10-K/A 1 v235183_10ka.htm AMENDMENT TO FORM 10-K Unassociated Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K/A
(Amendment No. 1)
 
(Mark One)
 
x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal year ended December 31, 2010
 
Or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                         to                                        
 
Commission File Number: 001-34744
 
JINGWEI INTERNATIONAL LIMITED
(Exact name of Registrant as Specified in its Charter)

Nevada
20-1970137
(State or Other Jurisdiction of
(IRS Employer Identification No.)
Incorporation or Organization)
 
 
Unit 701-702, Building 14,
Software Park, Keji Yuan Second Road
Nanshan District
Shenzhen PRC 518057
(Address of Principal Executive Offices) (Zip Code)
 
+86 755-83437888
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Exchange Act:
 
None.
 
Securities registered pursuant to Section 12(g) of the Exchange Act:
 
Title of Each Class:  Common Stock, $ 0.001 par value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes ¨ No x
 
Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes ¨ No x
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days.  Yes x  No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ¨  Accelerated Filer ¨  Non-Accelerated Filer ¨  Smaller Reporting Company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x
 
As of June 30, 2010, the aggregate market value of the voting and non-voting equity held by non-affiliates was approximately $50.2 million.
 
As of March 30, 2011, there were 20,354,209 shares of Common Stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 
 
 

 
 
EXPLANATORY NOTE
 
This annual report on Form 10-K is being filed as Amendment No. 1 to our Annual Report on Form 10-K (“Amendment No. 1”) which was originally filed on March 31, 2011 with the Securities and Exchange Commission. This Amendment No. 1 is filed solely with respect to the following items:
 
-  
Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations; and
 
-  
Part II, Item 8 – Financial Statements and Supplementary Data
 
Except as specifically referenced herein, this Amendment No. 1 does not reflect any event occurring subsequent to March 31, 2011, the filing date of the original report.
 
 
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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, interactive marketing and software services in the PRC. We have established multiple anchor customers in both the Telecom & Power sectors with long-term relationships since 2001. This relationship is expected to continue and further strengthen in 2011 as result of our technical competency and services leadership which continued to bring high value to the business of these customers. We offer a rich portfolio of business intelligence and interactive marketing services powered by a proprietary database with more than 400 million consumer profiles and a complementary set of Data Mining and Business Intelligence tools to enable customers to reach their targeted Chinese consumers. Services include market segmentation, customer churn, fraud detection, trend analysis, self-service reporting, database marketing, contact center services, mobile value-added services (MVAS) and multi-media, multi-channel advertising. In 2010, we further strengthened our position in the mobile internet marketing  space by leveraging our core competencies to partner with the telecommunications carriers to design, build and operate multiple mobile value-added services platforms including the industry renowned “mobile application store” to capitalize on the burgeoning growth in the use of mobile, internet and mobile commerce applications in China. With the deployment of our “mobile application store” platform at China Telecom and the pilot platform in China Unicom, several provincial operators have expressed interest to partner with us, to leverage our core competences in data mining and interactive marketing to help them operate the stores on partnership and revenue sharing basis for mutual benefits. This will be a strategic growth initiative for the Company in 2011.
 
Our services assist customers in improving product development and marketing effectiveness, increase operational efficiency and profitability, helps identify new market trends, target audiences and opportunities, delivers effective marketing messages to targeted consumers and provides interactive, proactive and personalized marketing and advertising for optimal results. While our traditional business had been on data mining, data marketing and software services, we have sharpened our focus in 2010 to further develop our interactive marketing platform and integrated mobile value added service platforms with targeted outbound sales campaigns via mobile phone advertising and value added services, as well as customer service/order fulfillment using online stores and at call centers throughout the country.
 
Along-with our core data mining and interactive marketing services segment, we also operate a software services business, with proven leadership in quality billing, Business Intelligence, Provisioning Support, Decision Support, Operations Support and Customer Relationship Management software applications, primarily for China’s leading telecommunication services carriers. The software services business also strengthens sales opportunities for our high margin interactive marketing and data mining platform, and allows us to enhance our customer database.  In 2010, we have achieved leadership position in the deployment of billing and OSS solutions to support IPTV rollout for China Telecom in 23 out of the country’s 31 provinces. And, through our channel partners, we have also deployed our billing and OSS solution for telecom carriers in overseas countries including Africa, Middle East and Asia.
 
 
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Currently, we offer 36 data mining and software platforms registered with the Shenzhen Bureau of Science, Technology and Information and National Government. And our intellectual property portfolio is covered by 30 patents issued by National Intellectual Property Administration of the People’s Republic of China. When these patents were registered with the appropriate authority, we receive a certificate with respect to protected intellectual property in such software; we then license the software to the customers for a usage fee as well as an optional annual maintenance fee after the standard warranty period. Our software services streamline back-office operations for the customers, enable accurate billing and provisioning, improve business operational efficiency, as well as enable intimate and personalized relationship management for their end-customers.

In the data mining segment, we presently own and manage a database containing detailed biographical, demographic and purchasing information on over 400 million Chinese consumers and a selected group of SMEs. We believe our database is one of the largest in China, and that it would be difficult for competitors to duplicate. The breadth of our database affords us the ability to conduct a wide range of interactive marketing and 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 carriers a vast range of MVAS. Unlike our competitors who mainly use carriers’ networks simply as a distribution channel, we work with  telecommunications carriers to design, build, operate and manage MVAS platforms jointly with them to offer to their customers under their own brands; based on which we have a share of the revenue derived from the services provided to their customers
 
The primary geographic focus of our operations is in China, with presence in more than 20 cities, where we derive most of our revenues. We conduct our business operations through Jingwei Hengtong, a wholly-owned subsidiary company of Jingwei International that became the primary beneficiary of Jingwei Communication via various contractual agreements. Both companies are registered in China.
 
Our future plans are to stay sharply focused to capitalize on the favorable industry trends to grow our business.  The following table summarizes the industry drivers that will continue to fuel our growth; and by leveraging our core competence and the multiple long term relationships with our clients in the telecommunications and power sectors, we are confident of our unique and competitive position to benefit from the significant growth waves unfolding in China.
 
 
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The following is a summary of the industry drivers that will continue to fuel our growth:
 

HOW THE COMPANY GENERATES REVENUE

We derive our revenues from the two business segments we operate in China, i.e., data mining and software services. Our products and services are sold by our sales and marketing organization, as well as an established reseller network. Our services are sold both on project by project basis and on service agreement basis based on which we derive our revenue in several ways depending on contract agreement with the customers: (a) a contracted project development and implementation fee for the project; (b) a licensing fee an annual maintenance for the use of our software; (c) an agreed share of the revenues with the service provider derived either from consumer purchases resulting from our database marketing and promotion activities, or from revenue generated from the service platform we design, develop and in some cases, operate for the carriers, and (d) a combination of (a), (b)and (c) above.
 
We work with business partners and operate under exclusive software licensing and revenue sharing agreements with China Telecom in 16 provinces, China Unicom in 27 provinces and China Mobile in 6 provinces. 

We own and manage a database containing detailed biographical, demographic and purchasing information on about 400 million Chinese consumers and a selected group of small and medium-sized enterprises. The breadth of our database affords us 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, mobile text and interactive advertising. We share in the revenues derived from consumer purchases resulting from our marketing and promotion activities.

For example, within our data mining services operations, we help telecommunications carriers to acquire 3G service subscribers, as well as sign up users for highly profitable mobile value added services, some of which were developed by us.  Fees are charged to a subscriber’s monthly bill. Telecommunications carriers typically charge a predetermined percentage of this fee and remit the remainder to the service provider like us. For advanced services, revenue sharing varies among products and services offered.
 
 
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Our software services include a broad range of data mining, business intelligence, billing, provisioning support, decision support, operations support and customer relationship management systems, primarily for China’s leading telecommunications carriers, systems vendors and the State Grid Corporation of China. By leveraging our strong relationships with these customers and business partners, we have been effective at cross-selling our comprehensive high margin data mining and interactive marketing services, both directly and indirectly to a wide spectrum of customer base through these service providers, thereby also allows us to refresh, enhance and update our customer database for other opportunities.
 
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 mobile value -added Services and interactive marketing campaigns through multi-media channels including mobile Internet marketing solutions.
 
Our products and services are sold by our sales and marketing organization, as well as an established reseller network in China including Hong Kong SAR. Our reseller networks consist of systems integration houses and telecom carriers where Jingwei’s products and services are sold as part of their systems solution package for their customers. We also contract other third parties as resellers to sell our software and mobile 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 mobile value added services, we would pay a percentage from our revenue as commissions, which are typically between 10% and 15%. All other products and services are sold through our direct sales. Data mining services are sold on a project by project basis. In addition to one time fees, we share future revenue streams from consumer purchases, as a result of our marketing and promotion activities.

Developments in 2010

2010 has been a trying year for Jingwei to achieve an aggressive growth target for the year following a period of slow to moderate growth in prior years. Although the year has been filled with challenges, we were able to keep the right focus and achieve strong growth momentum to finish the year with a 24% growth in revenue and 56% growth in net income; which was in line with the guidance we provided to the investment community at the end of 2009.

During the year, the Company has achieved several significant milestones that are critical for the future growth of our business:
 
 
Strategic Entry into Mobile Internet Marketing – Secured major contracts to be the vendor of choice to develop and deploy industry renowned “mobile application store” platforms for two of the three telecommunications carriers in China, with the first system deployed in Sichuan for China Telecom in the second quarter of 2010, and a pilot system deployed for China Unicom in Shanghai in the third quarter of 2010. With the deployment of these platforms, we are in discussion with several regional operators to help them operate the store under a revenue sharing model, similar to the model used with interactive marketing. To the operators, our value is to help them offer targeted service packaging, by getting the right applications to the right consumers at the right time; and we can also help the stores market their applications to targeted consumers to effectively increase the number of downloads for mutual benefits.

 
● 
Capitalized on the nation’s 3-Network Convergence program and achieved leadership position in deployment of billing and OSS software solutions to support IPTV in 23 of the country’s 31 provinces for China Telecom. And, building on our successes, we have also deployed similar products for telecom carriers in overseas countries including Africa, Middle East and Asia. This year, we expect the program for DTV rollout for cable operators will accelerate and that there will be continuing demand for our solutions in both the telecom and cable TV sectors in China as well as for countries outside China.

 
● 
Strategic win in data mining and interactive marketing sector – secured and signed framework agreement with Zhejiang China Unicom in the fourth quarter to partner with them to design, develop and operate an integrated platform to leverage Jingwei’s core competences to support their mobile society channel and marketing initiatives to effectively and profitably support the greater than 80,000 channel depots in the province on “revenue sharing” basis. We expect a commercial launch of this service in the first quarter of 2011, followed by similar requirement from other provincial subsidiaries.
 
 
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Merger and Acquisition to broaden our service portfolio and extend geographic coverage in data mining and mobile VAS - on November 9, 2010, the Company, through its wholly-owned subsidiary Xinguochuang, completed the acquisition of 100% equity interest of Haicom, a corporation registered in Shanghai, China that provides Internet and mobile value added service platforms to telecommunication carriers in more than ten provinces. This transaction is an important step in our effort to strengthen our 3G related mobile value-added service product portfolios, as well as expand business developments with a dozen strategically important regional subsidiaries of China Unicom and China Telecom.
 
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
 
The Company recognizes revenue when the amount of revenue can be reliably measured, it is probable that economic benefits will flow to the entity and specific criteria have been met for each of the Company’s activities as described below.

i.           Software and system services
 
Subject to these criteria and in accordance with ASC 985 Software Revenue Recognition, 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 pursuant to the percentage-of completion method of accounting, and d) evidence of customers’ acceptance of milestone achievement. The Company’s software and system services sale arrangements do not have multiple deliverables.

As the software and system services typically takes more than three months to complete, the Company accounts for the timing and amount of revenue using the percentage-of-completion method based on proportion of work done. The percentage of work done is determined based on milestones agreed in the contract and percentage of total contract value due to be paid upon achievement of such milestones. The amount due after reaching certain milestones agreed in the contract generally reflects the progress of work at that point.
 
ii.           Data mining services
 
Revenue from data mining services is recognized when the services are rendered.

iii.          Bundled mobile products
 
In accordance with ASC 605-25, Revenue Recognition, the Company recognizes revenue, net of 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.
 
 
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The Company followed 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 return). During the years ended December 31, 2010 and 2009, the Company has recognized a large amount sales order of handsets with customized mobile VAS software built-in on a gross basis, as the Company acts as the primary obligor in the arrangement, has latitude in establishing price and physically changes products in most cases, the Company recognized all revenue from these sales of bundled mobile product on a gross basis, based on EITF No.99-19. The sale of bundled mobile product is classified as data mining service for the years ended December 31, 2010 and 2009.
 
Allowance for Doubtful Accounts
 
Significant management judgment is required to estimate our allowance for doubtful accounts in any accounting period.  The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade and other receivables. The Company makes 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, the Company established the general provisioning policy to make the allowance for doubtful accounts according to the aging of trade and other receivables as follows:
       
Trade and other receivables due:
     
Within one year
    0.3 %
After one year but within two years
    5.0 %
After two years but within three years
    20.0 %
Over three years
    100.0 %
 
Additional specific provisions are made against trade and other receivables aged for more than one year to the extent which they are considered to be doubtful.
 
Bad debts are written off when identified. The Company does not accrue interest on trade and other receivables.
 
Foreign Currency

The consolidated financial statements have been prepared in accordance with US GAAP. The functional currency of the operating subsidiaries in PRC is the Chinese Yuan Renminbi (“RMB”). However, the reporting currency is the United States dollar (“USD”). Assets and liabilities of these companies have been translated into dollars using the exchange rate at the balance sheet date. Income and expense items are translated at average rate for the year. Translation adjustments are reported separately and accumulated in a separate component of equity (accumulated other comprehensive income).
 
The exchange rates adopted are as follows:
  
 
2010
   
2009
 
Year end RMB exchange rate
    6.61       6.84  
Average yearly RMB exchange rate
    6.78       6.84  
 
No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation
 
There is no significant fluctuation in exchange rate for the conversion of RMB to U.S. dollars after the balance sheet date.

 
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Stock-Based Compensation

The Company adopted ASC 718 Stock Compensation, effective on January 1, 2006. We recognize the cost resulting from all share-based payment transactions in our financial statements using a fair-value-based method. We measure compensation cost for all outstanding unvested stock-based awards made to our employees and directors based on estimated fair values and recognize compensation over the service period for awards expected to vest. The estimated fair value of stock options and stock purchase rights granted pursuant to our employee stock purchase plan is determined using the Black-Scholes valuation model. The Black-Scholes valuation model requires us to make certain assumptions about the future. Estimation of these equity instruments’ fair value is affected by our stock price, as well as assumptions regarding subjective and complex variables such as employee exercise behavior and our expected stock price volatility over the term of the award. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. Where such historical information is not available, we applied the “Simplified Method” in accordance with ASC 718-10-S99-1 in valuation of all our options, which are granted at-the-money, nontransferable and nonhedgeable, and vest based upon a service condition alone. For stock options and common stock warrants issued to non-employees, they are measured as of the date required by ASC 505-50 Equity-Based Payments to Non-Employees.

Goodwill

The excess of the purchase price over the fair value of net assets acquired is recorded on the consolidated balance sheets as goodwill. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.

Goodwill is tested following a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill.

The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. We recognized no impairment loss on goodwill in 2010.
 
Recently enacted accounting standards

The Financial Accounting Standards Board (“FASB”) issued ASU 2010-13, Compensation—Stock Compensation (ACS Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. The ASU codifies the consensus reached in Emerging Issues Task Force (EITF) Issue No. 09-J. The amendments to the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.

The amendments in the ASU are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier adoption is permitted. The amendments are to be applied by recording a cumulative-effect adjustment to beginning retained earnings. The Company is currently evaluating the impact of adopting this update on its consolidated financial statements.

The FASB has issued ASU 2009-17, Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This determination is based on, among other things, the other entity’s purpose and design and the Company’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. ASU 2009-17 also required additional disclosures concerning an enterprise’s continuing involvement with VIEs. ASU 2009-17 is effective at the start of the Company’s first fiscal year beginning after November 15, 2009. The adoption had no effect on the Company’s financial position, results of operations, or cash flows.

In January 2010, the FASB has issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. ASU 2010-06 amends Codification Subtopic 820-10 and now requires a reporting entity to use judgment in determining the appropriate classes of assets and liabilities and to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009. As this standard relates specifically to disclosures, the adoption will not have any impact on the Company’s consolidated financial position and results of operations.

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. ASC 2010-09 was effective upon issuance. The adoption of this standard had no effect on the Company’s consolidated financial position or results of operations.

In December 2010, FASB issued revised guidance on “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The revised guidance specifies that an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the revised guidance should be included in earnings as required by Section 350-20-35. The revised guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting this guidance.

In December 2010, FASB issued revised guidance on the “Disclosure of Supplementary Pro Form Information for Business Combinations.” The revised guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The revised guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The revised guidance is effective prospectively 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, 2010. The Company has not early adopted the new guidance and is currently evaluating the impact on its consolidated financial statements of adopting this guidance.

In 2010, except for the above ASUs, FASB issued several ASUs - ASU 2010-1 through ASU 2010-29, which are not expected to have a material impact on the consolidated financial statements upon adoption.

 
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RESULTS OF OPERATIONS

Net Revenues
   
Years Ended December 31
 
   
2010
   
2009
       
   
(In thounsands, except percentage)
 
Net Revenues
       
% of
Net
Revenue
         
% of
Net
Revenue
   
% of Change
YOY
 
                                         
Data mining
    17,904       48 %     19,452       64 %     -8 %
                                         
Software
    19,737       52 %     10,807       36 %     83 %
                                         
Total Net Revenues
    37,641       100 %     30,259       100 %     24 %

Our total net revenue increased 24% year over year to $37.6 million in 2010 from $30.3 million in 2009, primarily driven by continuous robust demand for our software and system integration solutions in the telecommunications and power sectors, which increased 83% to $19.8 million in 2010, from $10.8 million in 2009. Revenues from data mining, on the other hand, decreased 8% to $17.9 million in 2010, from $19.5 million in 2009, primarily due to the prolonged delay in signing two major contracts with provincial subsidiaries of China Unicom, to provide value-added data mining and interactive marketing services to support their regional society channel program and their regional mobile application stores.

Cost of Sales
   
Years Ended December 31
 
   
2010
   
2009
       
   
(In thousands, except percentage)
 
Cost of Sales
       
% of
Cost of
sales
         
% of
Cost of
sales
   
% of Change
YOY
 
                                         
Data mining
    10,561       54 %     12,494       66 %     -15 %
                                         
Software
    8,916       46 %     6,504       34 %     37 %
                                         
Total
    19,477       100 %     18,998       100 %     3 %
 
Our total cost of sales increased 3% to $19.5 million in 2010 from $19.0 million in 2009, primarily driven by surge in demand for our software and system integration solutions, and amortization of acquired intangible assets related to Newway acquisition, offset by improvement in product mixes such as high-margin off-the-shelf software products. The cost of sales from data mining decreased to $10.6 million in 2010 from $12.5 million in 2009, which was in line with the 8% decline in sales from 2009.
 
 
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Gross profit margin

   
Years Ended December 31
 
   
2010
   
2009
 
Gross profit margins:
           
Data Mining
    41 %     36 %
Software Services
    55 %     40 %
Overall
    48 %     37 %

Our overall gross profit margin was 48% in 2010, up 11% as compared to 37% in 2009. The margin improvement was mainly due to the increase in software sales, as the Company continued to deploy off-the-shelf software products to meet new demands from the 3-Network Convergence project and from incremental sales to selected overseas countries through our strategic partner.

Operating Expenses

   
Years Ended December 31
 
   
2010
   
2009
       
   
(In thousands, except percentage)
 
Operating Expenses
       
% of
Net
Revenue
         
% of
Net
Revenue
   
% of Change
YOY
 
Selling, general and admin expenses
    6,673       18 %     3,859       13 %     73 %
                                         
Research and development
    2,415       6 %     1,155       4 %     109 %
                                         
Total
    9,088       24 %     5,014       17 %     81 %

Our total operating expenses increased 81% to $9.1 million in 2010 from $5.0 million in 2009, primarily driven by our efforts in sales and marketing to open new interactive marketing opportunities with 3G service rollout, and continuous investment in research and development.

Selling, general and administrative expenses increase 73% to $6.7 million in 2010 from $3.9 million from 2009. The increase mainly consisted of a $0.6 million increase in salary and benefits, a $0.3 million increase in share-based compensation, a $0.2 million increase in travel and lodging, and a $1.2 million increase in amortization of acquired intangible assets.

Research and development expenses increased 109% to $2.4 million in 2010 from $1.2 million in 2009, mainly reflecting the emphasis we place on the research and development of products and solutions in order to strengthen our competitiveness, including a $1.0 million increase in amortization of acquired intangible assets.

Income tax expense

Based on our current operating structure and preferential tax treatments available to us in China, for the year ended December 31, 2010, the Company recognized an income tax expense of $0.1 million representing an effective income tax rate of 1.3%, as compared to an income tax expense of $1.1 million representing an effective income tax rate of 15.9% in 2009. The low effective tax rate in current year is attributed to two factors: 1. In June 2010, Xinguochuang reversed its estimated enterprise income tax of $0.4 million recorded in 2009, upon the approval of Xinguochuang’s application for tax holiday. 2. To make the best use of Xinguochuang’s preferential tax status in the next few years, the Company started to shift a significant portion of business operations from New Yulong Software and other affiliates to Xinguochuang, resulting in a tax saving of $1.9 million in 2010. If tax benefits currently available to us in China were no longer available, our effective income tax rates for our operations could continue to rise in 2011 and thereafter.

 
11

 
 
LIQUIDITY AND CAPITAL RESOURCES

   
As of December 31,
 
   
2010
   
2009
 
   
(In thousands)
 
Cash and cash equivalents
    7,519       10,239  
Working capital
    43,737       31,968  
Shareholder’s equity
    59,347       44,260  

Our capital requirements are primarily working capital requirements related to hardware sales in system integration and bundled mobile solution, as well as costs associated with the expansion of our business, such as research and development and sales and marketing expenses. We recognize hardware costs in full upon delivery of the hardware to our customers. We typically place orders for hardware against back-to-back orders from customers and seek favorable payment terms from hardware vendors. However, we sometimes obtain less favorable payment terms from our customers, thereby increasing our working capital requirements. We have also historically financed working capital and other financing requirements through private placements of equity securities in 2007.

As of December 31, 2010, we had $7.5 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 twelve months.

The following table provides detailed information about our net cash flow for the year ended December 31, 2010.
 
   
Years Ended December 31,
 
   
2010
   
2009
 
   
(in thousands)
 
Net cash flows provided by operating activities
  $ 778     $ 8,813  
Net cash flows used in investing activities
    (4,922 )     (4,078 )
Net cash flows used in financing activities
    (93 )     (190 )
Effect of exchange rate changes on cash and cash equivalents
    1,517       222  
Net cash inflow
    (2,720 )     4,767  
 
Most of our operations are conducted through our affiliated companies which the Company controls through contractual agreements in the form of variable interest entities. Current regulations in China permit our PRC subsidiaries to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of these Chinese affiliates to make dividends and other payments to us may be restricted by factors that include changes in applicable foreign exchange and other laws and regulations.

A.  
Under PRC law, our subsidiary may only pay dividends after 10% of its after-tax profits have been set aside as reserve funds, unless such reserves have reached at least 50% of its registered capital. Such cash reserve may not be distributed as cash dividends.
B.  
The PRC Income Tax Law also imposes a 10% withholding income tax on dividends generated on or after January 1, 2008 and distributed by a resident enterprise to its foreign investors, if such foreign investors are considered as non-resident enterprise without any establishment or place within China or if the received dividends have no connection with such foreign investors’ establishment or place within China, unless such foreign investors’ jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.

As of December 31, 2010, there were $28.9 million retained earnings in aggregate available for distribution, aside from $3.6 million statutory reserve fund. The retained earnings from PRC subsidiaries and VIEs are subject to 10% PRC dividend withholding taxes upon distribution. There were no significant differences between retained earnings as determined in accordance with PRC accounting standards as compared to retained earnings as presented in our financial statements.

Most of our net revenues are currently generated in Renminbi. Any future restrictions on currency exchanges may limit our ability to use net revenues generated in Renminbi to make dividends or other payments in U.S. dollars or fund possible business activities outside China.

Foreign currency exchange regulation in China is primarily governed by the following rules:
 
 
Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;
 
 
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

Under the Administration Rules, foreign-invested enterprises like ours that need foreign exchange for the distribution of profits to their shareholders may effect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.
 
Operating activities

Net cash provided by operating activities for the year ended December 31, 2010 was $0.8 million, primarily driven by our strong net income of $9.9 million in current year, offset by $10.9 million used in accounts receivable, and $2.6 million used in inventory. As compared to the net cash provided by operating activities in 2009, the increase of $5.7 million used in accounts receivable was in line with the rapid sales growth achieved in current year, especially in software services and system integration segment.
 
Our trading terms with our customers are mainly on credit. Accounts receivable are presented net of an allowance for doubtful accounts. The Days Sales Outstanding as of December 31, 2010 was 277 days, as compared to 255 days as of December 31, 2009. The impact of the increase on our liquidity was not significant, as the current ratio as of December 31, 2010 was kept at 6.37. The following table shows the aging of accounts receivable at the end of 2010 and 2009:
 
Year
 
AR Balance
   
< 1 year
   
1-2 years
   
2-3 years
   
> 3 years
   
Revenue
 
2010    
    34,558       23,528       9,634       1,396       -       37,641  
2009  
    23,457       19,214       4,128       115       -       30,259  

The balance of accounts receivable has increased by 48% to $34.5 million, mainly due to the following factors:
 
 
A.  
The Company has successfully grown its sales by 24% in 2010;
 
 
B.  
The Company has experienced strong seasonality in quarterly sales results, with 64% of the total revenue achieved in the second half of 2010. Accordingly, a high percentage of the accounts receivable recorded during the period will be collected after year-end, due to our long credit period;
 
 
C.  
The Company has aggressively grown its business in the past two years, extending credit terms to a few less credit worthy new customers
 
Our long credit period arises because our major end customers are the three major telecom carriers in the China telecom market (“China Mobile”, “China Unicom” and “China Telecom”). Due to their virtual monopoly in the market, they have a clear advantage over service provider like us in negotiations regarding payment term and credit periods. At present, the standard credit term is usually between three to six months. Moreover, these customers, as State-controlled enterprises, release payments based on their internal schedule, as it takes various management levels to review and approve payment requests. In the last few years, the major telecom carriers have been through massive merger, business restructuring, and management shakeup, often causing delays in decision making in various aspects of their operations. So the payment process often takes longer than set forth in the contract.

In spite of the complicated collection process, we still regarded the telecom carriers, all of which are State-controlled enterprises, as “blue chip” companies with abundant financial resources. In the past the majority of accounts receivable has been collected for the full invoiced amounts.  We have a long-term business relationship with these customers, and believe the complication of fee collection will not lead to the uncertainty in receiving payment.

In addition to general provisions, specific provision is made against trade receivables aged for more than one year to the extent when collection appears doubtful. As of December 31, 2010, we have made judgments about credit worthiness of each customer, and set up allowance for uncollectible account as high as 50% for all of the accounts receivable aged greater than two years but within three years, and as high as 30% for selected accounts receivable aged greater than one year but within two years.
 
 
12

 

Investing activities
 
For 2010, $4.9 million net cash used in investing activities was primarily attributable to $4.1 million used in the acquisition of 100% equity interest of Haicom, and $0.6 million used in purchasing property and equipments.

For 2009, $4.1 million net cash used in investing activities was primarily attributable to $3.6 million used in acquiring intangible assets from Newway Technology and $0.4 million used in purchasing property and equipments.
 
Financing activities
 
Net cash used in financing activities for the year ended December 31, 2010 was $0.1 million, as compared to the net cash of $0.2 million used in financing activities in 2009. The net cash used in financing activities in 2010 was mainly to payoff of an interest bearing loan provided by a major shareholder in prior years.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
We do not have any off-balance sheet arrangements.
 
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our independent registered public accounting firm’s report and our consolidated financial statements begin on page F-1.
 
 
13

 
 
3. Exhibits
 
Number
 
Description
     
23.1
 
Consent of Bernstein & Pinchuk
     
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.
 
 
14

 
 
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.
 
 
 
JINGWEI INTERNATIONAL LIMITED
 
 
 
Dated:  September 20, 2011
By:  
/s/ George Du
 
 
Name:  
George Du
 
 
Title:
Chief Executive Officer, President and Chairman
(Principal 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:  September 20, 2011
By:  
/s/ George Du
 
 
Name:  
George Du
 
 
Title:
Chief Executive Officer, President and Chairman
(Principal Executive Officer)
 
 
 
Dated:  September 20, 2011
By:
/s/ Yong Xu
 
 
Name:
Yong Xu
 
 
Title:
Chief Financial Officer (Principal
Financial and Accounting Officer)
 
 
 
Dated:  September 20, 2011
By:
/s/ Corla Chen
 
 
Name:
Corla Chen
 
 
Title:
Director
 
 
 
 
Dated:  September 20, 2011
By:
/s/ Jason Chen
 
 
Name:
Jason Chen
 
 
Title:
Director
 
 
 
 
Dated:  September 20, 2011
By:
/s/ Lily Sun
 
 
Name:
Lily Sun
 
 
Title:
Director
 
 
15

 
 
JINGWEI INTERNATIONAL LIMITED AND SUBSIDIARIES
 
TABLE OF CONTENTS

 
 
Pages
Report of Independent Registered Public Accounting Firm
 
F-1
 
 
 
Consolidated Balance Sheets as of December 31, 2010 and 2009
 
F-2
 
 
 
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2010 and 2009
 
F-3
 
 
 
Consolidated Statements of Changes in Equity for the years ended December 31, 2010 and 2009
 
F-4
 
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009
 
F-5
 
 
 
Notes to Consolidated Financial Statements for the years ended December 31, 2010 and 2009
 
F-6

 
 

 
 


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 (together the “Company”) as of December 31, 2010 and 2009 and the related consolidated statements of income and comprehensive income, changes in equity, and cash flows (together the “consolidated financial statements”) for each of the years in the two-year period ended December 31, 2010.  The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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 audits 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 consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
 
 
/s/ Bernstein & Pinchuk LLP
New York, New York
March 30, 2011
 
 
F-1

 
 
Jingwei International Limited and Subsidiaries
Consolidated Balance Sheets
(in US dollars thousands, except share and par value)
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 7,519     $ 10,239  
Accounts receivable, less allowance of doubtful accounts of $2,040 and $1,266, respectively
    34,558       23,457  
Other receivables, prepayments and deposits, less allowance for doubtful accounts of $134 and $176, respectively
    3,610       3,219  
Inventories
    5,780       2,316  
Deferred tax assets
    413       258  
Total current assets
    51,880       39,489  
                 
Non-current assets
               
Property, plant and equipment, net
    1,854       1,385  
Intangible assets, net
    17,448       17,451  
Long-term investment
    1,797       1,737  
Goodwill
    3,209       -  
Total assets
  $ 76,188     $ 60,062  
                 
LIABILITIES AND EQUITY
               
Current liabilities
               
Accounts payable
  $ 4,122     $ 4,154  
Accruals and other payable
    1,890       1,279  
Income tax payable
    1,610       1,719  
Loan from a stockholder
    262       369  
Deferred tax liability
    259          
Total current liabilities
    8,143       7,521  
                 
Non-current liabilities
               
Deferred tax liabilities – non current
    965       803  
                 
Total liabilities
    9,108       8,324  
                 
Commitments and contingencies
    -       -  
Equity
               
Common stock, ($0.001 par value; 75,000,000 shares authorized; 20,350,167 and 17,049,000 shares issued as of December 31, 2010 and 2009, respectively; 20,347,167 and 17,049,000 shares outstanding as of December 31, 2010 and 2009, respectively)
    20       17  
Additional paid-in capital
    22,502       18,931  
Treasury Stock, at cost (3,000 and 0 shares as of December 31, 2010 and 2009, respectively)
    (12 )        
Statutory and other reserves
    3,590       2,916  
Retained earnings
    28,948       19,738  
Accumulated other comprehensive income
    4,299       2,658  
Total Company’s stockholders' equity
    59,347       44,260  
Noncontrolling interest
    7,733       7,478  
Total equity
    67,080       51,738  
                 
Total liabilities and equity
  $ 76,188     $ 60,062  

See notes to consolidated financial statements.
 
 
F-2

 
 
Jingwei International Limited and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(in US dollars thousands, except share and per share data)

   
Years Ended December 31
 
   
2010
   
2009
 
             
Sales
  $ 37,641     $ 30,259  
Cost of sales
    19,477       18,998  
                 
Gross profit
    18,164       11,261  
                 
Operating expenses
               
                 
Selling, general and administrative expenses
    6,673       3,859  
Research and development costs
    2,415       1,155  
      9,088       5,014  
                 
Income from operations
    9,076       6,247  
                 
Other income (expenses)
               
Subsidy income
    520       736  
Interest income
    60       181  
Interest expense
    (33 )     (14 )
Other income (expense)
    390       (56 )
      937       847  
Income before income taxes
    10,013       7,094  
Income tax expense
    129       1,126  
                 
Net income
    9,884       5,968  
                 
Less: Net income attributable to noncontrolling interest
    -       -  
Net income attributable to the Company’s stockholders
    9,884       5,968  
                 
Foreign currency translation adjustment
    1,896       112  
Comprehensive income
  $ 11,780     $ 6,080  
Comprehensive income attributable to noncontrolling interest
    255       18  
Comprehensive income attributable to the Company’s stockholders
    11,525       6,062  
Basic earnings per share
  $ 0.53     $ 0.35  
Diluted earnings per share
  $ 0.52     $ 0.34  
Weighted average common shares outstanding
               
                 
Basic
    18,707,424       17,049,000  
                 
Diluted
    18,933,659       17,512,610  
See notes to consolidated financial statements.
 
 
F-3

 
 
Jingwei International Limited and Subsidiaries
Consolidated Statements of Changes in Equity
(in US dollars thousands, except share amounts)
 
               
Company’s stockholders' equity
       
  
 
Total
equity
   
Number of
shares of
common stock
   
Common
stock
   
Additional
paid-in capital
   
Treasury
Stock
   
Statutory and
other reserves
   
Retained
earnings
   
Accumulated
other
comprehensive
income
   
Noncontrolling
interest
 
Balance, January 1, 2009
 
$
42,131
     
17,049,000
   
$
17
   
$
15,404
    $  -    
$
884
   
$
15,802
   
$
2,564
   
$
7,460
 
                                                                         
Shares to be issued as acquisition consideration from Newway (Note 12)
   
3,287
                     
3,287
                                         
Foreign currency translation adjustment
   
112
     
-
     
-
     
-
             
-
     
-
     
94
     
18
 
Share based compensation cost (Note 11)
   
240
     
-
     
-
     
240
             
-
     
-
     
-
     
-
 
Transfer to statutory and other reserves
   
-
     
-
     
-
     
-
             
2,032
     
(2,032
)
   
-
     
-
 
Net income
   
5,968
     
-
     
-
     
-
             
-
     
5,968
     
-
     
-
 
Balance, December 31, 2009
 
$
51,738
     
17,049,000
   
$
17
   
$
18,931
    $  -    
$
2,916
   
$
19,738
   
$
2,658
   
$
7,478
 
                                                                         
Issuance of common shares in connection with an asset acquisition from Newway (Note12)
   
-
     
3,287,167
     
3
     
(3
)
                                       
Issuance of common shares under incentive plan
   
26
     
14,000
             
26
                                         
Common shares to be issued in connection with acquisition of Haicom (Note 3)
   
2,992
                     
2,992
                                         
Repurchase of common stock`
   
(12
)
   
(3,000)
                     
(12
)
                               
Foreign currency translation adjustment
   
1,896
     
-
     
-
     
-
             
-
     
-
     
1,641
     
255
 
Share based compensation cost (Note 11)
   
556
     
-
     
-
     
556
             
-
     
-
     
-
     
-
 
Transfer to statutory and other reserves
   
-
     
-
     
-
     
-
             
674
     
(674
)
   
-
     
-
 
Net income
   
9,884
     
-
     
-
     
-
             
-
     
9,884
     
-
     
-
 
Balance, December 31, 2010
 
$
67,080
     
20,347,167
   
$
20
   
$
22,502
    $
(12
)  
$
3,590
   
$
28,948
   
$
4,299
   
$
7,733
 

See notes to consolidated financial statements

 
F-4

 

Jingwei International Limited and Subsidiaries
Consolidated Statements of Cash Flows
(in US dollars thousands)
   
Years Ended December 31
 
   
2010
   
2009
 
             
Cash flows from operating activities
           
Net income
  $ 9,884     $ 5,968  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation & amortisation
    3,970       2,763  
Allowance for doubtful accounts
    1,409       1,189  
Share-based compensation expense
    556       240  
Changes in operating assets and liabilities:
               
Accounts receivable
    (10,946 )     (5,216 )
Other receivables, prepayments and deposits
    (632 )     472  
Inventories
    (2,591 )     486  
Deferred tax
    (134 )     (258 )
Accounts payable
    (249 )     2,187  
Accruals and other payables
    (302 )     (186 )
Income tax payable
    (187 )     1,168  
Net cash provided by operating activities
    778       8,813  
Cash flows from investing activities
               
Acquisition of property and equipment
    (601 )     (445 )
Acquisition of intangible assets
    (225 )     (3,633 )
Cash paid for business acquisition
    (4,096 )        
Net cash used in investing activities
    (4,922 )     (4,078 )
Cash flows from financing activities
               
Proceeds from exercise of stock options
    14       -  
Repayment of stockholder loans
    (107 )     (190 )
Net cash used in financing activities
    (93 )     (190 )
Effect of foreign currency translation on cash and cash equivalents
    1,517       222  
Net (decrease) increase in cash and cash equivalents
    (2,720 )     4,767  
Cash and cash equivalents - beginning of year
    10,239       5,472  
Cash and cash equivalents - end of year
  $ 7,519     $ 10,239  
Supplemental disclosure of cash flow information
               
Income tax paid
  $ 404     $ 310  
Interest paid
  $ -     $ -  
Non-cash investing activities
               
Share consideration issued for acquisition of intangible assets from Newway
  $ 3,287     $ -  

See notes to consolidated financial statements.
 
 
F-5

 
 
Jingwei International Limited and Subsidiaries
Notes to Consolidated Financial Statements
(Stated in US dollars thousands, except per share amounts)

NOTE 1.
CORPORATE INFORMATION AND DESCRIPTION OF BUSINESS

The consolidated financial statements include the financial statements of Jingwei International Limited (“Jingwei”), its subsidiaries and companies it controls through contractual agreements in the form of variable interest entities (“VIEs”). Jingwei International Investments Limited (“Jingwei BVI”), Jingwei International Investment (HK) Ltd. (“Jingwei HK”), Jingwei Hengtong Technology (ShenZhen) Co. Ltd (“Jingwei Hengtong”), Shenzhen Jingwei Communication Co., Ltd. (“Jingwei Communication”), New Yulong Information Technology Co. Ltd. (“New Yulong IT”), New Yulong Software Technology Development Co. Ltd. (“New Yulong Software”), Beijing New Media Advertising Co. Ltd. (“Beijing New Media”), Shenzhen Xinguochuang Information Technology Company Limited (“Xinguochuang”), Shanghai Haicom Telecommunication Technology Limited ("Haicom"), and Jiangsu Liandong Communication Ltd. ("Jiangsu Liandong"). Jingwei International Limited, its subsidiaries and VIEs are collectively referred to as the “Company”. All significant inter-company accounts and transactions have been eliminated in consolidation.

Corporation Information

The Company, formerly known as Neoview Holdings Inc. (“Neoview”), was established in Nevada, US on November 17, 2004, as a public shell company. On May 16, 2007, Neoview and Synergy Business Consulting LLC, a principal stockholder of Neoview, entered into a share exchange agreement with the stockholders of Jingwei BVI. Pursuant to the share exchange agreement, Neoview acquired all of Jingwei BVI’s issued and outstanding shares from Jingwei BVI’s stockholders in exchange for the issuance to Jingwei BVI’s stockholders of 11,554,000 shares of Neoview’s common stock, constituting 86.4% of outstanding common shares of Neoview on a fully-diluted basis.

As a result of this share exchange transaction, Jingwei BVI became a wholly-owned subsidiary of Neoview. Under accounting principles generally accepted in the United States of America (“U.S. GAAP”), the share exchange transaction was treated as a reverse acquisition, with Jingwei BVI as the accounting acquirer and Neoview as the acquired party.

Immediately following the closing of the merger, Neoview changed its name to Jingwei International Limited (“the Company”), and consummated a private placement of 3,395,000 units on May 16, 2007, each consisting of one (1) share of its common stock and 0.3 of a warrant to purchase one (1) share of its common stock, at a price per unit of $5.00 for for aggregate gross proceeds of $16,975,000.

Jingwei BVI was incorporated in British Virgin Islands (“BVI”) in May 2006, and is a holding company without any operation.

Jingwei HK, a wholly owned subsidiary of Jingwei BVI, was established on October 31, 2006 in Hong Kong. It is engaged in telecommunication equipment sales, software development and e-commerce.

Jingwei Hengtong, a wholly owned subsidiary of Jingwei HK, was established in People’s Republic of China (“PRC”) on February 8, 2007. It is engaged in computer hardware and software development, and business consulting services.
 
 
F-6

 
 
On February 8, 2007, Jingwei Hengtong entered into a series of contractual agreements (“Contractual Agreements”) for a ten-year term with Jingwei Communication, a PRC company established on May 8, 2001 to develop computer software and telecommunication equipments, to operate call center, as well as to provide internet and mobile value added service. Pursuant to the Contractual Agreements, Jingwei Hengtong has agreed to exclusively provide to Jingwei Communication technology consulting services, and bear all of Jingwei Communication’s operating costs, in exchange for all of its income from the business operations. Jingwei Hengtong has also agreed to guarantee Jingwei Communication’s performance of its obligations under contracts, agreements and transactions between Jingwei Communication and third party customers. In return, Jingwei Communication had pledged its accounts receivables and all of its assets to Jingwei Hengtong. Moreover, the stockholders of Jingwei Communication had also entered into pledge agreements with Jingwei Hengtong, pursuant to which they agreed to pledge all their rights and interests, including voting rights, in favor of Jingwei Hengtong. Jingwei Hengtong was also granted an option to acquire the equity interests of Jingwei Communication within 10 years for a purchase price equal to its shareholders’ original paid-in price or the lowest price permissible under PRC laws. Finally, Jingwei Hentong had made an interest-free loan to Jingwei Communications to fund its capitalization, which can only be repaid upon the shareholders of Jingwei Communications transferring their equity interests to Jingwei Hengtong.

The noncontrolling interest does not change since 100% of all income and losses are allocated to the Company in accordance with the Contractual Agreements.  Since there is no dividend distribution to noncontrolling interest, its balance changed between periods according to the exchange rate during that period.
 
PRC regulations prohibit direct foreign ownership of entities engaged in certain restricted businesses, including the provision of value-added telecommunications services in the PRC where certain licenses are required for the provision of such services. To comply with PRC laws and regulations, the Company engages in such businesses through contractual commitments with the VIEs, principally Jingwei Communication and the subsidiaries directly or indirectly controlled by Jingwei Communication, included New Yulong IT, New Yulong Software, Jiangsu Liandong, Beijing new Media, Xinguochuang and Haicom.
 
New Yulong IT, a wholly owned subsidiary of Jingwei Communication, was established on January 4, 1999 in Shenzhen, China. It mainly conducts mobile value added service, software development and computer information system integration,
 
New Yulong Software, wholly owned by Jingwei Communication directly and indirectly through New Yulong IT, was established on June 14, 2005 in Shenzhen, China. It is engaged in software development and computer information system integration.
 
Jiangsu Liandong, a wholly owned subsidiary of Jingwei Communication, was established on December 11, 2009 in Suqian, China. It is engaged in software development and computer information system integration,
 
Beijing New Media, a wholly owned subsidiary of New Yulong IT, was established on July 23, 2008 in Beijing, China. It is engaged in creating, planning and handling advertising, as well as providing branding strategy and sales promotions for its clients.
 
Xinguochuang, a wholly owned subsidiary of New Yulong IT, was established on April 29, 2009, in Shenzhen, China. It is engaged in software development and computer information system integration, domestic and international trade.
 
 
F-7

 
 
On November 9, 2010, Xinguochuang completed the acquisition of 100% equity interest of Haicom, a corporation registered in Shanghai, China that provides internet and mobile value added service platforms to telecommunication operators in more than ten provinces in China.
 
The Company presents its financial statements on a consolidated basis with those of Jungwei Communication and its subsidiaries, as a result of its controlling financial interest in accordance with ASC 810-10.
 
Description of Business

The Company is one of the leading providers of data mining and interactive marketing and software services in PRC. The Company's services include market segmentation, customer trend and churn analysis, fraud detection and direct marketing services such as telemarketing, direct mailing and wireless value added services. The Company also operates a software services business, which provides a broad range of billing systems, provisioning solutions, decision support and customer relationship management systems for PRC’s leading mobile telecommunication carriers.

NOTE 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a)
Basis of presentation and consolidation

The consolidated financial statements of the Company, its subsidiaries and its VIEs have been prepared in confirmity with U.S. GAAP. All significant inter-company accounts and transactions have been eliminated in consolidation.

The Company adopted the purchase method to consolidate Jingwei Communication, with the current assets and liabilities recorded at fair value which approximated their historic book value on February 8, 2007, the effective date (“effective date”) of the Contractual Agreements. The fair value of the acquired net assets of Jingwei Communication was $6.6 million on the effective date, after eliminating all the intercompany transaction and balances, and was recognized as noncontrolling interest on the consolidated balance sheet. The noncontrolling interest changes only for translation adjustments since 100% of all income and losses are allocated to the Company in accordance with the Contractual Agreements and there are no dividend distributions to noncontrolling interest. The noncontrolling interest amounted to $7.7 million and $7.5 million as of December 31, 2010 and 2009, respectively. The change in amount was the result of foreign currency translation adjustment.

b)
Use of estimates

In preparing consolidated financial statements in conformity with U.S. GAAP, management makes estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the amounts of revenues and expenses during the years ended December 31, 2010 and 2009. Actual results could differ from those estimates.

Significant estimates based on management's best estimation include, but are not limited to, the valuation of trade receivables and other receivables, inventories, the estimation on useful lives of property and equipment and intangible assets, the valuation of options, and allowance for deferred tax assets.

c)
Business combination

For a business combination with acquisition date on or after January 1, 2009, the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree were recognized at the acquisition date, measured at their fair values as of that date. In a business combination achieved in stages, the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, were recognized at the full amounts of their fair values. In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest in the acquiree, that excess in earnings was recognized as a gain attributable to the Company.
 
 
F-8

 
 
Deferred tax liability and asset were recognized for the deferred tax consequences of differences between the tax bases and the recognized values of assets acquired and liabilities assumed in a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 740-10.

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in business combinations. Goodwill is not amortized; rather, impairment tests are performed at least annually or more frequently if circumstances indicate impairment may have occurred. If impairment exists, goodwill is immediately written off to its fair value and the best estimate of that loss is recognized in those financial statements.

d)
Cash and cash equivalents

Cash includes not only currency on hand but demand deposits with banks or other financial institutions. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. No cash and cash equivalents are restricted as to withdrawal or usage.

e)
Accounts receivable, net and other receivables

Accounts receivable are recognized and carried at original sales amounts less an allowance for uncollectible accounts, as needed.

The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability 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:
 
Account and other receivables due:
     
Within one year
    0.3 %
After one year but within two years
    5.0 %
After two years but within three years
    20.0 %
Over three years
    100.0 %

Additional specific provision is made against trade and other receivables aged for more than one year to the extent when collection appears doubtful.

Bad debts are written off when identified. The Company does not accrue interest on trade and other receivables.

f)
Inventory

Inventories consist of direct materials, labor costs and those indirect costs related to contract performance and are stated at the lower of cost or market. The cost of inventories is determined principally by the specific identification method.
 
 
F-9

 
 
Where there is evidence that the utility of inventories, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, a provision is accrued for the difference with charges to cost of sales.

g)
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 as follows:

   
Estimated Useful lives (years)
   
Residual value
 
Leasehold improvements
    5       0 %
Motor vehicles
    10       10 %
Office equipment and computers
    5       10 %

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.

h)
Intangible assets, net

Intangible assets represent database, software, strategic alliance, non-compete agreement, customer relationship, competed technology and partnership agreement. The value of the database and software was established based on historic acquisition costs. The valuation and allocation of intangible assets of strategic alliance, non-compete agreement, customer relationship, competed technology and partnership agreement were measured based on fair value.

The finite lived intangible assets are amortized over their estimated useful lives, and are reviewed annually for impairment, or more frequently, if indications of possible impairment exist.

i)
Long term investment

Long term investment with equity interest of less than 20% is recorded at cost and carried at that amount until it is sold or otherwise disposed of or until it is written down. A write-down from original cost is appropriate when dividends received represent a dividend received in excess of earnings subsequent to the investment date. Otherwise, dividends received are recorded as investment income.

j)
Impairment of long-lived assets
 
The Company follows ASC 360-10 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 consolidated financial statements.
 
 
F-10

 
 
k)
Concentration of Credit Risks

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, trade and other receivables. As of December 31, 2010 and 2009, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in PRC. With respect to trade and other receivables, the Company establishes 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.

l)
Fair value of financial instruments

The carrying values of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, other receivables, prepayments and deposits, account payable, accruals and other payables, and loan from a stockholder approximate their fair values due to the short-term maturity of such instruments.

m)
Comprehensive income

The Company follows ASC 220-10 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 years ended December 31, 2010 and 2009 presented includes foreign currency translation adjustments.

n)
Revenue recognition
 
The Company recognizes revenue when the amount of revenue can be reliably measured, it is probable that economic benefits will flow to the entity and specific criteria have been met for each of the Company’s activities as described below.

i.      Software and system services
 
Subject to these criteria and in accordance with ASC 985 Software Revenue Recognition, 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 pursuant to the percentage-of completion method of accounting, and d) evidence of customers’ acceptance of milestone achievement. The Company’s software and system services sale arrangements do not have multiple deliverables.

As the software and system services typically takes more than three months to complete, the Company accounts for the timing and amount of revenue using the percentage-of-completion method based on proportion of work done. The percentage of work done is determined based on milestones agreed in the contract and percentage of total contract value due to be paid upon achievement of such milestones. The amount due after reaching certain milestones agreed in the contract generally reflects the progress of work at that point.
 
ii.    Data mining services
 
Revenue from data mining services is recognized when the services are rendered.
 
 
F-11

 
 
iii.    Bundled mobile products
 
In accordance with ASC 605, Revenue Recognition, the Company recognizes revenue, net of 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.
 
These arrangements only require us to provide bundled mobile products, which include handsets and customized software, but not PCS, other services, deliverables or obligations on the part of the Company. As soon as the products are transferred to the customer, our performance is complete. The customer’s payments for the products are fixed. Therefore, these arrangements do not involve multiple deliverables, and are not deemed to be multi element arrangements in accordance with ASC 605-25 or ASC 985-605.
 
Under the guidance of ASC Topic 605-45, 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 return). During the year ended December 31, 2010 and 2009, the Company has recognized a large amount sales order of handsets with customized VAS softwares built in on a gross basis as the Company acts as the primary obligor in the arrangement, has latitude in establishing price and physically changes products in most cases, the Company recognized all revenue from these sales of bundled mobile product on a gross basis, based on ASC Topic 605-45. The sale of bundled mobile product is classified as data mining service for the years ended December 31, 2010 and 2009.

o)
Subsidy income

Subsidy income received in cash from government is recognized as income in the period received.

p)
Statutory and other reserves

In accordance with the relevant PRC regulations and the articles of association of the Company’s PRC subsidiaries and VIEs, allocation from net income to the following reserves is required:
 
i.      Statutory surplus reserve
 
In accordance with the relevant laws and regulations of PRC and the articles of association of our PRC subsidiaries and VIEs, these companies are required to appropriate 10% of their net income reported in PRC statutory accounts, after offsetting 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.
 
ii.    Discretionary surplus reserve
 
In accordance with the articles of association of our PRC subsidiaries and VIEs, the appropriation of net income reported in 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 subsidiaries and VIEs had appropriated their earnings to discretionary surplus reserve from their respective dates of inception to December 31, 2010.
 
 
F-12

 
 
q)
Income taxes
 
Income taxes are accounted for using an asset and liability approach which requires the recognition of income taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred income taxes are determined based on the differences between the financial reporting and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws. Deferred tax assets are reduced by a valuation allowance, if based on available evidence, it is considered that it is more likely than not that some portion of or all of the deferred tax assets will not be realized. In making such determination, the Company considers factors including (i) future reversals of existing taxable temporary differences, (ii) future profitability, and (iii) tax planning strategies.
 
r)
Warranty

The Company accounts for product warranties in accordance with ASC 450, Accounting for Contingencies. It provides for the estimated costs of hardware and software warranties at the time the related revenue is recognized. For hardware warranty, the Company estimates the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The hardware manufacture generally provides a warranty for the first year of the life of the component. For software warranty, the Company estimates the costs to provide bug fixes, such as security patches, over the life of the warranty. The Company regularly reevaluates its estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary. In its experience the cost of providing warranties has been immaterial.

s)
Functional currency and foreign currency translation

The functional currency of the operating subsidiaries in PRC is the Chinese Yuan Renminbi (“RMB”). However, the reporting currency is the United States dollar (“USD”). Assets and liabilities of these companies have been translated into dollars using the exchange rate at the balance sheet date. Income and expense items are translated at average rate for the year. Translation adjustments are reported separately and accumulated in a separate component of equity (accumulated other comprehensive income).

t)
Foreign operations 

Almost all of the Company’s operations and assets are located in China. The Company may be adversely affected by possible political or economic events in this country. The effect of these factors cannot be accurately predicted.
 
The per dollar exchange rates adopted are as follows:
 
  
  
2010
  
  
2009
  
Year end RMB exchange rate
   
6.61
     
6.84
 
Average yearly RMB exchange rate
   
6.78
     
6.84
 

No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
 
There has been no significant fluctuation in exchange rate for the conversion of RMB to U.S. dollars after the balance sheet date.
 
 
F-13

 
 
u)
Share-based compensations 

The Company adopted ASC 718 Stock Compensation, effective on January 1, 2006. The Company recognizes the cost resulting from all share-based payment transactions in its consolidated financial statements using a fair-value-based method. The Company measures compensation cost for all outstanding unvested stock-based awards made to its employees and directors based on estimated fair values and recognize compensation over the service period for awards expected to vest. The estimated fair value of stock options and stock purchase rights granted pursuant to our employee stock purchase plan is determined using the Black-Scholes valuation model. The Black-Scholes valuation model requires the management to make certain assumptions about the future. Estimation of these equity instruments’ fair value is affected by the stock price, as well as assumptions regarding subjective and complex variables such as employee exercise behavior and the Company’s expected stock price volatility over the term of the award. Generally, the Company’s assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. Where such historical information is not available, the Company applied the “Simplified Method” in accordance with ASC 718-10-S99-1 in valuation of all its options, which are granted at-the-money, nontransferable and nonhedgeable, and vest based upon a service condition alone. For stock options and common stock warrants issued to non-employees, they are measured as of the date required by ASC 505-50 Equity-Based Payments to Non-Employees.

v)
Basic and diluted earnings per share

In accordance with ASC 260 Earnings per Share, basic earnings per common share is computed by using net income divided by the weighted average number of shares of common stock outstanding for the periods presented. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of the Company. Potential common stock shares consist of shares that may arise from outstanding dilutive common stock options and warrants (the number of which is computed using the “treasury stock method”). The calculation of 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.

w)
Recently enacted accounting standards

The Financial Accounting Standards Board (“FASB”) issued ASU 2010-13, Compensation—Stock Compensation (ACS Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. The ASU codifies the consensus reached in Emerging Issues Task Force (EITF) Issue No. 09-J. The amendments to the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.
 
 
F-14

 
 
The amendments in the ASU are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier adoption is permitted. The amendments are to be applied by recording a cumulative-effect adjustment to beginning retained earnings. The Company is currently evaluating the impact of adopting this update on its consolidated financial statements.

The FASB has issued ASU 2009-17, Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. ASU 2009-17 changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. This determination is based on, among other things, the other entity’s purpose and design and the Company’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. ASU 2009-17 also required additional disclosures concerning an enterprise’s continuing involvement with VIEs. ASU 2009-17 is effective at the start of the Company’s first fiscal year beginning after November 15, 2009. The adoption had no effect on the Company’s financial position, results of operations, or cash flows.

In January 2010, the FASB has issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. ASU 2010-06 amends Codification Subtopic 820-10 and now requires a reporting entity to use judgment in determining the appropriate classes of assets and liabilities and to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009. As this standard relates specifically to disclosures, the adoption will not have any impact on the Company’s consolidated financial position and results of operations.

In February 2010, the FASB issued ASU 2010-09, "Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements." ASU 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. ASC 2010-09 was effective upon issuance. The adoption of this standard had no effect on the Company’s consolidated financial position or results of operations.

In December 2010, FASB issued revised guidance on “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The revised guidance specifies that an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the revised guidance should be included in earnings as required by Section 350-20-35. The revised guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company is currently evaluating the impact on its consolidated financial statements of adopting this guidance.
 
In December 2010, FASB issued revised guidance on the “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The revised guidance specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The revised guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The revised guidance is effective prospectively 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, 2010. The Company has not early adopted the new guidance and is currently evaluating the impact on its consolidated financial statements of adopting this guidance.

In 2010, except for the above ASUs, FASB issued several ASUs – ASU 2010-1 through ASU 2010-29, which are not expected to have a material impact on the consolidated financial statements upon adoption.
 
 
F-15

 
 
NOTE 3.
BUSINESS COMBINATION
 
On November 9, 2010, Xinguochuang completed the acquisition of 100% equity interest of Haicom, a corporation registered in Shanghai, China that provides Internet and mobile value added service platforms to telecommunication operators in more than ten provinces. The Company will pay Haicom stockholders an aggregate purchase price of $8.2 million, including initial cash payment of $5.2 million in total and contingent consideration up to $2.99 million in the form of the Company’s common stock, subject to the achievement of certain performance goals.
 
The transaction was accounted for using the purchase method of accounting, and, accordingly, the acquired assets were recorded at their estimated fair values on the acquisition date. The Company preliminarily allocated the purchase price of $8.2 million to the assets acquired based on their estimated fair values, as follows:
 
   
Purchase Price Allocations (‘000)
 
Intangible Assets:
     
Customer relationship
  $ 766  
Competed technologies
    499  
Partnership agreement
    1, 406  
Net assets
       
Cash and cash equivalents
    432  
Accounts receivable
    1,246  
Deferred income tax asset, current
    6  
Other current assets
    905  
Fixed assets
    398  
         
Accounts payable
    (93 )
Other current liabilities
    (64 )
Other long term liabilities
    (94 )
Deferred income tax liabilities, current and non-current
    (401 )
Goodwill
    3,143  
         
Total:
  $ 8,149  
 
 
F-16

 
 
In accordance with SEC Regulation S-X Rule 3-05, Haicom was not a significant subsidiary as of the acquisition date, therefore no separate audited financial statements are presented. The results of operations of Haicom for the period from November 9, 2010 to December 31, 2010 had been consolidated.
 
The fair values of the intangible assets were determined using the “cost,” “income approach-excess earnings”, and “with and without” valuation methods. In performing the purchase price allocation, the Company considered, among other factors, forecasted financial performance of the acquired business and market performance of the acquired business in China.
 
The goodwill is mainly attributable to intangible assets that cannot be recognized separately as identifiable assets under U.S. GAAP, and comprise (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of the synergy economies of scale expected from combining the operations resulting from the acquisition. None of the goodwill recognized is expected to be deductible for income tax purposes.
 
The following unaudited pro forma information summarizes the results of operations of the Company for the years ended December 31, 2010 and 2009 assuming that the Company’s acquisition of Haicom occurred as of January 1, 2010 and 2009, respectively. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisitions been completed at the beginning of the periods indicated, nor is it indicative of future operating results.

   
December 31,
 
   
2010
   
2009
 
Pro forma revenue
  $ 41,301     $ 34,021  
Pro forma net income
  $ 10,433     $ 6,000  
Pro forma net income per share—basic
  $ 0.56     $ 0.35  
Pro forma net income per share—diluted
  $ 0.55     $ 0.34  

Since the acquisition date of November 9, 2010, Haicom has generated $958 of revenue and $271 of net income.

NOTE 4.
ACCOUNTS RECEIVABLE, NET

At December 31, 2010 and 2009, accounts receivable include the following:

   
December 31,
 
   
2010
   
2009
 
Accounts receivable
  $ 36,598     $ 24,723  
Less: allowance for doubtful debts
    2,040       1,266  
    $ 34,558     $ 23,457  

The Company wrote off accounts receivables $372 and $57 in total in 2010 and 2009, when the balances were deemed uncollectible, respectively.
 
 
F-17

 
 
NOTE 5.
INVENTORIES

At December 31, 2010 and 2009, inventories consist of the following:

   
December 31,
 
   
2010
   
2009
 
Project costs
  $ 5,780     $ 2,272  
Others
            44  
    $ 5,780     $ 2,316  

NOTE 6.
OTHER RECEIVABLES, PREPAYMENT AND DEPOSITS

The following table summarizes the components of other receivables, prepayments and deposits as of December 31, 2010 and 2009:

   
December 31,
 
   
2010
   
2009
 
Prepaid services fees
  $ 933     $ 209  
Advance to vendors
    1,972       2,297  
Deposit
    122       143  
Other receivables
    717       746  
      3,744       3,395  
Less: allowance for doubtful debts
    134       176  
    $ 3,610     $ 3,219  

The balance as of December 31, 2010 mainly includes various prepayments to business partners for project development costs, and advances to suppliers to order goods and equipments.

NOTE 7.
PROPERTY AND EQUIPMENT

At December 31, 2010 and 2009, property and equipment, at cost, consist of:

   
December 31,
 
   
2010
   
2009
 
Leasehold improvements
  $ -     $ 153  
Motor vehicles
    985       371  
Office equipments and computers
    3,576       1,475  
      4,561       1,999  
Less: Accumulated depreciation and amortization
    2,707       614  
Property and equipment, net
  $ 1,854     $ 1,385  

Depreciation expenses for the years ended December 31, 2010 and 2009 were $454 and $356, respectively.

NOTE 8.
INTANGIBLE ASSETS, NET

The breakdown of the intangible asset balance as of December 31, 2010 and 2009 as well as related amortization period for each asset class is as follows:
  
   
December 31,
  Amortization
Cost
 
2010
   
2009
 
Period
Databases
  $  14,864     $ 14,493  
8 years
Strategic alliance
    7,278       7,068  
5.5 years
Non-compete agreement
    327       316  
2 years
Software
    397       202  
8 years
Customer relationship
    782       -  
5.2 years
Competed technology
    509       -  
4.2 years
Partnership agreement
    1,435       -  
4.2 years
      25, 592       22,079    
Less: accumulated amortization
    8,144       4,628    
Net
  $ 17,448     $ 17,451    

 
F-18

 
 
Amortization expense for the years ended December 31, 2010 and 2009 was $3,547 and $2,544 respectively.
 
The future amortization expenses for the net carrying amount of intangible assets with definite lives as of December 31, 2010 are expected to be as follows:
 
2011
  $ 3,962  
2012
    3,882  
2013
    3,826  
2014
    3,831  
2015 and thereafter
    1,947  
    $ 17, 448  
 
The Company recognized no impairment loss on intangible assets with definite lives in years ended December 31, 2010 and 2009.

NOTE 9.
LONG TERM INVESTMENT

In December 2008, New Yulong IT invested in Shanghai Jiuhong Investment Group Limited (“Jiuhong”) for a 19.8% equity interest, as an initial attempt to expand its data mining service into commercial real estate leasing market with Jiuhong. The investment is accounted for under the cost method, as the Company does not have a significant influence over the business and operations of Jiuhong.

The Company did not receive any dividends in 2010, and has not received any dividends in excess of the proportionate share of accumulated earnings since the date of acquisition, as a reduction of the cost of the investment.

No event or change in circumstance indicates that its carrying amount of the long-term investment is not recoverable, and no impairment was recognized during the years ended December 31, 2010 and 2009, respectively.

NOTE 10.
INCOME TAX EXPENSE

The Company uses the asset-liability method of accounting for income taxes prescribed by ASC 740 Income Taxes. The Company, its subsidiaries and the VIEs each files their taxes individually.

United States

Jingwei International Limited is subject to the United States of America Tax law at tax rate of 34%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the periods presented, and believes that its earnings are permanently invested in PRC.
 
 
F-19

 
 
BVI

Jingwei BVI was incorporated in the BVI and, under the current laws of the BVI, it is not subject to income tax.

Hong Kong

Jingwei HK was incorporated in Hong Kong and is subject to Hong Kong profits tax. Jingwei HK is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. The applicable statutory tax rate is 16.5%.

PRC

The applicable income tax rates in 2010 for the Company’s PRC operating companies, New Yulong IT, New Yulong Software, Jingwei Hengtong, Jingwei Communication, Beijing New Media, Xinguochuang and Jiangsu Liandong, Haicom, are described as follows: New Yulong IT and Haicom are qualified as high-tech software enterprises and entitled to a preferential income tax rate of 15%, which is subject to government review and approval every three years. New Yulong Software, Jingwei Hengtong, Jingwei Communication are all entitled to a preferential income tax rate of 22% in 2010. Jiangsu Liandong is subject to 25% income tax rate in 2010. Beijing New Media as a small business taxpayer and taxed on a deemed basis, i.e. 2.5% of its reported total revenue, due to its small business status. In April 2010, State Tax Bureau approved Xinguochuang for its application for preferential enterprise income tax treatment, which exempted the entity from income tax for two years beginning with 2010, its first year of profitable operations, and entitled it to a 50% tax reduction to 12.5% for the subsequent three years and 25% thereafter.

The provisions for income tax expense (benefit) from continuing operations consisted of the following:
 
   
December 31,
 
   
2010
   
2009
 
Current income tax expense
    327       1,384  
Deferred income tax benefit
    (198 )     (258 )
                 
Total provisions for income taxes
  $ 129     $ 1,126  

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred income tax assets and liabilities were as follows:

   
December 31,
 
   
2010
   
2009
 
Deferred tax assets:
           
Allowances and reserves
  $ 413     $ 171  
Net operating loss - China
    272       -  
Share-based compensation
            87  
                 
Total gross deferred tax assets
    685       258  
Valuation allowance
    (272 )     -  
                 
Total net deferred tax assets
    413       258  
Deferred tax liabilities:
               
Amortization of acquired intangibles at fair value
    1,224       803  
                 
Total net deferred tax liabilities
  $ 811     $ 545  
 
 
F-20

 
 
   
December 31,
 
   
2010
   
2009
 
Current deferred tax assets
  $ 413     $ 258  
                 
Current deferred tax liabilities
    259          
Non-current deferred tax liabilities
    965       803  
Total net deferred tax liabilities
  $ 811     $ 545  

In assessing the likelihood of realizing the deferred tax assets, management considers whether it is more likely than not that some portion of or all of the deferred tax assets will not realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the net operating losses and temporary differences become deductible. Considering the Company’s profitable operating results in the past three years, and its projected future taxable income and tax planning strategies, management believes that the Company is able to generate sufficient future taxable income to reap the full tax benefits of deducible temporary difference.

The company adopted ASC 740-10 effective January 1, 2007 to account for uncertain tax position. ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of a tax position in accordance with ASC 740-10 is a two-step process. The first step is recognition – we determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the “more-likely-than-not” recognition threshold, we presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement - a tax position that meets the “more-likely-than-not” recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement.

The Company’s policy is to record interest and penalties associated with unrecognized tax benefits as additional income taxes in the statement of operations. The Company did not recognize any interest or penalties for the years ended December 31, 2010 and 2009 related to unrecognized tax benefits.
 
Undistributed foreign earnings amounted to approximately $28,948 as of December 31, 2010. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for PRC foreign withholding taxes, if any, has been made. Upon distribution of those earnings, the Company would be subject to up to $2,895 of PRC foreign withholding tax.
 
 
F-21

 
 
The following table reconciles the Company’s effective tax for the periods presented:

   
Year ended December 31,
 
   
2010
   
2009
 
             
Expected enterprise income tax at statutory tax rate
  $ 3,093     $ 2,064  
Effect of preferential tax rate
    (2,368 )     (822 )
Non-deductible expenses
    1       -  
Super R&D deductions
    (43 )     (90 )
Reversal of prior year income tax provisions
    (404 )        
Others
    (150 )     (26 )
Effective enterprise income tax
  $ 129     $ 1,126  

For the year ended December 31, 2010, the Company recognized an income tax expense of $129 on income before income taxes of $10,013, representing an effective income tax rate of 1.3%, as compared to an income tax expense of $1,126 on a income before income taxes of $7,095, representing an effective income tax rate of 15.9% in 2009. The low effective tax rate is attributed to two factors: 1. In June 2010, Xinguochuang reversed its estimated enterprise income tax of $0.4 million recorded in 2009, upon the approval of Xinguochuang’s application for tax holiday. 2. To make the best use of Xinguochuang’s preferential tax status in the next few years, the Company started to shift a significant portion of business operations from New Yulong Software and other affiliates to Xinguochuang, resulting in a tax saving of $1,886 in 2010.
 
During the years ended December 31, 2010 and 2009, if the Company’s subsidiaries and VIEs in the PRC were neither in the tax holiday period nor had they been specifically allowed special tax concessions, the income tax expense and earnings per share amounts would be as follows:
 
   
2010
   
2009
 
Change in income tax expense       
    2,368       822  
Net income per common share - basic
    0.13       0.05  
Net income per common share - diluted      0.13       0.05  
 
New Yulong IT and Haicom are qualified as high-tech software enterprises and entitled to a preferential income tax rate of 15%, which is subject to government review and approval every three years. Their current preferential tax treatments ended on December 31, 2010, and are currently under government review for renewal. Xinguochuang has been exempted from income tax until December 31, 2011, and will be entitled to a reduced income tax rate of 12.5% until December 31, 2014.
 
NOTE 11.
SHARE-BASED COMPENSATION

On May 21, 2008, the Company adopted Jingwei International Limited 2008 Omnibus Securities and Incentive Plan (the “Plan”), which authorized the Company to grant options for the purchase shares of common stock to employees, directors and consultants at prices not less than the fair market value on the date of grant for incentive stock options and nonqualified options. Shares as to which an option is granted under the Plan but remains unexercised at the expiration, forfeiture or other termination of such option may be the subject of the grant of further options.
 
On April 16, 2008 the Company granted a total of 63 key employees of the Company, options to purchase a total of 301,100 shares of the Company’s common stock at a strike price equal to US$4.95 and vested equally in four years. The contractual term is 10 years and it is non-transferable. The options were valued at $2.278 on the grant date. The Company recognized $18 share-based compensation expense in 2010.
 
On September, 29, 2009 the Company granted to Rick Luk the CEO of the Company, options to purchase a total of 200,000 shares of the Company’s common stock at strike price equal to US$1.64. The contractual term is 10 years. The options were valued at $0.883 per unit on the grant date. On June 29, 2010 the Company entered into an amended stock option agreement with Rick Luk to shorten the vesting period from three years in the original agreement to two years. The Company recognized $115 share-based compensation expense in 2010.
 
On February 23, 2010 the Company granted to Yong Xu, the CEO of the Company, options to purchase a total of 150,000 shares of the Company’s common stock at a strike price equal to $2.05 to be vested over two years. The contractual term is 10 years. The options were valued at $1.21 per unit on the grant date. The Company recognized $91 share-based compensation expense in 2010.
 
On September 7, 2010, the Company granted a total of 43 key employees of the Company, under the Company’s 2008 Omnibus Securities and Incentive Plan, options to purchase a total of 500,000 shares of the Company’s common stock at a strike price equal to US$4.10 and vested equally in four years. The contractual term is 5 years and it is non-transferable. The options were valued a $2.02 per unit on the grant date. The Company recognized $60 share-based compensation expense in 2010.
 
The vesting periods of the options under the Plans are determined based on individual stock option agreements. Options granted to the officers generally were vested and became exercisable over two years. Options granted to the employees in 2008 and 2010 became vested and exercisable over four years at an equal annual rate of 25% from the date of grant. In total, there were 798,950 shares outstanding, including those vested and those expected to vest, as of December 31, 2010.

On June 12, 2008 the Company granted to Strategic Growth International, Inc (“SGI”) options to purchase a total of 150,000 shares of the Company’s common stock at a premium strike price of US$7.00 per share as part of the compensation for investor relations service (the “Service”). The contractual term is 5 years. These options vest in 4 quarterly installments in equal amount of 25,000 beginning with the date of the grant and the balance of 50,000 vesting on June 5, 2009. Due to service termination by the Company, there were only 33,000 shares outstanding, all vested and exercisable, as of December 31, 2010. The Company recognized $0 share-based compensation expense in 2010.
  
On November 5, 2009, the Company granted ToneTat Investment Limited (“ToneTat”) options to purchase a total of 500,000 shares of the Company’s common stock at a strike price of $2.10 per share as compensation for investor relations and financial advisory services. The contractual term is 3 years and it is non-transferable. On May 7, 2010, the Company executed an amendment with ToneTat to extend the service term to March 31, 2011, and to modify the vesting conditions of the last 300,000 options to require satisfactory completion of duties until then. The Company recognized $272 share-based compensation expense in 2010.
 
Per the above two agreements, the current vesting conditions and vesting schedule are as followings:
(a) be immediately vested and exercisable as to One Hundred Thousand (100,00) Shares as of November 5, 2009;
(b) become vested and exercisable as to an additional One Hundred Thousand (100,000) Shares upon the Optionee’s satisfactory completion of six (6) months of services;
(c) become vested and exercisable as to the remaining Three Hundred Thousand (300,000) Shares, upon satisfactory completion of services till 03/31/2011.
 
In accordance with ASC 505-50-25-7, the first 100,000 shares shall be recognized in November 2009, when these fully vested, nonforfeitable equity instruments are issued at the date the Company and ToneTat enter into an agreement for services. Also, because of the elimination of any obligation on the part of the grantee to earn the equity instruments, a measurement date of November 5, 2009 has been reached, in accordance with ASC 505-50-30-15.
 
In accordance with ASC 505-50-30-11/12/13, a performance commitment does not exist based on the consulting agreement with ToneTat. Therefore, the Company recognized the compensation expense related to the additional 100,000 shares in the second quarter of 2010, when ToneTat’s performance is complete. The measurement date was decided to be May 5, 2010. 
 
The amendment on May 5, 2010 modified the vesting conditions for the last 300,000 shares to extend the service term until March 31, 2011. There is still no performance commitment from the consultant before completion of performance, as ToneTat may quit before completion, The 300,000 stock options are thus ultimately measured when performance is complete in 2011.
 
The Company entered into the amendment before the measurement date of the 300,000 shares based on the original agreement. Therefore, the Company did not recognize any compensation expense, nor record any modification entries in this regards in 2010.
 
 
F-22

 
 
In total 14,000 stock options have been exercised. The Company bought back 3,000 shares of public stock as treasury stock in 2010, and accounted for it as equity transaction under cost method.
 
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Company’s employee stock options have characteristics significantly different from those of traded options. In addition, option valuation models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock, and changes in the subjective input assumptions can materially affect the fair value estimate of employee stock options.
 
The value of options granted was estimated on the date of the respective grant using the following weighted average assumptions:
 
    2010     2009     2008  
Weighted average risk-free rate of return
    2.56 %     0.63 %     3.20 %
Weighted average expected option life       
    3.76       4.07       5.63  
Weighted average volatility rate
    64.1 %     76.0 %     75.9 %
Weighted average dividend yield
    0 %     0 %     0 %
 
As of December 31, 2010, there was $861 unrecognized share-based compensation cost, which is expected to be recognized into the consolidated statements of operations over a weighted-average vesting period of 2.17 years. To the extent the actual forfeiture rate is different from the original estimate, actual share-based compensation cost related to these awards may be different from the expectation.

The following table summarizes all Company stock option and warrant transactions for the years ended December 31, 2010 and December 31, 2009:

   
Number of
options and
warrants
   
Weighted-
average
exercise price
   
Weighted-average
remaining contractual
life (Years)
 
Outstanding, January 1, 2009
    1,903,250     $ 5.58       3.98  
Granted
    300,000       1.79       7.44  
Forfeited
    150,000       2.30       8.75  
Exercised
                       
Outstanding, December 31, 2009
    2,053,250     $ 5.27       3.21  
Granted
    750,000     $ 3.42       5.19  
Forfeited
    311,450     $ 4.56       6.10  
Exercised
    14,000       1.90       9.02  
Outstanding, December 31, 2010
    2,477,800     $ 4.82       2.58  

Exercisable options and warrants as of December 31, 2010:

Range of exercise
prices
 
Number outstanding
currently exercisable as
of December 31, 2010
 
Weighted-average
remaining
contractual life
(years)
   
Weighted-average
exercise price of
options currently
exercisable
 
                 
$1.64-$7.00
    1,950,200     1.68     $ 5.13  
 
The total exercisable options and warrants as of December 31, 2010 include: a) 1,459,850 warrants issued in a private placement on May 16, 2007; b) 233,000 shares of options issued to consultants in 2008 and 2009; c) 257,350 shares issued to employees under the 2008 Incentive Plan.
 
The Company has accounted for employee share-based compensation expense based on the grant date fair values of the awards. Estimates of fair value are not intended to predict actual future events or the value that ultimately will be realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company for accounting purposes.
 
In accordance with ASC 718 Stock Compensation, the Company has recorded stock-based compensation expense during year ended December 31, 2010 and 2009 of $556 and $240 in connection with the issuance of these options.

NOTE 12.
BASIC AND DILUTED EARNINGS PER SHARE

Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares comprise shares issuable upon the exercise of share based awards, using the treasury stock method. The reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for income from continuing operations is shown as follows (in thousands, except share and per share data):

   
December 31,
 
   
2010
   
2009
 
Numerator for basic and diluted earnings per share:
           
Net income
  $ 9,884     $ 5,968  
Denominator for basic earnings per share—weighted average shares outstanding
    18,707,424       17,049,000  
Dilutive effect of stock-based compensation plan
    226,235       52,714  
Dilutive effect of contingently issuable shares
    -       410,896  
Denominator for diluted earnings per share
    18,933,659       17,512,610  
Basic earnings per share
  $ 0.53     $ 0.35  
Diluted earnings per share
  $ 0.52     $ 0.34  
 
 
F-23

 
 
On July 1, 2010, 3,287,167 shares associated with the purchase of intangible assets from Shenzen Newway Digital S&T Co., Ltd. (the “Purchase”) were issued as consideration, since all the performance targets associated with the Purchase had been met and there was no circumstance under which those shares would not be issued.
 
The Company had 2,251,565, and 1,439,640 common stock options and warrants outstanding in 2010 and 2009, respectively, which could have potentially diluted earnings per share in the future, but were excluded in the computation of diluted earnings per share in those periods, as their exercise prices were above the average market values in such periods.

NOTE 13.
SEGMENT INFORMATION

The Company has two reportable segments based on the type of services provided, i.e. data mining services, and software and system services. Information for the segments for years ended December 31, 2010 and 2009 in accordance with ASC 280 Segment Reporting is shown separately as follows:
 
   
December 31
 
   
2010
   
2009
 
   
Data Mining
Services
   
Software
Services
   
Total
   
Data
Mining
Services
   
Software
Services
   
Total
 
Net Revenue
  $ 17,904       19,737     $ 37,641     $ 19,452     $ 10,807     $ 30,259  
Gross profit
    7,343       10,821       18,164       6,958       4,303       11,261  
Net Income
    3,996       5,888       9,884       3,712       2,256       5,968  
Segment Assets
    40,879       35,309       76,188       43,700       16,362       60,062  
Depreciation& Amortization
    3,724       246       3,970       2,620       142       2,762  
Expenditure for segment assets
  $ 636       190     $ 826     $ 4,078     $ -     $ 4,078  

There is no inter-segment revenue. Segment assets include property and equipment and intangible assets.

NOTE 14.
VIE

To satisfy PRC laws and regulations, the Company conducts certain business in the PRC through the VIEs.

Resulting from the Contractual Agreements signed between Jingwei Hengong and Jingwei Communication, the Company includes the assets, liabilities, revenues and expenses of Jingwei Communication and its subsidiaries in China (the “VIEs”) in its consolidated financial statements.
 
On February 8, 2007, Jingwei Hengtong and Jingwei Communications entered into a series of VIE agreements for a term of ten years. Upon the execution of these agreements, Jingwei HengTong became the primary beneficiary of Jingwei Communications, which allowed the Company to consolidate the financial results of Jingwei Communications and its subsidiaries. The agreements with Jingwei Communications are described as followings:

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. During the term of this Agreement, Jingwei Communications shall not terminate this Agreement unless Jingwei HengTong engages in any gross negligence, fraud, other illegal acts or is confronted with the bankruptcy. Notwithstanding the aforesaid provisions, Jingwei HengTong may terminate this Agreement at any time with a written notice to Jingwei Communications within thirty (30) days in advance.
 
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’s 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’s 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, may be extended only upon Jingwei HengTong’s written confirmation prior to the expiration of this Agreement and the extended term shall be determined by both parties hereto through mutual consultation. During the valid term of this Agreement, Jingwei Communications shall not terminate this Agreement. Notwithstanding the above stipulation, Jingwei HengTong shall have the right to terminate this Agreement at any time by issuing a thirty (30) days prior written notice to Jingwei Communications.
 
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’s consumer database, and a software copyright and license. Jingwei HengTong paid RMB1,000 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 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 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 Communications’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.

As a result of the Operating Agreement, the Company was granted with unconstrained decision making rights and power over key operational functions within the VIEs. As a result of Exclusive Technology Consulting Services Agreement the Company will bear all of the VIEs operating costs in exchange for 100% of the net income the VIEs. There is not any income or loss of the VIE attributed to other parties. The Company does not have any equity interest in our VIEs, but instead has the right to enjoy economic benefits similar to equity ownership through our contractual arrangements with VIEs and their shareholders.

These contractual arrangements may not be as effective in providing the Company with control over the VIEs as direct ownership. Due to its VIE structure, the Company has to rely on contractual rights to effect control and management of the VIEs, which exposes it to the risk of potential breach of contract by the shareholders of Jingwei Communications for a number of reasons. For example, their interests as shareholders of Jingwei Communications and the interests of the Company may conflict and the Company may fail to resolve such conflicts; the shareholders may believe that breaching the contracts will lead to greater economic benefit for them; or the shareholders may otherwise act in bad faith. If any of the foregoing were to happen, the Company may have to rely on legal or arbitral proceedings to enforce its contractual rights, including specific performance or injunctive relief, and claiming damages. Such arbitral and legal proceedings may cost substantial financial and other resources, and result in disruption of its business, and the Company cannot assure that the outcome will be in its favor. Apart from the above risks, there is no significant judgments or assumptions regarding enforceability of the contracts. Mr. George Du, Chairman of the Company, also is the controlling stockholder of Jingwei Communications, who holds 90% of its common shares.

In addition, as all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce these contractual arrangements, it may not be able to exert effective control over the VIEs, and its ability to conduct its business may be materially and adversely affected. At present, the equity interest pledge agreement has not been registered with the PRC regulator.
 
None of the assets of the VIEs can be used only to settle obligations of the consolidated VIEs. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets. As of December 31, 2010 and December 31, 2009, respectively, there was $15,059 and $20,710 of liabilities of the Company’s consolidated VIEs for which creditors did not have recourse to the general credit of the Company or its subsidiaries.
 
 
F-24

 
 
The following financial statement amounts and balances of the VIEs were included in the accompanying consolidated financial statements as of and for the years ended December 31:
 
   
Years Ended December 31,
 
   
2010
   
2009
 
Total assets
  $ 53,122     $ 51,857  
Total liabilities
    15,059       20,710  

   
Years Ended December 31,
 
   
2010
   
2009
 
Revenues
  $ 28,047     $ 25,141  
Net Income
    10,004