’ resolution passed on March 8, 1999, it was ratified that the title to the building belonged to the Company. In 2005, the title to the building was transferred to Forlink Technologies (Chengdu) Limited.

 

NOTE 7 - LONG TERM INVESTMENTS

 

   September 30,   December 31, 
   2012   2011 
           
Equity investments  $-   $- 
Cost investments   1,360,931    1,074,531 
           
   $1,360,931    1,074,531 

 

In December 2003, the Company invested $760,870 in a privately held PRC company, All China Logistics Online Co., Ltd., for a 17.8% equity interest. The Company has recorded the investment at cost because it does not have the ability to exercise significant influence over the investee.

 

On October 24, 2005, the Company set up China Liquid Chemical Exchange Company Limited, a limited liability company in PRC, and shares the risk and rewards up to the equity interest of 13.46%. 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. China Liquid Chemical Exchange Company Limited paused its operations as of December 31, 2011. The value of the investment was $0 as of September 30, 2012.

 

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), the software been deployed to Wuxi in December 2006. The Company recorded the investment at cost because it does not have the ability to exercise significant influence over Wuxi. On January 14, 2007, the Company entered into a Share Transfer Agreement with a major shareholder of Wuxi to transfer 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 a 10% equity interest in Wuxi. On February 2, 2012, Wuxi increased its registered capital to RMB 50,000,000, and since we invested additional funds into Wuxi, the ratio of our holding was still as a 10% equity interest.

 

On September 17, 2007, the Company invested $99,734 in a privately held PRC Company, Ningbo Bulk Commodities Exchange Corporation Limited (“NBBCE”), for a 25% equity interest. The Company’s investment was made through BFHX. The Company recorded the investment at cost as the Company does not have the ability to exercise significant influence over NBBCE because NBBCE’s strategic and business decisions are dominated by another major shareholder. NBBCE paused its operations as of December 31, 2011. The value of the investment was $0 from the end of 2011.

 

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On March 20, 2008, Forlink invested $71,124 (500,000 RMB), through BFHX, in Shandong LongDong Internet Technologies Limited (“SDLD”), a PRC limited liability company, established on October 24, 2007, for a 5% equity interest. SDLD, which commenced operations in December 2007, is in the business of providing of providing primary products e-commerce services. The purpose of this investment is to gain cash dividends from SDLD.

 

On October 8, 2010, the Company invested $151,213 (RMB 1,000,000), through BFHX, in Shanghai Shipping Freight Exchange Co., LTD (“SSFE”), a PRC limited liability company, established on October 8, 2010, for a 5% equity interest. SSFE did not commence its operations until March 25, 2011. The Company has recorded the investment at cost because it does not have the ability to exercise significant influence over the investee.

 

NOTE 8 - OTHER PAYABLES AND ACCRUED EXPENSES

 

   September
30,
   December
31,
 
   2012   2011 
           
Other payables  $336,458   $258,912 
Accrued salaries & wages   187,253    192,552 
           
   $523,711   $451,464 

 

Other payables include rental payable and utilities payable.

 

NOTE 9 – NON-CONTROLLING INTEREST

 

On February 2, 2012, the Company, through its subsidiary BFHX, acquired the remaining 10% equity interest in NNBCE that it did not previously own, for a total purchase amount of $203,884 (RMB 1,285,960).

 

NOTE 10 - INCOME TAX

 

According to the relevant PRC tax rules and regulations, FTCL, which is recognized as a New Technology Enterprise operating within a New and High Technology Development Zone, is entitled to an Enterprise Income Tax (“EIT”) rate of 15%.

 

Pursuant to approval documents dated September 23, 1999 and August 2, 2000 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, 2010, FTCL was entitled to an EIT rate of 15%.

 

Pursuant to an approval document dated January 19, 2004 issued by the State Tax Bureau, BFHX was fully exempted from EIT for fiscal years 2004, 2005 and 2006. As of December 31, 2010, 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 rate for FTCD, FTGX and NNBCE is 25%. No provision for EIT and Hong Kong profits tax were made for FTCL, FTCD, FTGX, NNBCE and FTHK as they have not gained taxable income for the periods.

 

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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 ASC 740, 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 September 30, 2010, the Company does not have any liability for uncertain tax positions. The adoption of FIN 48 did not have a material impact on the Company’s results operations, financial position or liquidity.

 

On March 16, 2007, the 5th Plenary Session of the 10th National People's Congress passed the Corporate Income Tax Law of the PRC ("the New Corporate Income Tax Law"), which took effect on January 1, 2008. Beginning on that date, the EIT rate 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 enactment of the New Corporate Income Tax Law did not have any financial effect on the provision for income tax for the year ended December 31, 2011 and on the amounts accrued in the balance sheet in respect of current tax payable.

 

NOTE 11 - OTHER TAXES RECOVERABLE/(PAYABLE)

 

Other taxes payable comprise mainly of the Valued-Added Tax (“VAT”) and Business Tax (“BT”). The Company is subject to output VAT levied at the rate of 17% of its operating revenue. The input VAT paid on purchases of materials and other direct inputs can be used to offset the output VAT levied on operating revenue to determine the net VAT payable or recoverable. BT is charged at a rate of 5% on the revenue from other services.

 

As part of the PRC government’s policy of encouraging software development in the PRC, companies that fulfill certain criteria set by the relevant authorities, and which develop their own software products and have the software products registered with the relevant authorities in the PRC, are entitled to a refund of VAT equivalent to the excess over 3% of revenue paid in the month when output VAT exceeds input VAT (excluding export sales). The excess portion of the VAT is refundable and is recorded by the Company on an accrual basis. The VAT rebate included in other income was zero and $151 for the three months ended September 30, 2012 and 2011, respectively.

 

NOTE 12– COMPREHENSIVE INCOME/(LOSS)

 

The components of comprehensive income/(loss) were as follows:

 

   Three Months Ended
September 30,
 
   2012   2011 
         
Net profit/(loss)  $(1,287,305)  $(664,821)
Foreign currency translation adjustment   42,833    175,964 
Comprehensive income/(loss)  $(1,244,472)  $(488,857)

 

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NOTE 13 - CONCENTRATION OF CUSTOMERS

 

During the year, the following customers accounted for more than 10% of total sales:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2012   2011   2012   2011 
Net sales derived from:                    
Customer A   23,673    329,243    863,895    1,048,900 
Customer B   *    158,001    *    474,002 
Customer C   *    *    *    * 
Customer D   18,662    17,881    47,714    83,741 
Customer E   *    59,618    108,699    334,527 
                     
% of total net sales from:                    
Customer A   4%   25%   40%   58%
Customer B   *    12%   *    26%
Customer C   *    *    *    * 
Customer D   3%   1%   2%   5%
Customer E   *    4%   5%   19%
                     
Account receivable from:                    
Customer A             *    51,490 
Customer B             *    2,222,851 
Customer C             *    269,359 
Customer D             *    * 
Customer E             *    103,758 
                     
% of total accounts receivable from:                    
Customer A             *    1%
Customer B             *    51%
Customer C             *    6%
Customer D             *    * 
Customer E             *    2%

 

* Less than 10%

 

20
 

 

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Statements contained herein that are not historical facts are forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in such forward looking statements are reasonable, the forward looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected. We caution investors that any forward looking statements made by us are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements. Such risks and uncertainties include, without limitation: well-established competitors who have substantially greater financial resources and longer operating histories, regulatory delays or denials, ability to compete as a company in a highly competitive market, and access to sources of capital.

 

The following discussion and analysis should be read in conjunction with our financial statements and notes thereto included elsewhere in this Form 10-Q. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-Q should be read as being applicable to all related forward looking statements wherever they appear in this Form 10-Q. The Company's actual results could differ materially from those discussed here. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.

 

Overview

 

We are a 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%

 

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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%.

 

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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.

 

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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 not be 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, 2011 
Net 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, 2011 
Net 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 net sales.

 

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 development for 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.

 

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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.

 

ITEM 4.CONTROLS AND PROCEDURES

 

Under the direction of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated our disclosure controls and procedures and internal control over financial reporting. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our CEO and CFO concluded that as of September 30, 2012, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

There was no change in our internal control over financial reporting during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

 

Exhibit No.   Description
     
3.1   Articles of Incorporation, as amended and currently in effect. (Incorporated by reference to Exhibit No. 3.1 of the Form 10-QSB for the quarter ended March 31, 2000, and filed on May 15, 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 15, 2000.)
     
3.3   Text of Amendment to Bylaws of Forlink Software Corporation, Inc. (Incorporated by reference to Exhibit 3.3 of the Current Report on Form 8-K filed on January 18, 2007)
     
3.4   Certificate of Amendment to Increase Number of Authorized Shares of Common Stock as filed with the Nevada Secretary of State on April 4, 2007 (Incorporated by reference to Exhibit No. 3.2 of the Form 10-K for the year ended December 31, 2008, and filed on March 30, 2009.)
     
3.5   Certificate of Amendment to Effect a 1-for-20 Reverse Stock Split as filed with the Nevada Secretary of State on February 21, 2008 (Incorporated by reference to Exhibit No. 3.3 of the Form 10-K for the year ended December 31, 2008, and filed on March 30, 2009.)
     
31.1   Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
31.2   Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
32.1   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
32.2   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema
     
101.CAL*   XBRL Taxonomy Extension Calculation
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase

  

* In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, except as expressly set forth by specific reference in such filing.

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  

  FORLINK SOFTWARE CORPORATION, INC.
     
Date: November 13, 2012 By: /s/ Yi He
    Yi He
    Chief Executive Officer
    (Principal Executive Officer)
     
Date: November 13, 2012 By: /s/ Hongkeung Lam 
    Hongkeung Lam
    Chief Financial and Accounting Officer
    (Principal Financial and Accounting Officer)

 

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