ITEM 1. BUSINESS
Business Overview
Jingwei International Limited (“we,” “us,” “the Company,” or “Jingwei”) is a technology services provider in China specializing in software and data mining services. In July 2006, Mr. George (Jianguo) Du, our President, General Manager and Chairman of the Board of Directors, established Jingwei International Investments Limited (“Jingwei BVI”). Jingwei BVI’s predecessor company, Shenzhen Yulong Communications, was one of China’s largest mobile paging systems providers with over 70 million subscribers. Jingwei’s predecessor company, Shenzhen Yulong Communications, was one of China’s largest mobile paging systems providers with over 70 million subscribers. In as the market transitioned from paging to cellular, Shenzhen Yulong Communications split into two separate entities: China Wireless Technologies Limited, to hold its hardware assets, and New Yulong, to hold its software assets and database. In 2001, New Yulong was merged into Shenzhen Jingwei Communications Co., Ltd. (“Jingwei Communications”). Concurrent with the merger, New Yulong transferred its proprietary consumer database to Jingwei Communications.
Our software services include a broad range of telecom billing systems, telecom service provisioning solutions and maintenance decision support and customer relationship management systems. We operate under exclusive licensing and revenue sharing agreements with China Mobile and China Unicom and have software installations with several additional Chinese telecom companies. By leveraging our strong relationships, we have been effective at cross-selling our comprehensive data mining services to our existing customer base and have increased our focus on providing software and data mining services to companies outside of the telecom sector. Our data mining capabilities, which include business efficiency and database marketing and analysis services, are bolstered by our proprietary database which contains detailed biographical, demographic and purchasing data on about 300 million Chinese consumers.
Our software and data mining products and services assist customers in improving operational efficiency and identifying new market opportunities, trends and target audiences. Once identified, we assist in the promotion and marketing of new product and service offerings directly to end-users on behalf of our customers through a combination of Wireless Value Added Services, direct marketing and telemarketing. We have performed data mining services for customers in the automobile, financial services, retail and utility industries, including Amway, ChangAn Auto, China Merchant Bank, Huabei Power, and continue to opportunistically pursue high quality prospects. In addition, we recently introduced a new software platform that management believes will enable us to service the cable television industry. The software was developed with similar functions and features as in the telecom operation support services and business support services. The software platform is for migration to digital television and internet protocol-based TV program delivery. So far, we have implemented this platform in 10 cities and expect to roll out this platform to 40 cities in 2008.
We also expect to begin to expand into the music download space pursuant to an exclusive contract with Unicom in selected provinces, one of the two mobile operators in China with over 150 million subscribers. We plan to create and maintain a music download site on behalf of Unicom populated with licensed songs from Chinese artists and artists from other music houses. For each of the songs downloaded by its subscribers, we will receive a fixed commission. We expect to fund the capital expenditure for this business operation internally.
We derive substantially all of our revenues from software services, data mining services, and sales of mobile handsets derived from our data mining capabilities. Our products and services are sold by our sales and marketing organization, as well as an established reseller network. Reseller networks primarily consist of systems integration houses where Jingwei’s software products are sold as part of their systems solution package for their customers. We contract third parties as resellers to sell our software and wireless value added services. For software, we typically provide our resellers with a fixed cost and the resellers would sell the system with their own margins. For wireless value added services, we would pay a percentage from our revenue as commissions. Commissions are typically between 10 to 15%. All other products and services are sold through our direct sales force or stores at which handsets are sold. Data mining services are sold on a project by project basis and, in addition to fees, we derive or share in the revenues derived from consumer purchases resulting from our database marketing and promotion activities.
In October 2006, Jingwei BVI established a wholly-owned subsidiary in Hong Kong, Jingwei Hong Kong, and in February 2007 established a wholly-owned subsidiary in the People’s Republic of China, Jingwei HengTong Technology (Shenzhen) Co., Ltd. (“Jingwei HengTong”). We operate our telecom-related businesses in China primarily through Jingwei Communications, which is based in China and wholly-owned by Chinese citizens, including our Chief Executive Officer and Chairman, Mr. Du, who owns 90% of Jingwei Communications. We do not have an equity interest in Jingwei Communications. In order to meet domestic ownership requirements under Chinese law, which restrict foreign companies from operating in certain value-added telecommunications and Internet services sectors, Jingwei Communications is controlled by Jingwei HengTong through a series of exclusive contractual relationships that are typical for international businesses in China. As a result of these arrangements, we have secured significant rights to influence Jingwei Communication’s business operations, policies and management, to approve all matters requiring shareholder approval, and the right to receive all income earned by Jingwei Communications. In addition, to ensure that Jingwei Communications and its shareholders perform certain obligations under these contractual arrangements, the shareholders have pledged to Jingwei HengTong all of their equity interests in Jingwei Communications. Upon the occurrence of certain events, the equity interests will be transferred to Jingwei HengTong, or at such time that current restrictions under PRC law on foreign ownership of Chinese companies providing value-added telecommunications services in China are lifted, Jingwei HengTong may exercise its option to purchase the equity interests in Jingwei Communications. From time to time, Jingwei HengTong enters into contracts with foreign affiliates of our telecom customers to provide services in China. Due to PRC regulations that restrict PRC entities engaged in value-added telecommunications and Internet services from performing services for entities located outside of the PRC, we utilize HuashiDai Information Technology Limited, a Hong Kong company in which Mr. Du is the majority shareholder, to perform these services. HuashiDai receives no consideration or other benefits for performing these services, and we receive payment for the work performed.
Industry and Market Overview
China Economic Overview
China’s GDP ($ in billions)
China Telecom and Internet Markets
China’s GDP grew an estimated 10.5% in 2006 to $2.6 trillion and continues to rank as the world’s fastest growing economy. The National Bureau of Statistics of China forecasts average annual GDP growth of 8.5% through 2010.
In 2006, substantially all of our revenues were derived from telecom-related customers. According to China’s Ministry of Information Industry (‘MII”), the number of fixed-line phone subscribers increased to 350 million, or 10.8%, in 2005. From 2002 to 2005, fixed-line phone subscribers increased at a 17.8% compound annual growth rate. Growth in China’s telecom sector is influenced greatly by China’s economic prosperity. The MII estimates that the total revenue of the telecom sector grew to approximately $82 billion, or 10.2% in 2006.
The Internet in China is mobile-centric and is one of the country’s fastest growing industries. Industry revenues increased from approximately $100 million in to approximately $2 billion in 2005. Forecasts indicate that the industry will reach $6 billion in 2009, a compound annual growth rate of 32%. Growth is being driven by increased spending power of the large and rapidly growing “digerati”, or those individuals viewed as technologically sophisticated, population.
China has a sizeable digerati population with approximately 500 million wired and wireless Internet subscribers. Digerati describes the knowledgeable group of users of leading edge digital technologies. Currently, wireless subscribers outnumber wired subscribers by a factor of approximately four to one. In 2006, China’s wireless telecom/Internet subscriber base reached an estimated 441 million, a 12% year-over-year increase.
The China Internet Network Information Center estimates that nearly 70% of Internet users in China are under the age of 30. The average weekly time spent online has steadily increased from 8.5 hours in 2001 to 15.9 hours in 2005. The demographic characteristics and increased consumption trends are very attractive to marketers.
China’s Internet market can be grouped into three segments: (i) online advertising; (ii) online games; and (iii) Wireless Value Added Services. Wireless Value Added Services is one of the fastest growing sectors of China’s Internet industry. The Wireless Value Added Services sector has grown from zero to approximately $1.2 billion in just five years. The Wireless Value Added Services sector is expected to double over the next five years resulting from (i) growth in wireless subscribers, (ii) low wireless penetration rates, (iii) increased spending power, (iv) average revenue per user (“ARPU”) expansion, (v) content proliferation, and (vi) network upgrades. Wireless Value Added Services service providers aggregate and/or develop digital content for wireless operators (e.g., China Mobile and China Unicom). Wireless Value Added Services based on current 2G and 2.5G networks include: short messaging services (SMS); multimedia messaging services (MMS); interactive voice messaging (IVR); games; screen savers; ring tones; color ring back tones (CRBT); wireless application protocol (WAP); and music downloads. The development of 3G networks potentially expand the range of Wireless Value Added Services to include video messaging, wireless video chat, wireless radio and IPTV.
Providers of Wireless Value Added Services rely on wireless operators’ networks to deliver their content. China Mobile, with over 265 million subscribers, and China Unicom, with over 128 million subscribers, are currently the largest wireless operators in China. As such, wireless operators are focused on managing their rapid subscriber growth and network infrastructure, and have decentralized Wireless Value Added Services and software service management to their provincial offices. Decentralization by wireless operators has increased competition among service providers as each strives to develop original, innovative content.
The Wireless Value Added Services segment is highly fragmented with few large competitors and numerous niche competitors. Although large companies, such as TOM Online, Inc. SINA Corp. and KongZhong Corp., have national presence and account for the majority of industry revenues, they compete intensely with numerous provincial competitors having local relationships and expertise.
Through constant development of innovative content, Wireless Value Added Services service providers have provided wireless operators with a significant, high margin revenue opportunity. For example, Wireless Value Added Services revenue currently accounts for approximately 20% of China Mobile’s total revenues, an increase from approximately 3% in 2001. Subscriber demand for new innovative content has led to strong wireless subscriber and ARPU growth. In addition, as competition increases between the incumbent wireless operators, they will need strong relationships with Wireless Value Added Services service providers to enhance the subscriber experience and improve customer retention.
Fees are charged to a subscriber’s monthly bill and wireless operators typically charge a predetermined percentage of this fee and remit the remainder to the service provider. For advanced services, revenue sharing varies among products.
Data Mining Services Overview
Data mining, the extraction of hidden predictive information from large databases, is a powerful technology with great potential to help companies focus on the most important information in their data warehouses. Data mining tools predict future trends and behaviors, allowing businesses to make proactive, knowledge-driven decisions. These tools include statistical models, mathematical algorithms and machine learning methods (algorithms that improve their performance automatically through experience, such as neural networks or decision trees). The automated, prospective analyses offered by data mining move beyond the analyses of past events provided by retrospective tools typical of decision support systems. Data mining tools can help answer business questions that traditionally were too time consuming to resolve. They scour databases for hidden patterns, finding predictive information that experts may miss because it lies outside their expectations.
Data mining can be performed on data represented in quantitative, textual or multimedia forms. Data mining applications use a variety of parameters to examine data including: association (patterns where one event is connected to another event, such as purchasing a pen and purchasing paper); sequence or path analysis (patterns where one event leads to another event, such as the birth of a child and purchasing diapers); classification (identification of new patterns, such as coincidences between duct tape purchases and plastic sheeting purchases); clustering (finding and visually documenting groups of previously unknown facts, such as geographic location and brand preferences); and forecasting (discovering patterns from which one can make reasonable predictions regarding future activities, such as the prediction that people who join an athletic club may take exercise classes).
Many companies already collect and refine massive quantities of data. Data mining techniques can be implemented rapidly on existing software and hardware platforms to enhance the value of existing information resources and can be integrated with new products and systems as they are brought on-line. When implemented on high performance client/server or parallel processing computers, data mining tools can analyze massive databases to deliver answers to questions such as, “Which clients are most likely to respond to my next promotional mailing and why?”
The core components of data mining technology have been under development for decades in research areas such as statistics, artificial intelligence and machine learning. Today, the maturity of these techniques, coupled with high-performance relational database engines and broad data integration efforts, make these technologies practical for current data warehouse environments. Data mining is now being broadly used in the business community because it is supported by technologies that are sufficiently mature including: (i) massive data collection; (ii) powerful multiprocessor computers; and (iii) innovative data mining algorithms. The increased availability of information and the decreasing costs of storing it have also played a role.
Given databases of sufficient size and quality, data mining technology can generate new business opportunities by providing these capabilities:
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Automated prediction of trends and behaviors. Data mining automates the process of finding predictive information in large databases. Questions that traditionally required extensive hands-on analysis can now be answered directly from the data - quickly. A typical example of a predictive problem is targeted marketing. Data mining uses data on past promotional mailings to identify the targets most likely to maximize return on investment in future mailings.
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Automated discovery of previously unknown patterns. Data mining tools sweep through databases and identify previously hidden patterns in one step. An example of pattern discovery is the analysis of retail sales data to identify seemingly unrelated products that are often purchased together. Other pattern discovery problems include detecting fraudulent credit card transactions and identifying anomalous data that could represent data entry keying errors.
A wide range of companies have deployed successful applications of data mining. The automobile, financial services, retailing and utility industries commonly use data mining to improve operational efficiency and identify new market opportunities, trends and target audiences. Examples of data mining applications include:
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A credit card company can leverage its vast warehouse of customer transaction data to identify customers most likely to be interested in a new credit product. Using a small test mailing, the attributes of customers with an affinity for the product can be identified. Recent projects have indicated more than a 20-fold decrease in costs for targeted mailing campaigns over conventional approaches.
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A diversified transportation company with a large direct sales force can apply data mining to identify the best prospects for its services. Using data mining to analyze its own customer experience, the company can build a unique segmentation identifying the attributes of high-value prospects. Applying this segmentation to a general business database such as those provided by Dun & Bradstreet can yield a prioritized list of prospects by region.
While early adopters of data mining have tended to be in information-intensive industries, the technology is applicable to any company looking to leverage a large data warehouse to better manage their customer relationships. Two critical factors for success with data mining are: (i) a large, well-integrated data warehouse; and (ii) a well-defined understanding of the business process within which data mining is to be applied, such as customer prospecting, retention and campaign management.
Products and Services
Software Services
Our software services include a broad range of operation and business support systems, such as billing systems, provisioning solutions and decision support and customer relationship management systems. Our software products are engineered to allow our customers to integrate our software with existing applications and services with minimal effort and programming overhead, which helps customers improve their customer relationships and operating efficiency. Although typically sold together, our software services are segmented into operation and business support services.
All telecom and cable operators require operation support services (OSS) to provide services to their customers. Once OSS are installed, business support services (BSS) are required to maintain and manage customers. Whenever Jingwei sells its proprietary OSS, BSS is also generally sold along with it, although each can be purchased on a stand-alone basis to supplement another provider. For most of the customers for whom Jingwei maintains third party OSS, BSS was sold as a replacement for the third party’s BSS. In 2007, Jingwei expects to sell more OSS than BSS to cable operators in a ratio of 3 to 1 and more BSS than OSS to telecom operators in a ratio 3 to 1.
Telecom operators typically already receive Operating Support Services (OSS) since this system is the base for them to offer their services.. Once OSS is installed, it is almost impossible for the operators to replace those services with a different system due to service disruption risk. Hence, we only sell OSS to telecom operators for new service offerings that require a new OSS.
On the other hand, Business Support Services (BSS) is an add-on to the base operating system which does not disrupt the operator’s service. Therefore, we can sell BSS to telecom operators to replace their existing system or sell additional modules to enhance their existing system whether this system is from Jingwei or third party. We expect to sell more BSS than OSS to the telecom operators. Whenever we sell OSS, we also bundled BSS with the sale.
Many cable operators are starting to convert their cable system to digital. They all immediately require a new OSS to get their digital service started and then typically install BSS later when they see fit. Therefore, cable operators require more OSS than BSS during this conversion period. Being the leading provider of IPTV and Digital TV system, Jingwei has implemented OSS in 6 provinces so far this year.
Operation Support Services (OSS)
Business Support Services (BSS)
Data Mining
Data mining is a technology that assists companies in identifying the most important information within the data they have collected on their current and potential customers. Through the use of data mining, companies are able to improve operational efficiency and identify new market opportunities, trends and target audiences enabling them to achieve increased revenues and profitability.
Our proprietary database contains the name, age, gender, identification number, income level, address, work status and type, mobile phone usage and pattern, telecom service subscriptions and purchasing history information of over 300 million Chinese consumers. This database is a key component of our business strategy in the telecom industry and our recent expansion into additional areas such as the automobile, cable, financial services, retail and utility industries. The initial data was collected from our predecessor company’s 70 million paging subscribers. We receive additional consumer profiles through strategic partners, such as China Photar Electronics Group Limited (“Photar”), a manufacturer of consumer electronics and office automation products.
The breadth of our database affords us the ability to conduct a wide range of data mining processes including:
Once a target audience is identified through data mining analysis, we assist our customers in the promotion and marketing of new products and services through telemarketing, direct marketing and Wireless Value Added Services. We share in the revenues derived from consumer purchases resulting from our marketing and promotion activities.
We outsource telemarketing services to a 2,000 seat call center, which is also tasked with updating the database. Direct marketing is conducted through targeted mailings and focus groups and marketing through Wireless Value Added Services is primarily conducted through short messaging service (SMS) and 2-dimensional barcode.
Within our data mining services segment, we also offer telecom providers a vast range of Wireless Value Added Services. Unlike our competitors who use telecom providers’ networks simply as a distribution channel, we create and manage Wireless Value Added Services for telecom providers to offer to their customers under their own brands. We would typically charge telecom providers a one time fee for each data mining task based on estimated costs plus profits. For data marketing, we would charge the telecom provider on a per target customer basis for promoting the products and services to the prospective customer and also receive a fee for each prospective customer who buys a product or service. For example with respect to a ring tone or music download subscription, we would charge the telecom provider a marketing fee on a per prospect basis, and when the prospective customer becomes a subscriber, we would receive a commission for each download. In addition, we may enter into revenue sharing arrangements with the telecom provider which would typically be on a one to three year term with automatic renewal annually. In most of the arrangements, we provide the hardware and software systems for an application such as magic call or missed call. Once a user is converted to become a service subscriber, we would receive a one-time success fee that ranges from 10 to 15 RMB per user plus a percentage of recurring monthly revenues of approximately 10 to 15% of the total monthly fees.
Our Wireless Value Added Services offerings include:
Consumer Electronic Sales
Our consumer electronics business includes sales of mobile handsets identified by our data mining capabilities, primarily Kangka-branded handsets. Once potential customers are identified, we send a message to them via handset. If the target customer responds to the message, we direct them to a retail location to purchase the new handset, which we purchase from the manufacturer. The manufacturer then ships the merchandise to the retail location, which collects the payment for the sale on our behalf.
Business Strategies for Future Growth
We currently have a number of initiatives in place to drive future growth.
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Leveraging Assets into New Markets. We believe that a key driver of our future growth will be the broad adoption of our data mining services outside of telecom sector. An increasing number of Chinese businesses are turning to data mining services in an effort to gain competitive advantages and increase revenues, profitability and overall efficiency. Through the effective utilization of our consumer database, we believe we are in a position to capitalize on this trend based upon the data mining expertise we have gained from serving the telecom sector. We have added customers in the automobile, financial services, retail and utility industries and continues to opportunistically pursue high quality prospects. For example, we have recently performed data mining services for Amway, ChangAn Auto, China Merchant Bank and Huabei Power. As part of this strategy, we intend to offer data mining services to large, multinational corporations with a presence in China to help them better reach their intended audiences by streamlining their marketing and promotional efforts. We maintain and enhance our consumer database through information obtained from maintaining warranty cards for electronic manufacturers such as Photar and Sagem International and are in the process of establishing a joint data mining laboratory with Tsinghua University Graduate School. We will continue to purchase additional consumer profile databases from telemarketers and strategic partners. We will also enhance our data mining infrastructure by, for example, building a new data center and increasing data storage capacity to better serve our current and prospective customers.
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Expand Geographic Presence. Through business development initiatives, we plan to capture greater market share with our existing customer base and their affiliates and expand the geographic footprint that we serve. We believe that near-term opportunities exist to further expand our services to affiliates of China Mobile, China Unicom and China Telecom. To further this growth strategy, we opened five additional branch offices in 2007 to complement our geographic expansion including Tianjin, Shandong, Tiangsu, Guizhou and another office in Shenzhen with respect to which we have entered into leases, and are negotiating a lease with respect to a sixth additional branch office. Increase Cross Selling Efforts. Historically, we have been successful at selling our products and services to our customers due to their complementary nature. Companies that use data mining services to improve their operational efficiency and identify new market opportunities, trends and target audiences can employ our software services to actively manage their customer relationships and improve billing, provisioning and collection practices. As we increase our focus on providing data mining services to a broad range of companies, we believe there is a significant opportunity to cross-sell our software services as a complementary product.
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Introduce New Products and Services. We are committed to researching, designing and developing products and services that will continue to meet the demands of our customers. We employ 87 research and development professionals that are tasked with developing new software and services to meet changing market demands. Historically, we have introduced between two and three new products and services per year. The amounts we have spent on research and development are $171,459 in 2006 and $907, 281 in 2007. In 2008, we plan to spend more in research and development.
Near Term Growth Initiatives
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Expanding IPTV and DTV Software Services with Huawei. Recently, we began to offer software services for Huawei Technologies Co., Ltd. ’s Internet protocol television and digital television platforms. Headquartered in Shenzhen, China, Huawei is a large international provider of telecommunications equipment.
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Introduce New Service Offering to the Cable Television Industry. We intend to leverage our expertise in the telecom sector to adapt our existing software services for use in the cable television industry. Due to similarities in customer management and provisioning requirements, we believe the introduction of this service provides us with a near-term opportunity to diversify our customer base outside of the telecom sector.
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Capitalize on the Emerging 2-dimensional Barcode Trend. We have introduced a 2-dimensional barcode service and seek to capitalize on the rapid adoption of this emerging trend. Once a target audience is identified, our service enables customers to transmit a 2-dimensional barcode, representing an incentive offer or a ticket, to the target audience via short message service (SMS). For example, a company could deliver a voucher in 2-dimensional barcode format to a mobile device that could be redeemed when scanned at the point of sale. Furthermore, a company could deliver a 2-dimensional barcode to a target audience that, when scanned, would allow entrance into an event, such as a movie or concert.
Our 2-dimensional barcode service is a complementary offering to our comprehensive data mining services and analysis. We have recently begun offering this service to our customer base and have had early success with automobile retailers. We utilized our database to determine a target audience for a specific car model and subsequently sent an incentive offer to the target audience in 2-dimensional barcode format. Recipients of the barcode were able to receive a discount on a purchase of an automobile when the barcode was scanned by the retailer.
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Marketing a New Missed Call Notification System to Fixed-line Telecom Providers. We have introduced a missed call notification system for fixed-line telecom providers. The system is designed to notify a caller when a line with a busy signal becomes available. The system will help increase revenues for fixed-line telecom providers as more calls are expected to be connected. We have deployed the system on a trial basis to a telecom provider in the Henan province. We anticipate that revenues will be generated through revenue sharing agreements with telecom providers. Our missed call notification system is similar to *66 in the United States.
Competition
The software and data mining services markets in China are highly competitive. Although we do not currently compete against any one entity with respect to all aspects of our businesses, we do compete with various companies with respect to specific elements of our business. Many of our competitors are large companies with substantially greater resources. In the software services market, we compete with AsiaInfo Holdings, Inc., Lian Chuang, Neusoft and Digital China. In data mining services market, we compete primarily with Linkage and NCR Corp.
The principal competitive factors in our markets include:
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ability to provide products and services that are innovative and attractive to customers and their end-users;
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service functionality, quality and performance;
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customer service and support;
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pricing;
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establishment of a significant customer base; and
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ability to introduce new products and services to the market in a timely manner.
Customers and Markets
Our software service platforms are currently deployed with leading Chinese telecom carriers, including China Broadcast, China Mobile, China Netcom, China Rail Com, China Telecom and China Unicom. Each of our telecom customers has established provincial affiliates, which have independent purchasing authority for software platforms and Wireless Value Added Services for their regional networks. We have been successful in negotiating exclusive software licensing arrangements with eight provincial affiliates of China Mobile and three provincial affiliates of China Unicom and has recently begun managing third-party software platforms, which are computer software platforms not originally provided by Jingwei but which Jingwei currently maintains, for affiliates of China Mobile in five other provinces and for affiliates of China Unicom in three other provinces as they seek a better quality of service and a unified platform. We are not materially dependent on our exclusive software licensing arrangements and revenue sharing arrangements with China Mobile and China Unicom. We have non-exclusive operating arrangements with eight provincial affiliates of China Netcom, five provincial affiliates of China Broadcast, five provincial affiliates of China Telecom and one provincial affiliate of China Rail Com. In addition, affiliates of China Mobile and China Unicom have deployed our Wireless Value Added Services offering in 10 provinces. We believe that near-term opportunities exist to further expand our services to affiliates of China Mobile, China Unicom and China Telecom.
We are focusing on expanding our geographic footprint and continuing to diversify our customer base, in addition to introducing new products and services. We have added customers in the automobile, financial services, retail and utility industries and continues to opportunistically pursue high quality prospects. For example, we recently performed data mining services for Amway, ChangAn Auto, China Merchant Bank and Huabei Power. In addition, we have recently introduced a new software platform that management believes will enable us to service the cable television industry. In addition, in 2008, we expect to generate over 50% of our revenues from customers outside of the telecommunications industry, in industries such as real estate, entertainment, consumer electronics and financial services.
Percentage of Total Revenue by Major Customer
($ in millions)
Sales and Marketing
Our sales and marketing strategy has focused primarily on the telecom sector and substantially all of our historical revenues have been derived from telecom customers. In addition to continuing to grow our presence in the telecom sector, we have focused on the automobile, cable, financial services, retail and utility industries for further expansion. Our sales and marketing organization is structured into four strategic groups: (i) major account sales; (ii) branch sales; (iii) marketing; and (iv) customer service.
Major Account Sales. The major account sales group, with 10 account managers and support engineers, focuses its efforts on companies having a national presence. The major account sales group currently manages China Mobile, China Unicom and Huawei.
Branch Sales. The major account sales group is supported by our 14 strategically-located regional sales offices, allowing effective servicing of customers on a local basis. Each regional sales office is self-sufficient with a sales, engineering and support staff.
Marketing. The marketing department focuses on strategic partner development, market analysis and strategy and product development planning, in addition to the promotion of our brand, products and services. We also utilize an established reseller network to assist in the marketing of our data mining services.
Customer Service. Due to the importance of our products and services to our customers’ daily back office operations, we place a significant emphasis on customer service activities. Customer service is handled on a local level by support engineers and on a national level by research and development specialists. We also maintain telephone and e-mail support for general product and service support.
The typical sales cycle for both software and data mining services is between two and four months. For software installations, we charge a one-time license fee, which can range from $50,000 to $500,000 per installation, and an annual maintenance fee equivalent to 10-15% of the initial amount, creating a recurring revenue stream. Data mining services are sold on a project by project basis and we share in the revenues derived from consumer purchases resulting from our marketing and promotion activities. Based on historical trends, management estimates that approximately 48%, 47% and 5% of our annual revenues are derived from license fees, revenue sharing agreements and maintenance fees, respectively.
Regulatory Matters
The telecommunications industry is highly regulated in China. PRC laws and regulations restrict foreign investment in China’s telecommunications service industry. The contractual arrangements between our wholly-owned subsidiary, Jingwei HengTong, and Jingwei Communications, allow us to exercise significant rights over the business operations of Jingwei Communications and to realize the economic benefits of the business. We believes that our operations are in compliance in all material respects with current, applicable PRC regulations. However, many PRC laws and regulations are subject to extensive interpretive power of governmental agencies and commissions, and there is substantial uncertainty regarding the future interpretation and application of these laws or regulations.
Employees
As of March 14, 2008 Jingwei had 345 employees, including 22 in management, 214 in research and development, 81 in sales and marketing and 28 in administrative/sales support. None of our employees are represented by labor unions or subject to collective bargaining agreements. We believe our employee relations are good.
Intellectual Property
Currently, we offer 17 software platforms and our intellectual property portfolio is covered by nine patents issued by the National Intellectual Property Administration of the People’s Republic of China and the Shenzhen Bureau of Science, Technology and Information. When these patents were registered with the appropriate authority, we received a certificate with respect to our protected intellectual property in such software. We then license the software to our customers for a usage fee. We presently do not have any registered trademarks. In addition we have received certificates with respect to two registered copyrights.
ITEM 1A.
ITEM 1A. RISK FACTORS
In addition to the other information in this annual report, the following factors should be considered carefully in evaluating the Company’s business and prospects. THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT ON THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR STATEMENTS. We are subject to, among others, the following risks:
Risks Related to Our Business
We have a limited operating history which provides a limited basis for you to evaluate our financial and operating performance.
Our limited operating history and the early stage of development of the industry in which we operate makes it difficult to evaluate our business and future prospects. Although our revenues have grown rapidly, we cannot assure you that we will maintain our profitability or that we will not incur net losses in the future. We expect that our operating expenses will increase as we expands. Any significant failure to realize anticipated revenue growth could result in significant operating losses. We will continue to encounter risks and difficulties in implementing our business model, including potential failure to:
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increase awareness of our products, protect our reputation and develop customer loyalty;
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manage our expanding operations and service offerings, including the integration of any future acquisitions;
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maintain adequate control of our expenses; and
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anticipate and adapt to changing conditions in the markets in which we operate as well as the impact of any changes in government regulation, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics.
If we are not successful in addressing any or all of these risks, our business may be materially and adversely affected.
Our business depends to a large extent on mobile telecommunications service providers in China and any deterioration of such relationships may result in severe disruptions to our business.
We have derived, and believe we will continue to derive, a significant portion of our revenues from a limited number of large customers, such as China Mobile and China Unicom which are our only major customers who have been customers for over two years. We operate under exclusive software licensing and revenue sharing arrangements with China Mobile and China Unicom. Currently, China Mobile and China Unicom are the only mobile telecommunications service providers in China that have platforms for Wireless Value Added Services. Our agreements with them are generally for a period of less than one year and generally do not have automatic renewal provisions. Each of China Mobile and China Unicom retain the ability to renegotiate the terms of the agreement with the Company, either pursuant to the ability to terminate the existing agreement in favor of a new agreement or by means of the amendment provisions of such agreements. Such opportunities for expansion of services provided to such customers are not specifically contemplated by the terms of the current software license agreements. If neither of them is willing to continue to cooperate and negotiate with us upon expiration, we may not be able to conduct our existing Wireless Value Added Services business. In 2007, approximately 69% of our revenues were derived from five customers. The loss, cancellation, deferral or renegotiation of any large agreements with telecommunications operators or other major customers could have a material adverse effect on our profitability.
In addition, if either China Mobile or China Unicom decides to change its content or transmission fees or its share of revenues, or does not comply with the terms and conditions of our agreements with them, our revenues and profitability could also be materially adversely affected.
Our financial condition and results of operations may be materially affected by the changes in policies or guidelines of the mobile telecommunications service providers.
The mobile telecommunications service providers in China may, from time to time, issue certain operating policies or guidelines, requesting or stating its preference for certain actions to be taken by all Wireless Value Added Services providers using their platforms. Due to our reliance on the mobile telecommunications service providers, a significant change in their policies or guidelines may have a material adverse effect on us. Such change in policies or guidelines may result in lower revenue or additional operating costs for us, and as such, we cannot assure you that our financial condition and results of operations will not be materially adversely affected by any such policy or guideline change.
Our customers are concentrated in a limited number of industries and a slowdown in these industries could have an adverse effect on our business.
Our customers are concentrated primarily in the telecommunications, media and technology industries, and to a lesser extent, the automobile, financial services, retail and utility industries, where the current trend is to outsource certain customer relationship management and value-added services. Our ability to generate revenue depends on the demand for our services in these industries. An economic downturn, or a slowdown or reversal of the tendency in any of these industries to rely on outsourcing could have a material adverse effect on our business, results of operations or financial condition.
The markets in which we operate are highly competitive and fragmented and we may not be able to maintain market share.
We operate in highly competitive markets and expect competition to persist and intensify in the future. Our competitors are mainly leaders in the software and data mining services markets, such as AsiaInfo Holdings, Inc., Lian Chuang, Neusoft and Digital China in the software services market and Linkage and NCR Corp. in the data mining services market. Our competitors also include small firms offering specific applications, divisions of large entities and other large independent firms. We face the risk that new competitors with greater resources than us will enter our markets.
Increasing competition among telecommunication companies in greater China has led to a reduction in telecommunication services fees that can be charged by such companies. If a reduction in telecommunication services fees negatively impacts revenue generated by our customers, they may require us to reduce the price of our services, or seek competitors that charge less, which could reduce our market share. If we must significantly reduce the price of our services, the decrease in revenue could adversely affect our profitability.
Key employees are essential to growing our business and could choose to work elsewhere.
Regis Kwong, Chief Executive Officer, George Du, President, General Manager and Chairman, and Helen Lu, Chief Financial Officer are essential to our ability to continue to grow our business. Messrs. Kwong and Du and Ms. Lu have established relationships within the industries in which we operate. If either of them were to leave the Company, our growth strategy might be hindered, which could limit our ability to increase revenue.
In addition, we face competition for attracting skilled personnel. If we fail to attract and retain qualified personnel to meet current and future needs, this could slow our ability to grow our business, which could result in a decrease in market share.
Although individual members of our management team have experience as officers of publicly-traded companies, much of that experience came prior to the adoption of the Sarbanes-Oxley Act and we may be required to implement compliance infrastructure without adequate resources.
It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance staff in order to develop and implement appropriate internal controls and reporting procedures. Unlike other, larger companies, our ability to dedicate resources for compliance purposes is limited. If we are unable to comply with the Sarbanes-Oxley Act’s internal controls requirements, we may not be able to obtain the independent auditor certifications that Sarbanes-Oxley Act requires publicly-traded companies to obtain.
Failure to provide significant management attention to international operations may negatively affect our business.
Our operations in China and in other Asian countries are subject to risks, including the following, which, if not planned and managed properly, could materially adversely affect our business, financial condition and operating results:
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legal uncertainties or unanticipated changes regarding regulatory requirements, political instability, liability, export and import restrictions, tariffs and other trade barriers;
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longer customer payment cycles and greater difficulties in collecting accounts receivable;
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uncertainties of laws and enforcement relating to the protection of intellectual property; and
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potentially uncertain or adverse tax consequences.
If we need additional financing, which may not be available on satisfactory terms or at all.
We believe that our existing cash will be sufficient to support our current operating plan for at least the next 18 months. However, our capital requirements may be accelerated as a result of many factors, including timing of development activities, underestimates of budget items, unanticipated expenses or capital expenditures, limitation of development of new potential products, future product opportunities with collaborators, future licensing opportunities and future business combinations. Consequently, we may need to seek additional debt or equity financing, which may not be available on favorable terms, if at all, and which may be dilutive to you.
We may seek to raise additional capital through public or private equity offerings, debt financings or additional corporate collaboration and licensing arrangements. To the extent we raise additional capital by issuing equity securities, our stockholders may experience dilution. To the extent that we raise additional capital by issuing debt securities, we would incur substantial interest obligations, may be required to pledge assets as security for the debt and may be constrained by restrictive financial and/or operational covenants. Debt financing would also be superior to your interest in bankruptcy or liquidation. To the extent we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or product candidates, or grant licenses on unfavorable terms.
We must respond quickly and effectively to new technological developments in order to remain competitive.
Our business is highly dependent on our computer and telecommunications equipment and software systems. Our failure to maintain our technological capabilities or to respond effectively to technological changes could adversely affect our business, results of operations or financial condition. Our future success also depends on our ability to enhance existing software and systems and to respond to changing technological developments. If we are unable to successfully develop and bring to market new software and systems in a timely manner, our competitors’ technologies or services may render our products or services noncompetitive or obsolete.
If we fail to protect adequately or enforce our intellectual property rights, or to secure rights to patents of others, the value of our intellectual property rights could diminish.
Our success, competitive position and future revenues will depend in part on our ability, and the ability of our licensors, to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties.
To date, we have nine patents issued by the National Intellectual Property Administration of the PRC and the Shenzhen Bureau of Science, Technology and Information. We anticipate filing additional patent applications both in the PRC and in other countries, as appropriate. However, we cannot predict the degree and range of protection patents will afford us against competitors, including whether third parties will find ways to invalidate or otherwise circumvent the our patents, if and when patents will issue, whether or not others will obtain patents claiming aspects similar to our patent applications, or if we will need to initiate litigation or administrative proceedings, which may be costly whether we win or lose.
Our success also depends on the skills, knowledge and experience of our scientific and technical personnel, consultants, advisors, licensors and contractors. To help protect our proprietary know-how and inventions for which patents may be unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this end, we require all of our employees, consultants, advisors and contractors to enter into confidentiality and, where applicable, grant-back agreements. These agreements may not provide adequate protection in the event of unauthorized use or disclosure or the lawful development by others of such information. If any of our intellectual property is disclosed, our value would be significantly impaired, and our business and competitive position would suffer.
If we infringe the rights of third parties, we could be prevented from selling products, forced to pay damages and compelled to defend against litigation.
If our products, methods, processes and other technologies infringe proprietary rights of other parties, we could incur substantial costs, and may have to obtain licenses (which may not be available on commercially reasonable terms, if at all), redesign our products or processes, stop using the subject matter claimed in the asserted patents, pay damages, or defend litigation or administrative proceedings, which may be costly whether it wins or loses. All these could result in a substantial diversion of valuable management resources.
We believe we have taken reasonable steps, including comprehensive internal and external prior patent searches, to ensure we have freedom to operate and that our development and commercialization efforts can be carried out as planned without infringing others’ proprietary rights. However, we cannot guarantee that no third party patent has been filed or will be filed that may contain subject matter of relevance to our development, causing a third party patent holder to claim infringement. Resolving such issues has traditionally resulted, and could in our case result, in lengthy and costly legal proceedings, the outcome of which cannot be predicted accurately.
We have never paid cash dividends and are not likely to do so in the foreseeable future.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate.
Risks Associated With Doing Business In Greater China
There are substantial risks associated with doing business in greater China, as set forth in the following risk factors.
Our operations and assets in greater China are subject to significant political and economic uncertainties.
Changes in PRC laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Under our current leadership, the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
Currency fluctuations and restrictions on currency exchange may adversely affect our business, including limiting our ability to convert Chinese renminbi into foreign currencies and, if Chinese renminbi were to decline in value, reducing our revenue in U.S. dollar terms.
Our reporting currency is the U.S. dollar and our operations in China use their local currency as their functional currencies. Substantially all of our revenue and expenses are in Chinese renminbi. We are subject to the effects of exchange rate fluctuations with respect to any of these currencies. For example, the value of the renminbi depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the official exchange rate for the conversion of renminbi to the U.S. dollar had generally been stable and the renminbi had appreciated slightly against the U.S. dollar. However, on July 21, 2005, the Chinese government changed its policy of pegging the value of Chinese renminbi to the U.S. dollar. Under the new policy, Chinese renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. As a result of this policy change, Chinese renminbi appreciated approximately 2.5% against the U.S. dollar in 2005, 3.3% in 2006 and 7% in 2007. It is possible that the Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of Chinese renminbi against the U.S. dollar. We can offer no assurance that Chinese renminbi will be stable against the U.S. dollar or any other foreign currency.
The income statements of our international operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully hedge our exchange rate risks.
Although Chinese governmental policies were introduced in 1996 to allow the convertibility of Chinese renminbi into foreign currency for current account items, conversion of Chinese renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange, or SAFE, which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee the availability of foreign currency conversion. We cannot be sure that we will be able to obtain all required conversion approvals for our operations or that Chinese regulatory authorities will not impose greater restrictions on the convertibility of Chinese renminbi in the future. Because a significant amount of our future revenue may be in the form of Chinese renminbi, our inability to obtain the requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in Chinese renminbi to fund our business activities outside of China, or to repay foreign currency obligations, including our debt obligations, which would have a material adverse effect on our financial condition and results of operations.
We are required to obtain licenses to expand our business into other provinces of mainland China.
Our activities must be reviewed and approved by various national and local agencies of the Chinese government before they will issue business licenses to us. There can be no assurance that the current Chinese government, or successors, will continue to approve and renew the our licenses. If we are unable to obtain licenses or renewals, we will not be able to continue our business operations in mainland China, which would have a material adverse effect on our business, financial condition and results of operations.
Existing and proposed regulation in the areas of consumer privacy, data use and/or security could affect our financial condition.
We and our customers are subject to regulations related to privacy and data use and security in the PRC, and our customers and us could be negatively impacted by these regulations. Our data mining services depend in large part on the use of consumer information obtained from former customers of Shenzhen Yulong Communications and various third-party sources. Regulation of privacy and data use and security in the PRC may increase the costs relating to the our business. Any additional regulations in these areas may also increase our costs to comply with such regulations and could materially and adversely affect our profitability. Finally, failure to comply with the privacy and data use and security laws and regulations to which we are subject could result in fines, sanctions or other penalties, which could materially and adversely affect our results of operations and overall business.
We may have limited legal recourse under PRC law if disputes arise under our contracts with third parties.
The Chinese government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. If our new business ventures are unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or, may hinder or prevent us from accessing important information regarding the financial and business operations of these acquired companies. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.
We must comply with the Foreign Corrupt Practices Act which could disadvantage us in the markets in which we operate.
We are required to comply with the United States Foreign Corrupt Practices Act, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China. If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage. Although we inform our personnel that such practices are illegal, we can not assure you that our employees or other agents will not engage in such conduct for which we might be held responsible. If the our employees or other agents are found to have engaged in such practices, we could suffer severe penalties.
PRC laws and regulations restrict foreign investment in China’s telecommunications service industry and we have entered into contractual agreements with Jingwei Communications to control and realize the benefits of the business. We are relying upon PRC laws and there is substantial uncertainty regarding the interpretation and application of current or future PRC laws and regulations.
Since we are deemed to be foreign persons or foreign-funded enterprises under PRC laws and cannot directly invest in companies operating in the telecommunications industry, we operate our businesses in China through Jingwei Communications, an operating company that is owned by PRC citizens and not by us. We control Jingwei Communications through a series of contractual arrangements. Although we believe we are in compliance with current PRC regulations, we cannot be sure that the PRC government would view these contractual arrangements to be in compliance with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. Because this structure has not been challenged or examined by PRC authorities, uncertainties exist as to whether the PRC government may interpret or apply the laws governing these arrangements in a way that is contrary to the opinion of our PRC counsel. If we, our wholly-owned subsidiaries or Jingwei Communications, were found to be in violation of any existing PRC laws or regulations, the relevant regulatory authorities would have broad discretion to deal with such violation, including, but not limited to the following:
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levying fines;
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confiscating income;
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revoking licenses;
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shutting down servers or blocking websites;
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requiring a restructure of ownership or operations; and/or
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requiring the discontinuance of Wireless Value Added Services businesses.
Any of these or similar actions could cause significant disruption to our business operations or render us unable to conduct our business operations and may materially adversely affect our business, financial condition and results of operations.
The contractual agreements between Jingwei HengTong and Jingwei Communications may not be as effective in providing operational control as direct ownership of these businesses and may be ineffective to permit consolidation of the financial results of the business.
We depend on Jingwei Communications, an operating company in which we have no equity ownership interest, for substantially all of our operations, revenues and net income, and must rely on contractual agreements to control and operate these businesses. Although we have been advised by PRC legal counsel that our contractual arrangements with the operating company are valid, binding and enforceable under PRC laws and regulations, these contractual agreements may not be as effective in providing and maintaining control over the operating company and its business operations as direct ownership of these businesses. For example, we may not be able to take control of Jingwei Communications upon the occurrence of certain events, such as the imposition of statutory liens, judgments, court orders, death or incapacity. Furthermore, if the operating company and its shareholders fail to perform as required under those contractual agreements, we will have to rely on the PRC legal system to enforce those agreements, and due to the uncertainties that exist under PRC law about its structure, there is no guarantee that we will be successful in an enforcement action and any action could result in the disruption of our business, damage to our reputation, diversion of our resources and significant costs. In addition, the PRC government may propose new laws or amend current laws that may be detrimental to our current contractual agreements with the operating company, which may in turn have a material adverse effect on our business operations.
Risks Related to the Common Stock
As we did not timely file or have declared effective a registration statement to register for resale shares from our recent offering we could be required to pay liquidated damages.
We entered into a Registration Rights Agreement at the time of closing of an aggregate of 3,395,000 units at $5.00 per unit, consisting of one share of common stock and 0.30 of a warrant to purchase one share of common stock at an exercise price of $6.00 per share, on May 16, 2007 (the “Offering”). Under the Registration Rights Agreement, we were obligated to file a registration statement providing for the resale of all or a portion of the shares included in the units and all, or a portion of the Shares underlying the warrants included in the units within 60 calendar days after the closing of the Offering and to use our best efforts to have it declared effective within 120 calendar days (or 180 calendar days in the event our registration is the subject of review and comment by the SEC, which it has been) of the closing of the Offering. As we have not met these timelines, we may be required to pay liquidated damages in the amount of 1% of the purchase price of the securities being registered, per month, subject to a maximum limit of 10%. Any of the investors entitled to registration rights under the Registration Rights Agreement, as counterparties thereto, could seek to enforce such rights against us, which could require the payment of liquidated damages totaling approximately $340,000, assuming all such investors elected to enforce such rights. We would calculate the exact amount owed any investor upon receiving a claim relating thereto.
We are controlled by a small number of existing shareholders, who may make decisions with which you may disagree
Our directors, officers and principal shareholders currently beneficially own approximately 53.4% of our outstanding shares in the aggregate. The interests of these shareholders may differ from your interests. These shareholders, acting together, could exercise significant influence over our operations and business strategy and will have sufficient voting power to influence all matters requiring approval by our shareholders, including the ability to elect or remove directors to approve or reject mergers or other business combination transactions, the raising of future capital and the amendment of our articles of association, which govern the rights attached to our common stock. In addition, this concentration of ownership may delay, prevent or deter a change in control, or deprive you of a possible premium for your common stock as part of a sale of our company.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
Our headquarters is located at Room 1605, Tianan Hi-tech Plaza Tower A, Tianan Cyber Park, Futian District, Shenzhen, PRC 518040. We have 19 branch offices strategically-located throughout China, affording our customers local expertise and management. Our facilities are used for sales and marketing, research and development and administrative functions. All of the facilities are leased. We believe our facilities are adequate for our current needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET PRICES OF COMMON STOCK
Our common stock price is quoted on the OTC Bulletin Board, or OTCBB, under the symbol “JNGW”. The following table sets forth for the periods indicated the high and low prices per share traded for our common stock as reported on the OTCBB. There were no reported bids for our common stock during 2006 and 2005.
Holders
As of March 10, 2008, there were approximately 39 stockholders of record of our common stock, par value $0.001 per share.
Dividends
We have not paid any cash dividends in the past and do not intend to pay cash dividends on our capital stock for the foreseeable future. Instead, we intend to retain all earnings, if any, for use in the operation and expansion of our business. The payment of any dividends in the future will be at the sole discretion of our Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
There were no sales of unregistered sales of equity securities during the fiscal year ended December 25, 2007 that have not been previously reported.
ISSUER PURCHASES OF EQUITY SECURITIES
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with “Item 6. Selected Financial Data” and our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K.
OVERVIEW
We are one of the leading providers of data mining and customer relationship marketing services in the People’s Republic of China (the “PRC” or “China”). With a customer database of about 300 million Chinese consumers, we enable leading Chinese companies to reach their target audience. Our services include market segmentation, customer trend and churn analysis, fraud detection and direct marketing services such as telemarketing and WVAS. We also operate a software services business, which provides a broad range of billing systems, provisioning solutions, decision support and customer relationship management systems for China’s leading mobile telecommunication carriers. The software services business strengthens sales opportunities for our high margin data mining platform, and allows us to enhance our customer database. We plan to evolve into an integrated marketing platform with targeted outbound sales campaigns via mobile phone advertising, and customer service/order fulfillment at call centers throughout the country.
Currently, we offer 17 software platforms and our intellectual property portfolio is covered by nine patents issued by the National Intellectual Property Administration of China and the Shenzhen Bureau of Science, Technology and Information. When these patents were registered with the appropriate authority, we received a certificate with respect to our protected intellectual property in such software. We then license the software to our customers for a usage fee. We presently do not have any registered trademarks.
The primary geographic focus of our operations is in China, where we derive all of our revenues. We conduct our business operations through Jingwei HengTong, a wholly-owned subsidiary company that became the primary beneficiary of Jingwei Communication via various contractual agreements. See note 8-“PRO FORMA STATEMENT” to the Consolidated Financial Statements for details of the agreements. Both companies are registered in China.
We raised net proceeds of $15.071 million through a private placement in May 2007. The proceeds of the private placement are being used to purchase equipment for storage and maintenance of our data, purchase of new data and working capital. With the injection of this capital, we expect to realize our business strategy and become a leading provider of data mining services in China.
We believe our future growth is in the broad adoption of our data mining service across various business segments and to leverage our vast consumer data to provide target marketing for domestic and multinational companies who want to carve out a burgeoning consumer market in China. In order to cement our leadership position in data mining and marketing, we will need to enhance our data mining infrastructure such as hardware and software tools as well as our data center. In addition, we plan to continue to acquire more consumer data from different industries and to constantly refresh and update the data that will help strengthen our data mining business.
HOW THE COMPANY GENERATES REVENUE
In 2007, we derived a significant amount of our revenues from software and data mining services. Beginning in the second half of 2007, we started providing targeted consumer marketing based on our proprietary consumer database.
Our products and services are sold by our sales and marketing organization, as well as an established reseller network. Data mining services are sold on a project by project basis and, in addition to fees, we share in the revenues derived from consumer purchases resulting from our database marketing and promotion activities.
We operate under exclusive software licensing and revenue sharing agreements with China Mobile in eight provinces and China Unicom in three provinces, and have software installations with several additional telecom companies, including China Broadcast, China Netcom, China Rail Com and China Telecom. In addition, we have recently begun managing third-party software platforms for affiliates of China Mobile in five other provinces and for affiliates of China Unicom in three other provinces.
We own and manage a database containing detailed biographical, demographic and purchasing information on about 300 million Chinese consumers and a selected group of SMEs. We believe our database is the largest in China, and that it would be difficult for competitors to duplicate. The breadth of our database affords our the ability to conduct a wide range of data mining processes. Once a target audience is identified through data mining analysis, we assist our customers in the promotion and marketing of new products and services through telemarketing, direct marketing and mobile text and interactive advertising. We share in the revenues derived from consumer purchases resulting from our marketing and promotion activities. Within our data mining services operations, we also offer telecom providers a vast range of WVAS. Unlike our competitors who mainly use telecom providers’ networks simply as a distribution channel, we create and manage WVAS for telecom providers to offer to their customers under their own brands.
OTHER RECENT DEVELOPMENTS
In February 2008, we entered into a letter of intent to acquire a majority of the shares of Redflag, an outdoor digital media company based in the city of Zhengzhou, the capital city of Henan province. Redflag has installed over 2,000 LED/LCD business stop signs on the major streets in Zhengzhou. This acquisition will provide our corporate customers an effective means to reach their target consumers as 80% of the population in China still depend on buses as their main transportation.
Also in February 2008, we entered into an agreement with Tsinghua University Graduate School, Shenzhen Campus (“GST”), to establish a joint data mining laboratory. The joint laboratory formed by GST and us will focus on optimizing data acquisition, refreshing, cross reference, filtration and classification models and will develop technology to further enhance consumer targeting efforts. Over time, we hope to create the leading technology to access up-to-date, relevant customer data as well as the ability to execute effective and measurable advertising campaigns based on this customer data.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States. In doing so, we have to make estimates and assumptions that affect our reported amount of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on historical data and trends and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.
Revenue Recognition
Our software services revenue are derived principally from operation support services, business support services, third party software maintenance and application developments. Revenues from software services are recognized when all of the following have occurred: (i) a contract has been signed by the customer (ii) the Company has delivered software services to the customer as defined by the customer; (iii) the project milestone delivered is assigned a fixed price; and (iv) the customer’s acceptance of the project is reasonably assured.
Our data mining services revenue are derived principally from data analysis and processing inclusive of market-basis analysis, customer churn analysis, trend analysis, and data marketing services through identifying specific groups of customers and directly marketing to them via either messages through the target customers’ handset or telemarketing. We charge our customers on project basis and/or share in the revenue derived from consumer purchases resulting from our database marketing and promotion activities. We recognize project based revenue when all of the following have occurred: (i) a contract has been signed by the customer; (ii) the Company has delivered the data mining services to the customer as defined by the customer; (iii) the project milestone delivered is assigned a fixed price; and (iv) the customer’s acceptance of the project is reasonably assured. We recognize revenue sharing with our customers according to the terms of the agreements with them once a written confirmation from the customer is received on a monthly basis.
Our consumer electronic sales include sales of mobile handsets identified by our data mining capabilities. We recognize all revenue from the sales of mobile handsets on a gross basis following Emerging Issues Task Force (“EITF”) No. 99-19, “Reporting Revenue as a Principal versus Net as an Agent.” The determination of whether we are the principal for a particular type of service is subjective in nature and is based on the evaluation of the terms of the arrangement. If terms of the arrangement were to change and cause us to no longer be a principal to the users, we would have to record our consumer electronic sales on a net basis. Consequently, this would cause a significant decline in our net revenues, but should not have a significant impact on our gross margin. During the year ended December 31, 2007, approximately 43% of our net revenues were consumer electronic sales recorded on a gross basis.
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts based on management’s assessment of the collectability of trade and other receivables. We make judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers is to deteriorate resulting in their inability to make payments, a larger allowance may be required.
Based on the above assessment, we established the general provisioning policy to make the allowance for doubtful accounts according to the aging of trade and other receivables as follows:
Additional specific provisions are made against trade and other receivables aged less than three years to the extent which they are considered to be doubtful.
Bad debts are written off when identified. We extend unsecured credit to customers ranging from four to seven months in the normal course of business. We do not accrue interest on trade and other receivables.
Foreign Currency
Our functional currency is the renminbi (“RMB”) which is not freely convertible into foreign currencies. We maintain our financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the date of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
For financial reporting purposes, our financial statements which are prepared using the functional currency have been translated into U.S. dollars. Assets and liabilities are translated at the exchange rates at the balance sheet date and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign currency translation adjustment of other comprehensive income, a component of stockholders’ equity. There is no significant fluctuation in exchange rate for the conversion of RMB to U.S. dollars after the balance sheet date.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (the “FASB”) issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”). Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 has been adopted by us as of January 1, 2007, and the provisions of FIN 48 will be applied to all tax positions under SFAS No. 109 after initial adoption. The cumulative effect of applying the provisions of this interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The adoption of FIN 48 did not require an adjustment to our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurement. SFAS No. 157 will be effective for fiscal years after November 15, 2007 and interim periods within those fiscal years. We do not believe that the adoption of the provisions of SFAS No. 157 will materially impact our financial statements or footnote disclosures.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and will become effective for us beginning with the first quarter of 2008. We are currently evaluating the impact of SFAS No.159 on our consolidated financial statements and footnote disclosures.
On December 4, 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, Noncontrolling interest in Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. The statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and expands disclosures in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We have not yet determined the impact of the adoption of SFAS No. 160 on our consolidated financial statements and footnote disclosures.
On December 4, 2007, the FASB issued SFAS No.141R, Business Combinations (SFAS No. 141R). SFAS No. 141R requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed, establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to expand disclosures about the nature and financial effect of the business combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We have not yet determined the impact of the adoption of SFAS No. 141R on our consolidated financial statements and footnote disclosures.
RESULTS OF OPERATIONS
Net revenues
Our net revenue for the year ended December 31, 2007 excludes that of Jingwei Communications and its subsidiaries, our variable interest entities, for one month ended January 31, 2007, as Jingwei BVI became the ultimate beneficiary of Jingwei Communications on February 8, 2007. See note 2-“Basis of presentation and consolidation” to the Consolidated Financial Statements for details. As the prior year periods reflected pre-acquisition numbers during which time we had no operations and were considered a “shell company”, we make a comparison to Jingwei Communications’ prior years’ consolidated financials as they account for substantially all of our revenues and costs of revenues for the eleven months ended December 31, 2007.
Our total net revenue increased 79% from 2006 to 2007. This was primarily due to year-over-year increase in Data mining revenue by 56% and the new addition of consumer electronic sales, partially offset by the decrease of software services revenue by 27%. Total net revenues increased 53% from 2005 to 2006. This was primarily due to the increases of 173% in data mining revenue and 23% in software services revenue. The growth of data mining revenue in 2007 over 2006 was mainly driven by the geographic expansion and adoption of data mining outside the telecom sector. The increase of data mining revenue in 2006 over 2005 was mainly due to 2005 not being a full operational year for our data mining business. The decrease of software services in 2007 over 2006 was mainly due to our telecom customers holding their investments steady in 2007, as 3G service policies were not clear in China. We expect our software revenue to increase in 2008 with the anticipated rollout of 3G services in China.
The table set forth below presents the financials in 2007:
Total net revenue increased 79% from the third quarter to the fourth quarter. This was primarily due to quarter-over-quarter increase in software services by 346%, consumer electronic sales by 29% and data mining by 18%. Total revenues declined 33% from the second quarter to the third quarter. This was primarily due to the 54% decline in consumer electronic sales and partially offset by the 7% and 14% quartet-over-quarter increase in data mining and software, respectively.
Data mining. Data mining revenue grew 18% in the fourth quarter and 7% in the third quarter. These growths were mainly driven by the geographic expansion and adoption of data mining outside the telecom sector. Our 5 new branch offices in Tianjin, Shandong, Jiangsu, Guizhou and Shenzhen began generating revenue in the third quarter. These new offices allow us to better service China Mobile and China Unicom at the provincial level, as well as market our services to new and other existing customers. We started to provide data mining services for the utility, real estate, financials, retail and other sectors in the third quarter. The revenue further increased in the fourth quarter.
Software Services. Software services revenue grew 346% in the fourth quarter and 14% in the third quarter. The sharp growth in the fourth quarter was primarily ascribed to the delay of revenue recognition of software services resulted from the extension of testing period for several large contracts and successful export of $1.8 million in software in the fourth quarter.
Consumer Electronic Sales. We started the contract to promote and market Kangka brand mobile handsets in the second quarter. The net revenue of the mobile handsets sales decreased 54% in the third quarter, as we opted to reduce the sales since this business generated very low gross margin for us. During the fourth quarter, we were able to obtain approval from the PRC taxing authorities regarding a change in paying a VAT as our consumer handset purchases and collecting a VAT as consumer handset sales to paying a business tax on these transactions. As a result, we reclassified approximately $1.4 million in such VAT payments and receipts as cost of goods sold and revenues, respectively. The net revenue increase in the fourth quarter was ascribed to this reclassification.
Gross profit margin
Our overall gross margin increased 4 percentage points to 45% in 2007 from 41% in 2006. The gross margin declined slightly from 42% in 2005 to 41% in 2006. The increase in gross margin in 2007 was mainly due to revenue growth and improved fixed cost allocations associated with the increase in revenues.
Overall gross margin increased 3 percentage points and 16 percentage points quarter-over-quarter in the fourth quarter and the third quarter in 2007, respectively, which was mainly due to the decline of consumer electronic sales as a percentage of total net revenues to 32% in the fourth quarter from 45% in the third quarter and to 45% in the third quarter from 66% in the second quarter of 2007.
Data mining. The gross margin of data mining decreased 9 percentage points quarter-over-quarter in the fourth quarter. This was mainly due to that most amortization costs of acquired database assets occurred in the fourth quarter. The total amortization costs in 2007 was $412,000.
Software Services. The gross margin of software services decreased 10 percentage points quarter-over-quarter in the fourth quarter of 2007. This was mainly due to that additional direct and indirect costs were incurred as a result of the extension of testing period for some large contracts.
Consumer Electronic Sales. The gross margin of consumer electronic sales was stable during the year.
Operating Expenses
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of compensation and incentive expenses, entertaining and marketing expenses, fees for professional services, travel expenses, and office expenses. The quarter-over-quarter increases in the fourth quarter and the third quarter reflected increased headcount in the second half of 2007 as a result of geographic expansion and enhancement of data mining business. Professional services expense increased towards the year end, partially causing the increase of selling, general and administrative expense in the fourth quarter.
Research and Development Costs. Research and development costs consist primarily of personnel-related expenses incurred for the development of software and maintenance of our database. The quarter-over-quarter increase in the fourth quarter was primarily due to increases in headcount and expenses spent for maintenance of the database. We expect our research and development expenses to continue to increase in absolute dollars in the near future.
Provision for income taxes
Based on our current operating structure and preferential tax treatments available to us in China, the effective income tax rate for our operations in China was 7.5% in 2007. If tax benefits currently available to us in China were no longer available, our effective income tax rates for our operations could increase in 2008 and thereafter. See Note 4-“Income Taxes” to the Consolidated Financial Statements for further discussion on income taxes. We expect our effective tax rate for our operations to increase in the future, as the preferential tax treatments on one of the subsidiaries of Jingwei Communication, our variable interest entity, will be phased out in 2008.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations and capital expenditures primarily using the net proceeds of $15.071 million raised through the private placement in May 2007 as well as cash generated from operations. The net proceeds from private placement are being used for the purchase of customer data, database storage equipment and increase of working capital. Prior to the private placement, the company has financed its operations primarily through internally generated funds.
As of December 31, 2007, we had $10.8 million in cash and cash equivalents to meet the future requirements of our operating activities. We believe that our existing cash and cash equivalents will be sufficient to fund our operating activities, capital expenditures and other obligations for at least the next 18 months.
However, we may sell additional equities or obtain credit facilities to enhance our liquidity position or to increase our cash reserve for future acquisitions. The sale of additional equity would result in further dilution to our shareholders. The incurrence in indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
The following tables set forth the movement of our cash and cash equivalents for the year ended December 31, 2007.
Operating activities
Net cash provided by operating activities for the year ended December 31, 2007 was $4.2 million. This was primarily attributable to the net income of $7.7 million, adjusted by non-cash related expenses including depreciation of $40 thousand and amortization of intangible assets of $412 thousand and a net increase in working capital items of $4.0 million. The net increase in working capital items was primarily due to an increase in trade receivables which resulted from the significant increase of revenue during 2007, partially offset by the increase in trade payables and other payables and accrued expenses.
Our net income for the year ended December 31, 2007 has eliminated the pre-acquisition net income of Jingwei Communication, our variable interest entity, for the month of January 2007. Our operating cash flows has eliminated the pre-acquisition operating cash flows of Jingwei Communication for the same period. See Note 2-“SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” to the Consolidated Financial Statements for further discussion on basis of presentation and consolidation.
Investing activities
Net cash used by investing activities for the year ended December 31, 2007 was $9.9 million which was mainly attributable to the acquisition of customer database and equipment for storage of data.
Financing activities
Net cash provided by financing activities for the year ended December 31, 2007 was $14.8 million, of which $15.071 million was related to the net proceeds from the private placement in May 2007.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Foreign Exchange Exposure
Translations
Our reporting currency is USD. The functional currency of our operating subsidiary in the PRC is RMB and our operating subsidiary also maintains its books and records in RMB. Accordingly, we are exposed to foreign currency translation effects as described in our consolidated financial statements.
Transactions
We are, to a certain extent, exposed to transaction foreign currency exposure arising from our operations in the PRC.
Our foreign currency exchange risk arises mainly from this mismatch between the currency of our sales, purchases and operating expenses. To the extent that our sales, purchases and operating expenses are not matched in exactly the same currency, we may be susceptible to foreign exchange exposure.
In addition, we also maintain a US dollars account with a financial institution for our US dollars receipts and US dollars payments. We may also incur foreign exchange gains or losses when we convert the US dollars balances into RMB.
Currently, we do not have a formal foreign currency hedging policy as our foreign exchange gains and losses in 2006 and 2007 were insignificant. Our management believes that it is more efficient for us to assess the hedging need of each transaction on a case-by-case basis. We will continue to monitor our foreign exchange exposure in the future and will consider hedging any material foreign exchange exposure should such need arise.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements and the footnotes thereto are included in the section beginning on page.
1. Report of Independent Registered Public Accounting Firm.
2. Consolidated Balance Sheets as of December 31, 2007 and 2006.
3. Consolidated Statements of Operations for the years ended December 31, 2007 and 2006.
4. Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2007 and 2006.
5. Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006.
6. Notes to the Consolidated Financial Statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants on accounting and financial disclosure.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on this evaluation, our principal executive officer and principal financial officer have concluded that during the period covered by this report, such disclosure controls and procedures were effective to detect the inappropriate application of US GAAP.
Management’s Report on Internal Control Over Financial Reporting
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, our principal executive officer and principal financial officer have concluded that during the period covered by this report, our internal controls over financial reporting were effective.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can only provide reasonable assurances with respect to financial statement preparation and presentation. In addition, any evaluation of effectiveness for future periods is subject to the risk that controls may become inadequate because of changes in conditions in the future.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during the year ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III.
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our current directors and executive officers are as follows:
Name
Age
Position
George (Jianguo) Du
President, General Manager and Chairman of the Board of Directors
Regis Kwong
Chief Executive Officer
Director
Helen Lu
Chief Financial Officer
Dr. Li Wei (David Lee)
Chief Technology Officer
Director
Zhisheng Wang
Executive General Manager; VP of Sales & Marketing
Director
Corla Chen
Director
Jason Chen
Director
Lou Guo Qing
Director
Lily Sun
Director
George (Jianguo) Du, President, General Manager and Chairman of the Board of Directors
Mr. Du was appointed President, General Manager and Chairman of the Board of Directors in connection with the Share Exchange. Prior to the Share Exchange, Mr. Du served in the same position, and as Chairman of the Board of Directors, at New Yulong, Jingwei BVI’s predecessor, from its inception in 2001. Mr. Du began his career as an engineer at the Shanghai 710 Research Institute (the “Institute”) in 1987 and later became the youngest Deputy Director of the Institute and General Manager of one of its subsidiaries in 1991. In 1993, Mr. Du founded Shenzhen Yulong Communications with fellow researcher, Mr. Guo Deying, to provide mobile paging software systems in China. In 1999, Shenzhen Yulong Communications split into two entities: Jingwei and China Wireless Technologies Limited. In December 2004, China Wireless Technologies Limited was listed on the Hong Kong Stock Exchange (ticker: 2369), and subsequently, Mr. Du became the Chairman of Jingwei. Mr. Du received his B.S. in Precision Instruments from Shanghai Jiaotong University in 1987 and an M.B.A. from Duke University in 2004.
Regis Kwong, Chief Executive Officer and Director
Mr. Kwong was appointed as Chief Executive Officer and was appointed as a Director in May 2007 in connection with the Share Exchange. Prior to the Share Exchange, Mr. Kwong served in the same position, and as a Director, at New Yulong, Jingwei BVI’s predecessor, since 2005. Mr. Kwong has over 20 years experience with leading global telecom services providers. From 1990 to 1995, Mr. Kwong was Regional Sales Manager at GTE (now Verizon). From 1995 to 1997, Mr. Kwong worked for GTE China as its Head of Operations. From 1997 to 1999, Mr. Kwong served as Vice President and General Manager for GTS China, a telecom operator in the United States and Europe. After GTS, Mr. Kwong founded Terremark Asia, a subsidiary of Terremark Worldwide (AMEX: TWW), to provide Internet messaging and Internet exchange services in China. From 2002 to 2005, Mr. Kwong was the Managing Director for China Consolidated Investments Limited. Mr. Kwong received his B.S. and Masters Degree in Computer Engineering from California Polytechnic University in 1985 and 1987, respectively, and an M.B.A. from Rutgers University in 1999.
Helen Lu, Chief Financial Officer
Ms. Lu was appointed as Chief Financial Officer effective December 6, 2007. Prior to the appointment, Ms. Lu served as the financial director of Pearson Financial Learning Asia, a division of Pearson Education in Asia, where she supervised and controlled the daily operational aspects of accounting systems, pricing, budgeting and credit controls and financial reporting. Prior to that, from 2005-2007, Ms. Lu worked with Ericsson (China) Communication Ltd. as an Internal Auditor. Ms. Lu served as senior financial analyst and financial controller for China Consolidated Investments Limited (CCIL), a Sino-Malaysian investment company with interests in several businesses including telecommunication services, from 2003-2004. Previously, Ms. Lu served as a senior auditor at Ernst & Young China where her experience included conducting IPO audits on numerous Chinese companies. Ms. Lu holds an MBA degree in Finance from the Chinese University of Hong Kong, and a B.A. degree in Economics from the Central University of Finance and Economics in China.
Dr. Li Wei (David Lee), Chief Technology Officer and Director
Dr. Li was appointed as Chief Technology Officer and was appointed as a Director in connection with the Share Exchange. Prior to the Share Exchange, Dr. Li served in the same position, and as a Director, at New Yulong, Jingwei BVI’s predecessor, since March 2005. Dr. Li was Deputy General Manager at Yijin Technology Company (“Yijin”) from October 2003 to March 2005. Prior to Yijin, Dr. Li was the Chief Technology Officer at Crystaltrace Gever Technology Company from November 2002 to October 2003. From 1998 to 2002, Dr. Li was the Deputy General Manager and Head of Research and Development at Yestock Technology Co. Ltd., a wireless and global positioning system (GPS) solutions provider in China. Dr. Li holds a PhD in Business Administration and a Masters Degree in Software Engineering from University of Wuhan in 2007 and 2004, respectively, and received his B.S. in Computer Science and Application from Central South University of Technology in 1998.
Zhisheng Wang, Executive General Manager and VP of Sales and Marketing
Mr. Whang was appointed as Executive General Manager and VP of Sales and Marketing in connection with the Share Exchange. Prior to the Share Exchange, Mr. Whang served in the same position at New Yulong, Jingwei BVI’s predecessor, since 2004, Mr. Wang was the Deputy General Manager at China Telecom in the Henan province from May 2002 to August 2004. Mr. Wang has over 20 years of senior engineering and management experience with China Post and Telecom. Mr. Wang received his Masters Degree in Computer Science and Technology from Information Engineering University in 2004, and his B.S. in Telephone Communications from Henan Posts and Telecommunications School in 1981.
Jason Chen, Director
Mr. Chen is the founder and Chairman of China Photar Electronics Group Limited, a Hong Kong stock exchange listed company (ticker: 8220). In 1995, Mr. Chen created a joint venture with Philips Electronics to manufacture fax machines and wireless phones. In 2003, Mr. Chen created a joint venture with Sagem Communications (“Sagem”) to manufacture consumer electronics and office automation products for worldwide distribution and listed the joint venture on the Hong Kong stock exchange in 2003. He was the Chief Executive Officer of Guangdong Fengda Hi-tech Co. Ltd. from 2002 to 2004 and has been the Chairman of China Fengda Electronic Group since 2004. Mr. Chen is the People’s Representative for Heyuan City in the Guangdong province. Mr. Chen received his B.A. in Chinese from Shenzhen University in 1998 and his Masters Degree in Administration Management from Shenzhen University in 2003.
Corla Chen, Director
Ms. Chen joined Jingwei as a director in 2007. Since 2004, Ms. Chen has been the General Manager of Motion Telecom Holdings Ltd. She was the Secretary of the Board of Directors of Motion Telecom Holdings Ltd. from 2003 to 2004. Ms. Chen received her I.M.B.A. from Peking University in Business Administration in 2004 and received her B.A. in English from Chengdu University in 1991.
Lou Guo Qing, Director
Mr. Lou has been a Senior Vice President at China Electronics Appliance Corporation, one of the largest telecom equipment providers in China, since 2004. From 2002 to 2004, Mr. Lou was the Deputy General Manager at China Unicom in the Henan province. From 2000 to 2002, Mr. Lou was the General Manager at China Unicom in the Zhengzhou province. Mr. Lou received his E.M.B.A. from China Europe International Business School in 2005 and his B.A. in Chinese from Henan University in 1989.
Lily Sun, Director
Ms. Sun has been a Vice President at Photar International Investment since 2004. Prior to joining Photar International Investment, Ms. Sun was the Sales Director at Shenzhen Modern Computing Limited from 2001 to 2004. From 1999 to 2001, Ms. Sun was a Sales Manager at Yulong Communications. Ms. Sun received her B.S. in Technology Management from Wuhan Technology Institute in 1999.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid by us in 2007 to all individuals who served as our chief executive officer and chief financial officer, who we collectively refer to as the named executive officers (“NEOs”). No other executives received total compensation greater than $100,000 in 2007.
Summary Compensation Table
Summary Compensation of Named Executive Officers(1)
(1)
Mr. Kwong did not receive compensation in 2007.
(2)
Ms. Helen Lu joined Jingwei in December 2007.
During each of the last two fiscal years, none of our other officers had salary and bonus greater than $100,000. In addition, our executive officers and/or their respective affiliates will be reimbursed by us for any out-of-pocket expenses incurred in connection with activities conducted on our behalf. There is no limit on the amount of these out-of-pocket expenses and there will be no review of the reasonableness of such expenses by anyone other than our Board of Directors, which includes persons who may seek reimbursement, or a court of competent jurisdiction if such reimbursement is challenged.
Director Compensation
Our directors are reimbursed for expenses incurred by them in connection with attending Board of Directors’ meetings, but they do not receive any other compensation for serving on the Board of Directors.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
Pension Benefits
We do not sponsor any qualified or non-qualified defined benefit plans.
Nonqualified Deferred Compensation
We do not maintain any non-qualified defined contribution or deferred compensation plans.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 10, 2008, certain information concerning the beneficial ownership of Common Stock by (i) each stockholder known to us to beneficially own five percent or more of our outstanding Common Stock; (ii) each director; (iii) each executive officer; and (iv) all of our executive officers and directors as a group, and their percentage ownership and voting power. As of March 10, 2008, there were 17,049,000 shares of Common Stock outstanding.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From time to time, our Chairman, Mr. George Du has financed our operations personally. We currently have a loan of $543,597 payable to Mr. Du. as of December 31, 2007, which amount includes the balance RMB 1,600,000 of a loan made on June 28, in the amount of RMB2,000,000 to New Yulong, a wholly-owned subsidiary of Jingwei Communications, for working capital purposes. This loan bears interest at a rate of 6.75% per annum and is unsecured and repayable on demand by Mr. Du. The remainder $324,842 of the balance is interest free payable on demand by Mr. Du.
During the year ended December 31, 2007, we paid interest expense of $44,073 against the loans payable to Mr. Du and made repayments of the loans totaling $2,000,949 to Mr. Du.
Due to PRC regulations that restrict PRC entities engaged in value-added telecommunications and Internet services from performing services for entities located outside of the PRC, or involve onerous currency compliance procedures, we have contractual arrangements with HuashiDai Information Technology Limited, a Hong Kong company in which Mr. Du is the majority shareholder, to engage in these business activities on our behalf. HuashiDai receives no consideration or other benefits for performing these services, and we receive payment for the work performed or good sold, as the case may be. In the first half year of 2007, Huashidai Information Technology Limited has signed contracts for the benefit of Jingwei with Hong Kong Qi Feng company for the amount of $4,686,230, which resulted in revenue of $5,097,395 in the first six months of 2007 and net income of $411,165 for the Company. If these services or goods were provided by us to an unrelated entity in an arm’s length transaction, the estimated fair value for these services or goods would be equal to the amount we receive from HuashiDai’s customer or pay to HuashiDai’s supplier, as the case may be, as there is no financial benefit created for Mr. Du’s company in this regard.
On May 16, 2007, Neoview entered into a Share Exchange Agreement (the “Exchange Agreement”) with Jingwei BVI, the shareholders of Jingwei BVI and Synergy Business Consulting, LLC, a principal shareholder of Neoview. Pursuant to the terms of the Exchange Agreement, the shareholders of Jingwei BVI transferred all of the share of Jingwei BVI in exchange for the issuance of 11,554,000 shares of Neoview’s common stock (“the Share Exchange”). At the time of entering into the Exchange Agreement, Jingwei BVI was the ultimate beneficiary of the control arrangements established with respect to Jingwei Communication and its results of operations. As a result of the share exchange, Jingwei BVI became our wholly-owned subsidiary and the shareholders of Jingwei BVI acquired approximately 86.4% of our issued and outstanding stock. Concurrently with the share exchange, we entered into a securities purchase agreement with a number of accredited investors for the sale of an aggregate of 3,395,000 units at $5.00 per unit, consisting of one share of our common stock and 0.30 of a warrant to purchase one share of the common stock at an exercise price of $6.00 per share, for aggregate gross proceeds equal to $16,975,000. Each investor agreed to purchase (i) that number of shares equal to the amount it was willing to invest divided by $5.00 and (ii) a warrant equal to the number of shares purchased pursuant to clause (i) multiplied by 30%. We also entered into an escrow agreement (the “Escrow Agreement”) with CRT Capital Group, LLC, a representative of the investors, Continental Stock Transfer & Trust Company (the “Escrow Agent”) and the following shareholders of Jingwei BVI: Centurion Investments Limited, Sidford International Limited, Charmfield Limited, Guo Qiang, Meng Fu Ying and Sun Yan Yan, in which 2,000,000 of the shares (the “Escrow Shares”) were delivered to the Escrow Agent as security for the achievement of $6,827,000 in net income for the year ended December 31, 2007 (the “Net Income Threshold”). If we achieve the Net Income Threshold, the Escrow Shares will be released back to such shareholders. If the Net Income Threshold is not achieved, an aggregate number of Escrow Shares (such number to be determined by a formula included in the Escrow Agreement) will be distributed pro-rata to the investors, based on the actual net income for the year ended December 31, 2007. The shareholders entered into the Escrow Agreement in favor of the investors as the valuation established with respect to Jingwei for purposes of their investment assumed our net income for 2007 would be approximately $6.8 million. By transferring shares pursuant to the Escrow Agreement in the event the Net Income Threshold is not achieved, the enterprise valuation will effectively be retroactively reduced in proportion. For example, in the event our net income in 2007 is $3.4 million, the deemed enterprise valuation will be reduced by half and the investors will receive the same number of shares they purchased in the offering for no additional consideration, effectively resulting in a 50% reduction of their original purchase price.
Our only “promoter” (within the meaning of Rule 405 under the Securities Act), or person who took the initiative in the formation of our business or in connection with the formation of our business received 10% of our debt or equity securities or 10% of the proceeds from the sale of such securities in exchange for the contribution of property or services, during the last five years has been Mr. Du. As disclosed elsewhere, in connection with the Share Exchange, the shareholders of Jingwei BVI received shares of Neoview’s common stock. Mr. Du, a shareholder of Jingwei BVI received approximately 72% of the outstanding shares of our US predecessor Neoview Holdings and, as the principle shareholder of Jingwei BVI, actively negotiated with the former owners of Neoview Holdings regarding the economics of such transaction.
On July 12, 2006, Synergy Business Consulting, LLC (“Synergy”) purchased 2,050,000 shares of common stock, or approximately 51.25% of the issued and outstanding common stock of Neoview Holdings from three existing shareholders in a private transaction, and attained voting control of Neoview Holdings. This was reported in a Form 8-K filed with the Securities and Exchange Commission on July 17, 2006. There were no transactions pursuant to which Synergy contributed assets to us or we issued shares to Synergy during the last five years.
The Chinese government has enacted an extensive regulatory scheme governing the operation of business with respect to value added telecommunication services, foreign investors were prohibited from investing in Internet content services. In compliance with PRC’s foreign investment restrictions, Jingwei HengTong and Jingwei Communications entered into various contractual agreements on February 8, 2007, details of which are summarized as follows:
Exclusive Technology Consulting Services Agreement. Pursuant to the exclusive technology consulting services agreement between Jingwei HengTong and Jingwei Communications, Jingwei HengTong has the exclusive right to provide to Jingwei Communications technology consulting services related to the design, development and implementation of computer software and the maintenance of networks, and provide access to Jingwei HengTong’s team of personnel who have extensive experience in information technology services. Under the terms of this agreement, Jingwei HengTong has agreed to pay all of the operating costs incurred by Jingwei Communications and Jingwei Communications shall pay bi-monthly service fees to Jingwei HengTong consisting of all income from the business operations. This agreement is for a ten year term expiring on February 8, 2017, with an automatic one (1) year renewal. The agreement is subject to early termination in accordance with the terms therein.
Operating Agreement. Pursuant to the operating agreement among Jingwei HengTong, Jingwei Communications and the shareholders of Jingwei Communications, Jingwei HengTong agrees to guaranty Jingwei Communications’ performance of its obligations under contracts, agreements and transactions between Jingwei Communications and third party customers. In return for the guaranty, Jingwei Communications has pledged its accounts receivables and all of its assets to Jingwei HengTong. The shareholders of Jingwei Communications have also agreed to appoint persons recommended by Jingwei HengTong to serve on Jingwei Communications’ Board of Directors and to appoint Jingwei HengTong’s managers as managers of Jingwei Communications. In addition, Jingwei Communications and its shareholders agree that without the prior consent of Jingwei HengTong, Jingwei Communications will not engage in any transactions that could materially affect the assets, liabilities, obligations, rights or operations of Jingwei Communications, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, including intellectual property rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operations to any third party. This agreement is for a ten year term expiring on February 8, 2017, subject to early termination in accordance with the terms therein.
Intellectual Property Assignment Agreement. Under the intellectual property assignment agreement, Jingwei Communications assigned to Jingwei HengTong all of its interest and rights in certain intellectual property, including without limitation, certain trademarks, the ownership of Jingwei Communications’ consumer database, and a software copyright and license. Jingwei HengTong paid RMB 1,000 for the intellectual property transferred under this agreement. Jingwei Communications agreed to take all actions and pay all expenses in connection with registering the intellectual property in Jingwei HengTong’s name.
Intellectual Property Agreement. Under the intellectual property agreement, Jingwei HengTong granted Jingwei Communications a non-exclusive, non-assignable and non-transferable license to use certain intellectual property, including without limitation, certain trademarks, consumer data bases, and a software copyright and license for use exclusively in the PRC. Jingwei HengTong will retain the sole and exclusive rights in the intellectual property, including any improvement, upgrades and derived products, no matter whether such products are created by Jingwei HengTong and Jingwei Communications. The annual license fee for all intellectual property is RMB 1,000,000. Jingwei HengTong has the right to waive payment, or adjust the amount of any license fees at any time, during the course of the agreement. This agreement is for a five year term expiring on February 8, 2012, subject to early termination in accordance with the terms therein.
Equity Pledge Agreement. Under this agreement between the shareholders of Jingwei Communications and Jingwei HengTong, the shareholders of Jingwei Communications pledged all of their equity interests in Jingwei Communications to Jingwei HengTong to guarantee their obligations under the amended and restated loan agreement and Jingwei Communication’s performance of its obligations under the technology consulting agreement. If Jingwei Communications or any of its shareholders breaches its respective contractual obligations under the amended and restated loan agreement or the technology consulting agreement, or upon the occurrence of one of the events regarded as an event of default under this agreement, Jingwei HengTong, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The shareholders of Jingwei Communications agreed not to dispose of the pledged equity interests or take any actions that would prejudice Jingwei HengTong’s interest, and to notify Jingwei HengTong of any events or upon receipt of any notices which may affect the shareholders’ interest. The equity pledge agreement will expire two years after Jingwei Communications and its shareholders fully perform their respective obligations under the technology consulting agreement and the loan agreement.
Exclusive Option Agreement. Under the option agreement among Jingwei HengTong, Jingwei Communications and the shareholders of Jingwei Communications, the shareholders of Jingwei Communications irrevocably granted Jingwei HengTong or its designated person an exclusive option to purchase, to the extent permitted by PRC law, a portion or all of the equity interests in Jingwei Communications for the cost of the original purchase price paid for the equity interests; provided, however, if under applicable PRC laws and regulations an appraisal is required, then the purchase price shall be the minimum amount of consideration permitted by applicable PRC law. In addition, Jingwei Communications and its shareholders agree that without the prior consent of Jingwei HengTong, Jingwei Communications will not take certain actions that may have a material adverse effect on the equity interests or the liabilities, rights or operations of Jingwei Communications. Jingwei HengTong or its designated person has the sole discretion to decide when to exercise the option, whether in part or in full. This agreement is for a ten year term expiring on February 8, 2017, subject to early termination in accordance with the terms therein.
Amended and Restated Loan Agreement. Under the loan agreement between Jingwei HengTong and the shareholders of Jingwei Communications, the shareholders confirmed that Jingwei HengTong had made an RMB2,000,000 interest-free loan to the shareholders of Jingwei Communications solely for the shareholders to fund the capitalization of Jingwei Communications. The loan can only be repaid upon the transfer of the equity interests from the shareholders to Jingwei HengTong and the use of the proceeds from such transfer to repay the loan. This agreement is for a ten year term expiring on February 8, 2017, subject to acceleration and extension in accordance with the terms therein.
Jingwei Communications was established on May 8, 2001 in the PRC. It has registered capital of RMB5,000,000 and is principally engaged in software development and data mining services in PRC. Mr. Du is the controlling stockholder of Jingwei Communications who holds 90% of its registered capital. Although the foregoing contractual arrangements that were implemented in order to comply with PRC law had the effect of divesting Mr. Du of direct economic benefit of owning Jingwei Communications, Mr. Du's plans for Jingwei's strategic growth and the need for foreign capital were the basis for his decision to implement such structure.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Audit Committee has selected Morrison Cogen LLP as our independent accountants for the fiscal year ended December 31, 2007. Morrison Cogen LLP was not our independent accounting firm for the fiscal year ended December 31, 2006.
Public Accountants’ fees
For fiscal years ended December 31, 2007, fees for services provided by Morrison Cogen LLP were as follows:
Audit Fees were for professional services rendered for the audit of the Company’s annual financial statements, the review of quarterly financial statements, and the preparation of statutory and regulatory filings. Audit-Related Fees relate to professional services rendered in connection with accounting consultations relating to SEC reviews on filings. Tax fees consist of fees billed for professional services for tax compliance, tax planning and tax advice. These services include assistance regarding federal, state and international tax compliance and planning, tax audit defense, and mergers and acquisitions.
Pre-Approval Policies and Procedures
In accordance with the SEC’s auditor independence rules, the Audit Committee has established the following policies and procedures by which it approves in advance any audit or permissible non-audit services to be provided to the Company by its independent auditor.
Prior to the engagement of the independent auditor for any fiscal year’s audit, management submits to the Audit Committee for approval lists of recurring audit, audit-related, tax and other services expected to be provided by the auditor during that fiscal year. The Audit Committee adopts pre-approval schedules describing the recurring services that it has pre-approved, and is informed on a timely basis, and in any event by the next scheduled meeting, of any such services rendered by the independent auditor and the related fees.
The fees for any services listed in a pre-approval schedule are budgeted, and the Audit Committee requires the independent auditor and management to report actual fees versus the budget periodically throughout the year. The Audit Committee will require additional pre-approval if circumstances arise where it becomes necessary to engage the independent auditor for additional services above the amount of fees originally pre-approved. Any audit or non-audit service not listed in a pre-approval schedule must be separately pre-approved by the Audit Committee on a case-by-case basis. Every request to adopt or amend a pre-approval schedule or to provide services that are not listed in a pre-approval schedule must include a statement by the independent auditors as to whether, in their view, the request is consistent with the SEC’s rules on auditor independence.
The Audit Committee will not grant approval for:
-
any services prohibited by applicable law or by any rule or regulation of the SEC or other regulatory body applicable to the Company;
-
provision by the independent auditor to the Company of strategic consulting services of the type typically provided by management consulting firms; or
-
the retention of the independent auditor in connection with a transaction initially recommended by the independent auditor, the tax treatment of which may not be clear under the Internal Revenue Code and related regulations and which it is reasonable to conclude will be subject to audit procedures during an audit of the Company’s financial statements.
Tax services proposed to be provided by the auditor to any director, officer or employee of the Company who is in an accounting role or financial reporting oversight role must be approved by the Audit Committee on a case-by-case basis where such services are to be paid for by the Company, and the Audit Committee will be informed of any services to be provided to such individuals that are not to be paid for by the Company.
In determining whether to grant pre-approval of any non-audit services in the “all other” category, the Audit Committee will consider all relevant facts and circumstances, including the following four basic guidelines:
-
whether the service creates a mutual or conflicting interest between the auditor and the Company;
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whether the service places the auditor in the position of auditing his or her own work;
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whether the service results in the auditor acting as management or an employee of the Company; and
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whether the service places the auditor in a position of being an advocate for the Company.
PART IV.
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
An index to Consolidated Financial Statements appears on page.
2. Schedules
All financial statement schedules are omitted because they are not applicable, not required under the instructions or all the information required is set forth in the financial statements or notes thereto.
(b) Exhibits
Exhibit Number
Description
2.1
Share Exchange Agreement dated as of May 16, 2007 (1)
2.2
Agreement and Plan of Merger dated May 17, 2007 (1)
3.1
Certificate of Incorporation (2)
3.2
By-laws of the Company (2)
4.1
Form of Lock Up Agreement, dated as of May 16, 2007 (1)
4.2
Form of Warrant (1)
10.1
Registration Rights Agreement, dated as of May 16, 2007 (1)
10.2
Securities Purchase Agreement, dated as of May 16, 2007 (1)
10.3
Escrow Agreement dated as of May 16, 2007 (1)
10.4
Exclusive Technology Consulting Services Agreement dated February 8, 2007 (3)
10.5
Operating Agreement dated February 8, 2007 (3)
10.6
Intellectual Property Assignement Agreement dated February 8, 2007 (3)
10.7
Intellectual Property Agreement dated February 8, 2007 (3)
10.8
Equity Pledge Agreement dated February 8, 2007 (3)
10.9
Exclusive Option Agreement dated February 8, 2007 (3)
10.10
Amended and Restated Loan Agreement dated February 8, 2007 (3)
21.1
Subsidiaries of Jingwei International Limited, filed herewith
31.1
Certification of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2
Certification of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith.
32.2
Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith.
(1) Incorporated by reference herein to the corresponding exhibit to the Current Report on Form 8-K filed on May 21, 2007.
(2) Incorporated by reference herein to the corresponding exhibit to the Company’s registration statement on Form SB-2 (File No. 333-122557).
(3) Incorporated by reference herein to the corresponding exhibit to the Company’s registration statement on Form SB-2 (File No. 333-145496).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 13, 2008
JINGWEI INTERNATIONAL LIMITED
By:
/s/ Regis Kwong
Name: Regis Kwong
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: March 13, 2008
By:
/s/ Regis Kwong
Name: Regis Kwong
Title: Chief Executive Officer (principal executive officer)
Dated: March 13, 2008
By:
/s/ Helen Lu
Name: Helen Lu
Title: Chief Financial Officer (principal financial and accounting officer)
Dated: March 13, 2008
By: /s/ George Du
Name: George (Jianguo)Du
Title: President and Chairman
Dated: March 13, 2008
By:
/s/ Dr. Li Wei
Name: Dr. Li Wei (David Lee)
Title: Director
Dated: March 13, 2008
By:
/s/ Zhisheng Wang
Name: Zhisheng Wang
Title: Director
Dated: March 13, 2008
By:
/s/ Corla Chen
Name: Corla Chen
Title: Director
Dated: March 13, 2008
By:
/s/ Jason Chen
Name: Jason Chen
Title: Director
Dated: March 13, 2008
By:
/s/ Lou Guo Qing
Name: Lou Guo Qing
Title: Director
Dated: March 13, 2008
By:
/s/ Lily Sun
Name: Lily Sun
Title: Director
Jingwei International Limited
and
Subsidiaries
Consolidated Financial Statements
December 31, 2007
Jingwei International Limited
and
Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Jingwei International Limited and subsidiaries
We have audited the accompanying consolidated balance sheets of Jingwei International Limited and subsidiaries (“the Company”) as of December 31, 2007, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for the year then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2007, and the consolidated results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/Morison Cogen LLP
Bala Cynwyd, Pennsylvania
March 10,
Accountants &
business advisers
Report of Independent Registered Public Accounting Firm
To the Directors and Stockholders of
Jingwei International lnvestments Limited
We have audited the accompanying consolidated balance sheet of Jingwei International lnvestments Limited (the “Company”) and its subsidiary as of December 31, 2006, and the related consolidated statements of operations, stockholders' equity and cash flows for the period from May 15, 2006 to December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiary as of December 31, 2006, and the consolidated results of their operations and their cash flows for the period from May 15, 2006 to December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.
PKF
Certified Public Accountants
Hong Kong, China
May 10,2007
Tei (852) 2806 3622 1 Fax (852) 2806 3712
Jingwei International Limited And Subsidiaries
Consolidated Balance Sheets
(Stated in US Dollars)
The accompanying notes are an integral part of these consolidated financial statements.
Jingwei International Limited And Subsidiaries
Consolidated Statements of Operations
(Stated in US Dollars)
The accompanying notes are an integral part of these consolidated financial statements.
Jingwei International Limited And Subsidiaries
Consolidated Statements of Comprehensive Income
(Stated in US Dollars)
The accompanying notes are an integral part of these consolidated financial statements.
Jingwei International Limited And Subsidiaries
Consolidated Statements of Stockholders' Equity
(Stated in US Dollars)
See accompanying notes to the consolidated financial statements.
Jingwei International Limited And Subsidiaries
Consolidated Statements of Cash Flows
(Stated in US Dollars)
The accompanying notes are an integral part of these consolidated financial statements.
Jingwei International Limited
Notes to Consolidated Financial Statements
(Stated in US Dollars)
Note 1 CORPORATE INFORMATION AND DESCRIPTION OF BUSINESS
Jingwei International Limited and its consolidated subsidiaries and variable interest entities (the “Company”) are a technology services provider in China specializing in software and data mining services. In May 2006, Mr. George (Jianguo) Du, our President and Chairman of the board of directors, established Jingwei International Investments Limited, a company organized under the laws of the British Virgin Islands (“Jingwei BVI”). Jingwei BVI has one wholly owned subsidiary, Jingwei International Investment (HK) Ltd. (“Jingwei HK”), which was established on October 31, 2006 in HongKong. On February 8, 2007, a wholly subsidiary of Jingwei HK, Jingwei Hengtong Technology (ShenZhen) Co. Ltd (“Jingwei Hengtong”) was established in People’s Republic of China (“PRC’). On the same day, Jingwei Hengtong and Shenzhen Jingwei Communication Co., Ltd. (Jingwei Communication), a PRC company, entered into various agreements. Upon the execution of these agreements, the Company became the primary beneficiary of Jingwei Communication which was treated as a variable interest entity of the Company. Jingwei Communication has two subsidiaries, New Yulong Information Technology Co. Ltd. which Jingwei Communication owns 100% and New Yulong Software Technology Development Co. Ltd., which Jingwei Communication owns 51.89% and New Yulong Information Technology Development Co. owns the other 48.11%.
On May 16, 2007, Jingwei BVI entered into a share exchange agreement with Neoview, Synergy Business Consulting LLC, a principal shareholder of Neoview, and the shareholders of Jingwei BVI. Neoview is a public Shell Company (“Shellco”). Pursuant to the share exchange agreement, Shellco acquired all of Jingwei BVI’s issued and outstanding shares from Jingwei BVI’s shareholders in exchange for the issuance to Jingwei BVI’s shareholders of 11,554,000 shares of Shellco common stock, constituting 86.4% of Shellco’s outstanding shares of common stock on a fully-diluted basis. As a result of this transaction, Jingwei BVI will become a wholly-owned subsidiary of Shellco. Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction in substance, rather than a business combination. That is, the share exchange is equivalent to the issuance of stock by Jingwei BVI for the net monetary assets of Shellco, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange will be identical to that resulting from a reverse acquisition, except no goodwill will be recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal acquirer, Shellco, are those of the legal acquiree, Jingwei BVI, which is considered to be the accounting acquirer. Shares and per share amounts stated have been adjusted to reflect the merger.
Immediately following the closing of the merger, Shellco consummated a private placement of 3,395,000 units, each consisting of one (1) share of Common Stock and 0.3 of a Warrant to purchase one (1) share of common stock, for aggregate gross proceeds of $16,975,000 or $5.00 per unit. In conjunction with this offering, the company paid a placement agent cash of $1,188,250, representing 7% of the aggregate gross proceeds of the offering, and issued the placement agent warrants to purchase 441,350 shares of its common stock exercisable within 60 days of December 10, 2007, representing 10% of the total number of shares sold in the offering, including the warrants to purchase 1,018,500 shares of the Company’s common stock. The warrants to purchase 441,350 shares were recorded as a non-cash offering expenses.
In connection with the Offering, the Company also entered into a registration rights agreement (the “Registration Rights Agreement”) with the Investors, in which the Company agreed to file a registration statement (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) to register for resale of the shares of common stock issued as part of the Units and the 1,018,500 shares of Common Stock underlying the Warrants (the “Warrant Shares”), within 60 calendar days of the Closing Date of the Offering, and use the Company’s best efforts to have the registration statement declared effective within 120 calendar days of the Closing Date of the Offering, or 180 calendar days following the Closing Date of the Offering, if the registration statement is subject to review and comment by the SEC. The Company will pay liquidated damages of 1% of the dollar amount of the Units sold in the Offering per month, payable in cash, up to a maximum of 10%, if each of the events occurs as the registration statement is not filed and/or declared effective within the foregoing time periods, until such event is cured.
Jingwei International Limited
Notes to Consolidated Financial Statements
(Stated in US Dollars)
The Company did not meet the July 16, 2007 filing deadline (60 days from the Closing Date of the Offering) and November 12, 2007 effective deadline (180 days from the Closing Date of the Offering) and therefore incurred a liquidated damages of $341,975 on that date. The Company is also incurring interest expense of 18% per annum rate of the liquidated damages.
The Company also entered into an escrow agreement with CRT Capital Group, LLC, a representative of the Investors (“CRT”), Continental Stock Transfer & Trust Company (the “Escrow Agent”) and certain of the Shareholders (the “Escrow Agreement”), in which 2,000,000 of the Shares (the “Escrow Shares”) were delivered to the Escrow Agent. The Escrow Shares are being held as security for the achievement of $6,827,000 in net income for the year ended December 31, (the “Net Income Threshold”). If the Company achieves the Net Income Threshold, the Escrow Shares will be released back to such Shareholders. If the Net Income Threshold is not achieved, an aggregate number of Escrow Shares (such number to be determined by a formula included in the Escrow Agreement) will be distributed pro-rata to the Investors, based on the actual net income for the year ended December 31, 2007.
Following the completion of the merger and the Offering, Shellco had 17,049,000 shares of Common Stock outstanding on a fully-diluted basis.
Note 2 SUMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
The accompanying consolidated financial statements of Jingwei International Limited (“Jingwei International”), its subsidiaries, namely, Jingwei HK, Jingwei Hengtong, and its variable interest entities, namely Jingwei Communication, New Yulong Information Technology Co. Ltd, and New Yulong Software Technology Development Co. Ltd., have been prepared in accordance with generally accepted accounting principles in the United States of America.
The consolidated financial statements include the accounts of Jingwei International, its subsidiaries and variable interest entities. All significant inter-company accounts and transactions have been eliminated in consolidation.
On January 17, 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46: Consolidation of Variable Interest Entities, an interpretation of ARB 51 (“FIN 46”), which was superseded by a revised interpretation (“FIN 46R”). These interpretations address financial reporting for entities over which control is achieved through means other than voting rights. According to the requirements of FIN 46R, Jingwei International has evaluated its relationships with Jingwei Communication. Jingwei International has concluded that, Jingwei Communication is a “variable interest entity” for accounting purposes, and as a result of the contractual arrangements, which enable Jingwei International to control Jingwei Communication, Jingwei International is the primary beneficiary of Jingwei Communication. Accordingly, Jingwei International adopted the provisions of FIN 46R and will consolidate Jingwei Communication. The contractual agreement with Jingwei Communication was in effect on February 8, 2007, however for accounting purposes the effective date was January 31, 2007. The income statement for year ended December 31, reflects the operations of the variable interest entities for the eleven months ended December 31, 2007, used the purchase method to consolidate Jingwei Communication, with the current assets and liabilities recorded at fair value which approximated their book value. The fair value of the acquired net assets of Jingwei Communication exceeded the deemed consideration given of $256,871. The Company reduced all of the non-current assets of Jingwei Communication, in the amount of $153,568 to zero and then recognized the remaining amount of $6,566,914 as Minority Interest -Variable Interest Entities on the balance sheet. The following table summarizes the fair value of the Jingwei Communication’s assets acquired and liabilities assumed as of February 8, 2007, with an effective date of February 1, 2007 for accounting purposes:
Jingwei International Limited
Notes to Consolidated Financial Statements
(Stated in US Dollars)
Use of estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of trade receivables and other receivables, inventories, and the estimation on useful lives of property, plant and equipment and intangible assets. Actual results could differ from those estimates.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cashôcash equivalents and trade and other receivables. As of December 31, 2007, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in the PRC, which management believes are of high credit quality. With respect to trade and other receivables, the Company extends credit based on an evaluation of the customer’s and other debtor’s financial condition. The Company generally does not require collateral for trade and other receivables and maintains an allowance for doubtful accounts of trade and other receivables.
Fair value of financial instruments
The carrying values of the Company’s financial instruments, including cash and cash equivalents, trade receivables, other receivables, prepayments and deposits, trade and other payables, and loan from a stockholder approximate their fair values due to the short-term maturity of such instruments.
It is management’s opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial instruments.
In respect of foreign currency risk, the Company is not exposed to this risk as majority of its trading transactions are denominated in its functional currency.
Jingwei International Limited
Notes to Consolidated Financial Statements
(Stated in US Dollars)
Comprehensive Income
The Company follows the Statement of Financial Accounting Standard (“SFAS”) No. 130, Reporting Comprehensive Income. Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income and foreign currency translation adjustments.
Cash and cash equivalents
Cash and cash equivalents include all cash, deposits in banks.
Allowance of doubtful accounts
The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectibility of trade and other receivables. A considerable amount of judgment is required in assessing the amount of the allowance and the Company considers the historical level of credit losses and applies percentages to aged receivable categories. The Company makes judgments about the credit worthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers is to deteriorate, resulting in their inability to make payments, a larger allowance may be required.
Based on the above assessment, during the reporting years, the management establishes the general provisioning policy to make allowance according to the aging of trade and other receivables as follows:
Additional specific provision is made against trade and other receivables aged less than three years to the extent which they are considered to be doubtful.
Bad debts are written off when identified. The Company extends unsecured credit to customers ranging from four to seven months in the normal course of business. The Company does not
accrue interest on trade and other receivables.
Property and equipment, net
Property and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.
Depreciation is provided on straight-line basis over the assets’ estimated useful lives. The principal depreciation rates are as follows :-
Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income.
Jingwei International Limited
Notes to Consolidated Financial Statements
(Stated in US Dollars)
Acquired intangible assets, net
Acquired intangible assets are the database valued at acquisition cost less accumulated amortization. Amortization is calculated using the straight-line method over their expected useful lives of 8 years.
Impairment of long-lived assets
The Company follows SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Long-lived assets and intangibles are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets and intangibles in the event that the net book values of such assets exceed the future undiscounted cash flows attributable to such assets. The Company is not aware of any events or circumstances which indicate the existence of an impairment which would be material to the Company’s financial statements.
Revenue recognition
In accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, the Company recognizes revenue, net of any taxes, when persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, receipt of goods by customer occurs, the price is fixed or determinable, and the sales revenues are considered collectible.
Subject to these criteria, the Company generally recognizes revenue from software and system services when: a) a contract has been signed by the customers, b) the Company has delivered software and system services to the customers as defined by the customers receiving the work product, c) the project milestone delivered is assigned a fixed price, and d) the customer acceptance of the project is reasonably assured.
Revenue from datamining services is recognized when the services are rendered.
The Company follows Emerging issues Task Force (“EITF”) No. 99-19, “Reporting Revenue as a Principal versus Net as an Agent.” Under the guidance of this EITF, the assessment of whether revenue should be reported gross with separate display of cost of sales to arrive at gross profit should be based on the following considerations: the Company acts as principal in the transaction, takes titles to the products and has risk and rewards of ownership (such as the risk of loss for collection, delivery or returns). Based on EITF No. 99-19, the Company recognizes all revenue from the sales of consumer electronic on a gross basis.
Government subsidies that compensate the Company for general expenses incurred and research and development activities are recognized as income at the time when the approval documents are obtained from the relevant government authorities and when they are received.
Advertising, transportation, research and development expenses
Advertising, transportation and research and development expenses are charged to expense as incurred.
For the reporting period, there was no advertising expense or transportation costs inccurred.
Jingwei International Limited
Notes to Consolidated Financial Statements
(Stated in US Dollars)
Retained earnings -appropriated
In accordance with the relevant PRC regulations and the Company’s Articles of Association, the Company is required to allocate its Income after tax to the following reserves:
(a) Statutory surplus reserve
In accordance with the relevant laws and regulations of the PRC and the articles of association of our PRC entities, these companies are required to appropriate 10% of their net income reported in the PRC statutory accounts, after offsetting any prior years’ losses, to the statutory surplus reserve. When the balance of such reserve reaches 50% of the respective registered capital of the subsidiaries, any further appropriation is optional.
The statutory surplus reserve can be used to offset prior years’ losses, if any, and may be converted into registered capital, provided that the remaining balance of the reserve after such conversion is not less than 25% of registered capital. The statutory surplus reserve is non-distributable.
(b) Discretionary surplus reserve
In accordance with the articles of association of our PRC entities, the appropriation of net income reported in the PRC statutory accounts to the discretionary surplus reserve and its utilization are subject to the stockholders’ approval at their general meeting. None of our PRC entities had appropriated their earnings to discretionary surplus reserve from their respective dates of inception to December 31, 2007.
Income taxes
The Company uses the asset and liability method of accounting for income taxes pursuant to SFAS No. 109 “Accounting for Income Taxes”. Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Off-balance sheet arrangements
The Company does not have any off-balance sheet arrangements.
Foreign currency
The functional currency of the Company is RMB which is not freely convertible into foreign currencies. The Company maintains its financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
For financial reporting purposes, the financial statements of the Company which are prepared using the functional currency have been translated into United States dollars. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign currency translation adjustment of other comprehensive income, a component of stockholders’ equity. The exchange rates in effect at December 31, 2007 and December 31 2006 were RMB1 for $0.1367 and $0.1242 respectively.
Jingwei International Limited
Notes to Consolidated Financial Statements
(Stated in US Dollars)
Stock-based compensation
The Company adopted SFAS No. 123(R), Share-Based Payment effective January 1, 2006. During the reporting periods, the Company did not have any stock-based compensation payments.
Basic and diluted earnings per share
The incremental shares from the assumed conversion of the warrants amounted to 160,417.
In accordance with SFAS No. 128, Earnings per Share, basic earnings per common share is computed using net income divided by the weighted average number of shares of common stock outstanding for the periods presented. Diluted earnings per common share assumes that outstanding common shares were increased by shares issuable upon exercise of those stock warrants for which the market price exceeds the exercise price, less shares that could have been purchased by the Company with related proceeds.
Recent accounting pronouncements
In June 2006, the Financial Accounting Standards Board (the “FASB”) issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”). Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 has been adopted by the Company as of January 1, 2007, and the provisions of FIN will be applied to all tax positions under SFAS No. 109 after initial adoption. The cumulative effect of applying the provisions of this interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The adoption of FIN 48 did not require an adjustment to the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurement. SFAS No. 157 will be effective for fiscal years after November 15, 2007 and interim periods within those fiscal years. The Company does not believe that the adoption of the provisions of SFAS No. 157 will materially impact its financial statements or footnote disclosures.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and will become effective for the Company beginning with the first quarter of 2008. The Company is currently evaluating the impact of SFAS No.159 on its consolidated financial statements and footnote disclosures.
On December 4, 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, Noncontrolling interest in Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. The statement establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and expands disclosures in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company has not yet determined the impact of the adoption of SFAS No. 160 on its financial statements and footnote disclosures.
Jingwei International Limited
Notes to Consolidated Financial Statements
(Stated in US Dollars)
On December 4, 2007, the FASB issued SFAS No.141R, Business Combinations (SFAS No. 141R). SFAS No. 141R requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed, establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to expand disclosures about the nature and financial effect of the business combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company has not yet determined the impact of the adoption of SFAS No. 141R on its financial statements and footnote disclosures.
Note 3 ACQUIRED INTANGIBLE ASSETS, NET
The following table summarizes intangible assets as of December 31, 2007:
The database has estimated useful lives of 8 years. As of December 2007, estimated amortization expenses for future periods are expected as follows:
Note 4 INCOME TAXES
The Company has operations only in PRC. Our PRC entities are subject to PRC enterprise income tax (“EIT”) on their taxable income. Our PRC entities registered in Shenzhen, a special economic zone in China, are entitled to a preferential income tax rate of 15%. New Yulong Information Technology Co. Ltd. and New Yulong Software Technology Development Co. Ltd are government certified advanced and new technology enterprises in Shenzhen and therefore half of their net income was exempted from tax in 2007. Pursuant to the new PRC tax law effective on January 1, 2008, our PRC entities that currently face an income tax of 15% will gradually transit to 25% from 2008 to 2012 i.e. 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% from 2012, unless they obtain the “advanced and new technology enterprise” status eligible for key support from the country under the new tax law. The advanced and new technology company incentive offers a reduced tax rate of 15%. The bar to obtain advanced and new technology status has been set higher however.
Jingwei International Limited
Notes to Consolidated Financial Statements
(Stated in US Dollars)
The following table sets forth reconciliation between the statutory EIT rate and the effective tax rate for our PRC operations for the year ended December 31, 2007.
No deferred tax asset has been recognized due to immateriality. During the year ended December 31, 2007, the Company recognized enterprise income tax of $680,385. The Company had no temporary differences as of December 31, 2007.
Note 5 AMOUNTS DUE TO A STOCKHOLDER
Amount represents loan from stockholder payable to Mr. George (Jianguo) Du for the balance of $218,756 with interest at 6.75 % and the amount of $324,842 interest free payable on demand by Mr. Du.
The loan is unsecured and repayable on demand. During the year ended December 31, the company paid interest expense of $44,073.
Note 6 STOCKHOLDERS’ EQUITY
On May 16, 2007, the company consummated a private placement of 3,395,000 units, each unit consists of one share of the Company’s common stock (the “Common Stock”) and 0.30 of a Warrant to purchase one share of the Common Stock (each a “Warrant” and collectively the “Warrants”) at an exercise price of $6.00 per share, subject to adjustment. The Common Shares and Warrants will be separately transferable, subject to compliance with the Securities Act. The total gross proceeds were $16,975,000, the offering costs were $1,903,970, resulting in net proceeds of $15,071,030. As part of the offering costs, the placement agent also received warrants to purchase 441,350 shares of the Company’s Common stock.
The Company issued warrants to purchase a total of 1,459,850 shares of common stock. The warrants have a four year term. As long as there is an effective registration statement covering the shares of Common Stock issuable upon exercise of the Warrants, the Company may redeem the Warrants on not less than 20 days' prior written notice, at a price of $0.01 per Warrant, if the following conditions are met: (i) the fair market value of our Common Stock exceeds 200% of the exercise price for the 20 consecutive trading day period ending five trading days prior to the date of the redemption notice and (ii) the Warrants are then exercisable.
The Warrants, at the option of the holder, may be exercised by cash payment of the exercise price or if the registration statement is not declared effective by the SEC within six months of the Offering closing date, by “cashless exercise”. A “cashless exercise” means that in lieu of paying the aggregate purchase price for the shares being purchased upon exercise of the Warrants in cash, the holder will forfeit a number of shares underlying the Warrants with a “fair market value” equal to such aggregate exercise price. The Company will not receive any additional proceeds to the extent that warrants are exercised by cashless exercise.
The exercise price and number of shares of Common Stock issuable upon exercise of the Warrants may be adjusted in certain circumstance, including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation.
No fractional shares will be issued upon exercise of the Warrants. If, upon exercise of a Warrant, a holder would be entitled to receive a fractional interest in a share, we will pay to the holder cash equal to such fraction multiplied by the then fair market value of one full share. The Warrants will contain standard and customary weighted average anti-dilution protection.
Note 7 MAJOR SUPPLIERS
During the year ended December 31, 2007, the Company purchased 74% of its goods and services from 2 suppliers, including 37% from a related party of the Company. As of December 31, 2007, amounts due to those suppliers included in the trade payables were $1,322,173. This concentration makes the Company vulnerable to a near-term adverse impact, should the relationships be terminated.
Jingwei International Limited
Notes to Consolidated Financial Statements
(Stated in US Dollars)
Note 8 RELATED PARTY TRANSACTIONS
During the year ended December 31, 2007, Huashidai Information Technology Limited (“Huashidai”), a Hong Kong company in which Mr. George (Jianguo) Du is the major shareholder, signed contracts for the benefit of the Company with a third supplier for an aggregate amount of $4,686,230. As of December 31, 2007, there is no balance owing to Hushidai.
Note 9 SEGMENT INFORMATION
Beginning February 1, 2007, with the acquisition of Jingwei Communication, the Company has there reportable segments based on the type of services provided, dataming services, consumer electronics sales and software and system services. Information for the segments in the year ended December 31, 2007 are disclosed under FAS 131, “Disclosures about Segments of an Enterprise and Related Information” as below:
Note 8 PRO FORMA STATEMENT
On February 8, 2007, the company registered Jingwei Hengtong, a wholly owned subsidiary company in PRC. On the same day, Jingwei Hengtong and Jingwei Communication entered into various contractual agreements, details of which are summarized as follows.
Exclusive Technology Consulting Services Agreement. Pursuant to the exclusive technology consulting services agreement between Jingwei Hengtong and Jingwei Communication, Jingwei Hengtong has the exclusive right to provide to Jingwei Communication technology consulting services related to the design, development and implementation of computer software and the maintenance of networks, and provide access to Jingwei Hengtong’s team of personnel who have extensive experience in information technology services. Under the terms of this agreement, Jingwei Hengtong has agreed to pay all of the operating costs incurred by Jingwei Communication and Jingwei Communication shall pay bi-monthly service fees to Jingwei Hengtong consisting of all income from the business operations. This agreement is for a ten year term expiring on February 8, 2017, with an automatic one (1) year renewal. The agreement is subject to early termination in accordance with the terms therein.
Operating Agreement. Pursuant to the operating agreement among Jingwei Hengtong, Jingwei Communication and the shareholders of Jingwei Communication, Jingwei Hengtong agrees to guaranty Jingwei Communication’s performance of its obligations under contracts, agreements and transactions between Jingwei Communication and third party customers. In return for the guaranty, Jingwei Communication has pledged its accounts receivables and all of its assets to Jingwei Hengtong. The shareholders of Jingwei Communication have also agreed to appoint persons recommended by Jingwei Hengtong to serve on Jingwei Communication’s Board of Directors and to appoint Jingwei Hengtong’s managers as managers of Jingwei Communication. In addition, Jingwei Communication and its shareholders agree that without the prior consent of Jingwei Hengtong, Jingwei Communication will not engage in any transactions that could materially affect the assets, liabilities, obligations, rights or operations of Jingwei Communication, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, including intellectual property rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operations to any third party. This agreement is for a ten year term expiring on February 8, 2017, subject to early termination in accordance with the terms therein.
Jingwei International Limited
Notes to Consolidated Financial Statements
(Stated in US Dollars)
Intellectual Property Assignment Agreement. Under the intellectual property assignment agreement, Jingwei Communication assigned to Jingwei Hengtong all of its interest and rights in certain intellectual property, including without limitation, certain trademarks, the ownership of Jingwei Communication’s consumer database, and a software copyright and license. Jingwei Hengtong paid RMB1,000 for the intellectual property transferred under this agreement. Jingwei Communication agreed to take all actions and pay all expenses in connection with registering the intellectual property in Jingwei Hengtong’s name.
Intellectual Property Agreement. Under the intellectual property agreement, Jingwei Hengtong granted Jingwei Communication a non-exclusive, non-assignable and non-transferable license to use certain intellectual property, including without limitation, certain trademarks, consumer data bases, and software copyright and license for use exclusively in the PRC. Jingwei Hengtong will retain the sole and exclusive rights in the intellectual property, including any improvement, upgrades and derived products, no matter whether such products are created by Jingwei Hengtong and Jingwei Communication. The annual license fee for all intellectual property is RMB1,000,000. Jingwei Hengtong has the right to waive payment, or adjust the amount of any license fees at any time, during the course of the agreement. This agreement is for a five year term expiring on February 8, 2012, subject to early termination in accordance with the terms therein.
Equity Pledge Agreement. Under this agreement between the shareholders of Jingwei Communication and Jingwei Hengtong, the shareholders of Jingwei Communication pledged all of their equity interests in Jingwei Communication to Jingwei Hengtong to guarantee their obligations under the amended and restated loan agreement and Jingwei Communication’s performance of its obligations under the technology consulting agreement. If Jingwei Communication or any of its shareholders breaches its respective contractual obligations under the amended and restated loan agreement or the technology consulting agreement, or upon the occurrence of one of the events regarded as an event of default under this agreement, Jingwei Hengtong, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The shareholders of Jingwei Communication agreed not to dispose of the pledged equity interests or take any actions that would prejudice Jingwei Hengtong’s interest, and to notify Jingwei Hengtong of any events or upon receipt of any notices which may affect the shareholders’ interest. The equity pledge agreement will expire two years after Jingwei Communication and its shareholders fully perform their respective obligations under the technology consulting agreement and the loan agreement.
Exclusive Option Agreement. Under the option agreement among Jingwei Hengtong, Jingwei Communication and the shareholders of Jingwei Communication, the shareholders of Jingwei Communication irrevocably granted Jingwei Hengtong or its designated person an exclusive option to purchase, to the extent permitted by PRC law, a portion or all of the equity interests in Jingwei Communication for the cost of the original purchase price paid for the equity interests; provided, however, if under applicable PRC laws and regulations an appraisal is required, then the purchase price shall be the minimum amount of consideration permitted by applicable PRC law. In addition, Jingwei Communication and its shareholders agree that without the prior consent of Jingwei Hengtong, Jingwei Communication will not take certain actions that may have a material adverse effect on the equity interests or the liabilities, rights or operations of Jingwei Communication. Jingwei Hengtong or its designated person has the sole discretion to decide when to exercise the option, whether in part or in full. This agreement is for a ten year term expiring on February 8, 2017, subject to early termination in accordance with the terms therein.
Amended and Restated Loan Agreement. Under the loan agreement between Jingwei Hengtong and the shareholders of Jingwei Communication, the shareholders confirmed that Jingwei Hengtong had made a RMB2,000,000 interest-free loan to the shareholders of Jingwei Communication solely for the shareholders to fund the capitalization of Jingwei Communication. The loan can only be repaid upon the transfer of the equity interests from the shareholders to Jingwei Hengtong and the use of the proceeds from such transfer to repay the loan. This agreement is for a ten year term expiring on February 8, 2017, subject to acceleration and extension in accordance with the terms therein.
Jingwei International Limited
Notes to Consolidated Financial Statements
(Stated in US Dollars)
On January 17, 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46: Consolidation of Variable Interest Entities, an interpretation of ARB 51 (“FIN 46”), which was superseded by a revised interpretation (“FIN 46R”). These interpretations address financial reporting for entities over which control is achieved through a means other than voting rights. According to the requirements of FIN 46R, the Company has evaluated its relationships with Jingwei Communication and concluded that, Jingwei Communication is a “variable interest entity” for accounting purposes, and as a result of the contractual arrangements, which enable the Company to control Jingwei Communication, the Company is the primary beneficiary of Jingwei Communication. Accordingly, the Company adopted the provisions of FIN 46R and will consolidate Jingwei Communication.
Jingwei Communication was established on May 8, 2001 in PRC. It has registered capital of RMB5,000,000 and is principally engaged in Software development and Data mining services in PRC. Mr. Du is the controlling stockholder of the company who holds 90% of the company’s registered capital.
The following unaudited Pro Forma financial information presents the combined results of operation of the Company as if the variable interest entity relationship, the reverse merger and the group were in existence as of the beginning of fiscal years 2006 and 2007: