CHINA TRANSINFO TECH CP 10-K 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended: December 31, 2008
For the transition period from __________ to ____________
Commission File Number: 001-34134
CHINA TRANSINFO TECHNOLOGY CORP.
(Exact name of registrant as specified in its charter)
07 Floor E-Wing Center
No. 113 Zhichunlu, Haidian District
Beijing, China 100086
(Address of principal executive office and zip code)
(86 10) 82671299
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act None
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
Indicate 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 the 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 “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
As of June 30, 2008, the aggregate market value of the shares of the Registrant’s common stock held by non-affiliates (based upon the closing price of such shares as reported on the Over-the-Counter Bulletin Board) was approximately $35.9 million. Shares of the Registrant’s common stock held by each executive officer and director and each by each person who owns 10 percent or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 23, 2009, there were 22,187,314 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
CHINA TRANSINFO TECHNOLOGY CORP.
For the Fiscal Year Ended December 31, 2008
Use of Defined Terms
Except where the context otherwise requires and for the purposes of this report only:
Statements contained in this annual report include “forward-looking statements” within the meaning of such term in Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause actual financial or operating results, performances or achievements expressed or implied by such forward-looking statements not to occur or be realized. Forward-looking statements made in this Report generally are based on our best estimates of future results, performances or achievements, predicated upon current conditions and the most recent results of the companies involved and their respective industries. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “should,” “project,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” “potential,” “opportunity” or similar terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions. Potential risks and uncertainties include, among other things, such factors as:
Additional disclosures regarding factors that could cause our results and performance to differ from results or performance anticipated by this annual report are discussed in Item 1A. “Risk Factors.” Readers are urged to carefully review and consider the various disclosures made by us in this annual report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this annual report speak only as of the date hereof and we disclaim any obligation to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.
ITEM 1. BUSINESS
We are a leading provider of public transportation information systems technology and comprehensive solutions in China. Our goal is to become the largest transportation information product and comprehensive solutions provider, as well as the largest integrated transportation information platform and commuter traffic media platform builder and operator in China. Substantially all of our operations are conducted through our variable interest entities that are PRC domestic companies owned principally or completely by our PRC affiliates. Through our variable interest entities, we are involved in developing multiple applications in transportation, digital city, land and resource filling system based on Geographic Information Systems (“GIS”) technologies which is used to service the public sector.
Our main focus is on providing transportation solutions. Our products and services include:
We also offer full range solutions for transportation oriented GIS (“GIS-T”) covering transportation planning, design, construction, maintenance and operation .
History and Corporate Structure
We were originally incorporated in Nevada on August 3, 1998 under the name R & R Ranching, Inc. to breed bison. On December 10, 2003, we executed an agreement and plan of reorganization, or the Intra-Asia Agreement, with Intra-Asia Entertainment Corporation, a Delaware corporation (“Intra-Asia Delaware”), whereby Intra-Asia Delaware became our wholly-owned subsidiary and we amended our articles of incorporation to change our name to “Intra-Asia Entertainment Corporation.” From the first half of 2006 until May 14, 2007 when we completed a reverse acquisition transaction with Cabowise International Ltd. (“Cabowise”), a BVI company, we were a blank check company and did not engage in active business operations other than our search for, and evaluation of, potential business opportunities for acquisition or participation.
On May 14, 2007, we acquired Cabowise through a share exchange transaction pursuant to which we issued to the shareholders of Cabowise 10,841,492 shares of our common stock in exchange for all of the issued and outstanding capital stock of Cabowise. Cabowise thereby became our wholly-owned subsidiary and the former shareholders of Cabowise became our controlling stockholders. On the same day, our indirect Chinese subsidiary, Oriental Intra-Asia Entertainment (China) Limited (“Oriental”), acquired eighty-five percent (85%) equity interest in Beijing PKU Chinafront High Technology Co., Ltd. (“PKU”), which commenced its businesses in October 2000. As a result, PKU became a majority-owned subsidiary of Oriental.
Current Chinese laws restrict companies with foreign ownership to operate in three business segments that we recently entered into: online services, taxi advertising, and security and surveillance related business. In order to comply with the applicable Chinese laws, we determined to restructure our subsidiaries and enter into a series of commercial arrangements to allow the Company to operate in these restricted business segments (“Restructuring”).
On February 3, 2009, as described below, through our indirect Chinese subsidiary, Oriental and Oriental’s former subsidiary, PKU, we entered into a series of equity transfer agreements with China TransInfo Technology Group Co., Ltd., a company formed under Chinese law (the “Group Company”), pursuant to which we transferred all of our indirect equity interests in PKU and PKU’s subsidiaries to the Group Company. Established in China on May 26, 2008, the Group Company is wholly owned by four Chinese affiliates of the Company, Shudong Xia, our Chairman, CEO and President and the beneficial owner of approximately 43% of the Company’s outstanding capital stock, Zhiping Zhang, the Company’s Vice President of Research and Development, Zhibin Lai, the Company’s Vice President and Wei Gao, the designee of SAIF Partners III L.P., a 11% shareholder of the Company (the “Group Company Shareholders”).
Through Oriental and PKU, we entered into the following specific agreements to transfer all of its equity interests in its respective Chinese subsidiaries to the Group Company (the “Equity Transfer”):
In connection with the Equity Transfer, on February 3, 2009, the following contractual arrangements were also made among relevant parties, which have given us contractual rights to control and manage the business of the Group Company and the Group Company’s subsidiaries (the “Contractual Arrangement” and together with the Equity Transfer, the “Restructuring”):
The main purpose of the Restructuring is to allow us to engage in the above three restricted business segments in China. As a result of the Restructuring, we transferred all of our indirect equity interests in PKU and PKU’s subsidiaries to the affiliated Group Company and accordingly, PKU and PKU’s subsidiaries became direct and indirect subsidiaries of the Group Company, which is wholly owned by the Group Company Shareholders who are all Chinese citizens. At the same time, through the Contractual Arrangement, we maintain substantial control over the VIE Entities’ daily operations and financial affairs, election of their senior executives and all matters requiring shareholder approval. Under FASB Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN 46R”), we are required to consolidate the VIE Entities into our financial statements because the Contractual Arrangement provides us with the risks and rewards associated with equity ownership, even though we do not own any of the outstanding equity interests in any of the VIE Entities. As a result the Restructuring, we are able to engage in these three restricted business segments through the VIE Entities and derive the economic benefits that we would otherwise have as the owner of VIE Entities while still complying with Chinese laws.
The following chart reflects our organizational structure as of the date of this report:
Transportation in China
Over the past two decades, China has completed series of large-scale highway infrastructure projects. As a result, according to the Ministry of Communication, China now has the second longest highway network in the world with a total length of approximately 53,800 kilometers at the end of 2007. In addition, China has approximately 70% of the world’s toll highways according to highway management department of the Ministry of Communication. According to the China’s 11th 5-Year Plan, it is estimated that the total mileage of urban rapid transit projects in China will exceed 1,862 kilometers by 2010, with total new investment of nearly $74 billion from 2006 to 2010.
China has a population of about 1.33 billion, which accounts for about 20% of the world’s population and makes it the most populous country in the world. With rapid economic development and urbanization, car ownership has increased dramatically, leading to unprecedented transportation challenges in many cities of China. According to Traffic Management Bureau of Ministry of Public Security, at the end of 2008 China had over 129 million private vehicles. The number is estimated to grow at least 5% over the next several years. Given the current conditions, the Chinese government intends to improve transportation management using advanced information technology solutions. At the same time, motorists are also eager to have access to real time traffic information. This strong demand from the private and public sectors is creating an unprecedented market opportunity for transportation information products and services.
The Ministry of Communication is the country’s highest level transportation regulator. In December 2004, the Ministry of Communication announced a development plan for Chinese national highway system. Under this plan, China will expand its highway network to 65,000 kilometers by 2010, and to 85,000 kilometers by 2020. After its completion, the Chinese national highway network will connect all provincial capitals and cities with populations of at least half-a-million. Under the plan, the total investment in the national highway network will be about $300 billion for the period from 2005 to 2020. From 2005 to 2010, the annual investment in the plan is expected to be approximately $22 billion, with an additional $14.5 billion to be invested annually between 2010 to 2020. Along with the new $584 billion of a new investment included in the recently announced Chinese economy stimulus plan, the Ministry of Communication in November 2008 submitted its new budget to the Chinese central government with the total investments in the transportation sector at about $730 billion for the next 3 to 5 years.
Intelligent Transportation Systems in China
Intelligent Transportation Systems (“ITS”) provide information and data tools for different types of transportation infrastructure by deploying solutions such as communication, monitoring, tolling and planning. The 14th World Congress on ITS, defined ITS as comprehensive systems that integrate and apply advanced information, communication, control, sensor, and computer technology to effectively coordinate people, vehicles, and roads/rails to realize real-time information transfer, as well as on-time, highly efficient, safe, and energy-efficient transportation.
China’s ITS industry is still at its early stage in terms of developments. Although China’s rapid economic growth over the past decade and accelerating urbanization have led to development of its transportation infrastructure, China has also recognized a need to use nationwide transportation networks more efficiently and effectively. China began its ITS efforts in early 1990s with goals to enhance transportation management efficiency, to improve network throughput, and to reduce the negative effect of transportation to the economy and environment. In terms of highways, China has been investing heavily in building up the ITS. However, compared to an average proportion of 7%-10% of ITS investment to total highway investment in developed countries, China has only reached about 1%. Also, almost all highways are toll highways in China, which means ITS is a necessity. Given that China is ranked second in total highway length and first in total toll highway mileage in the world, a larger-scale, more advanced ITS is needed. The increasing urban and highway traffic density also drives continued developments for ITS applications in communication and planning. As increasingly more urban and highway ITS gets deployed, the ITS market will shift towards focusing on specialized information solutions and value-added information services in the future. The urban ITS market is also still at a very initial development stage, comparable to that of the highway ITS market 10 years ago. On the other hand, this is a large but fragmented market with great potential.
Despite being at an early stage, the overall ITS market in China is highly attractive due to rapidly developing transportation infrastructure and increasing demand for ITS applications to manage it. The unique characteristics of China’s ITS industry mentioned above and the current low penetration level underline the large market potential. China’s expanding transportation network, along with its need for more effective and efficient transportation networks, has led to the need for better ITS. As a result of this and support provided by recent central government policies, investment in the ITS industry has increased significantly. According to the Chinese government’s 11th 5-year Plan, the Chinese government is estimated to spend approximately $7.3 billion on IT spending in the segments of transportation. Even though there is no current breakdown of IT spending from the new $730 billion budget by the Ministry of Communication, we estimated that it would not go below 5% of the total spending.
Our Products and Services >
Our core business is developing ITS in transportation sector utilizing GIS application software and technologies. We also develop GIS applications in Digital City and land & resource areas. When providing services to customers for GIS application software, some of our customers require us to purchase necessary hardware and provide system integration for them. Our major products and services are described as follows:
Transportation Planning Information System
Our transportation planning information system is a software system utilized by traffic management engineers to plan roads and water transportation, safety monitoring and conduct strategic planning. The system facilitates the comprehensive management of different information and data required for traffic planning such as national economic data, road and waterway data and digital mapping data. The system provides planners with information search tools, statistical analysis and models to serve planning and organizing needs.
Pavement Maintenance System
Our pavement maintenance system is a practical business application system developed specifically for pavement data collection and operations management. Based on field data collected by PDA device and with the support of backend data center, the system provides multiple functional modules, such as data acquisition, project management, quality management, equipment management, materials management, assessment analysis, business reports and public travel information inquiries. Pavement management system can quickly identify pavement “diseases”, efficiently process related data, and maintain information in a scientific manner for timely and accurate supports. It solves the problems from inefficiency of traditional manual operations due to complexity of information.
Electronic Toll Collection
ETC is a technology that allows for electronic payment of tolls. An ETC system is able to determine if a car is registered in a toll payment program, alert enforcers of toll payment violations, and debit the participating account. With ETC, these transactions can be performed without stopping or slowing down the vehicles. ETC is becoming a globally accepted method of toll collection and a trend aided by the growth of interoperable ETC technologies. ETC is used in urban areas, bridges, tunnels, high occupancy toll lanes, toll roads, and turnpikes. Toll charges are generally based on mileage, maintenance requirements, or congestion levels.
Traffic Information Service System
Our Traffic Information Service System is a software system that provides the public with real time road conditions and related information. The system continuously transmits transportation data gathered from sensory devices and displays the results on an e-map interface. The system also supports web based search and analysis applications.
Taxi Security Monitoring, Commanding and Dispatching Platform
Our Taxi LED GPS Monitoring and Coordinating System is a highly integrated technological system operated with wireless satellite communication. It is used for GPS, transmitting photos, alarms and information distribution, vehicle dispatch by calls. The system can be used for increasing safety and oversight in the taxi industry as well as remote supervision and management of public transportation. The system is composed of a GPS monitoring management center, imbedded GIS, an information transmitting center and onboard monitoring terminal modules. Built into the pre-existing telecommunication network and integrated with an e-map, the system platform provides related authorities with basic information such as the location of an accident, incident time and images from within a taxi. The system allows for better coordination with emergency services.
GIS-T (Transportation) Middleware
Our GIS-T middleware is the product based on the mainstream GIS platform applied in the traffic field. With such middleware, the user can quickly establish its own application systems without significant customizations. This product has strong applicability in traffic information management, model analysis and visual expression and supports efficient integration of various traffic information models and systems.
Traffic Flow Surveying Solutions
We provide transportation management authorities at provincial and municipal levels with traffic flow surveying solutions, which include coil traffic flow detector, microwave traffic flow detector and video traffic flow detector for base stations as well as traffic flow intelligent data center.
Intelligent Parking System
Our Intelligent Parking Systems (“IPS”) obtain information about available parking spaces, process it and then present it to drivers by means of variable message signs. Our IPS is used in two ways: to guide drivers in congested areas to the nearest parking facility with available parking spaces and to guide drivers within parking facilities to empty spaces. Although the former function is more common, guidance systems within parking lots are becoming more common. This growing number of guidance systems addresses drivers’ need for more information about the position and number of the spaces that are actually available within a parking structure. IPS reduces time and fuel otherwise wasted while searching for empty spaces and helps the parking facility operate more efficiently.
Red Light Violation Snapshot System
The red light violation snapshot system is used to snap and record automatically red light violations. Our video red light violation snapshot system consists of panorama camera, close-up camera and video trigger, license plate identification modules, and LED directional fill light in relation to close-shot camera. The close-up camera captures the violating vehicles passing through the monitoring area. It can snap one close-range picture and have license plate identification. Further, it interlinks with panorama camera to continue snapping 2~3 panorama pictures to form complete evidence data information. In addition, it has such auxiliary functions of automatically recording panorama, license plate feature, speed, passing time and crossing name of vehicles in the snapshot directions.
Intelligent Highway Vehicle Monitoring System
Our highway vehicle monitoring system is used for image snapshot, license plate identification, speed recording, and blacklist database verification of vehicles passing through highway monitoring areas. The system consists of front-end testing unit (camera, video testing module, vehicle tester and LED light) and main control unit (industrial control computer, system management software and communications module). The front-end system uploads images and related data to the command center on real time basis. The central communications server, database server and PC workstation then analyze and manage the uploaded data. The system can be used for vehicle speed automatic testing, which snaps speeding vehicle images and information, and uploads to violation snapshot system for processing and punishment. The system also serve the purpose for traffic flow testing, which provides data support for traffic control authorities.
Intelligent Traffic Management Platform
Our intelligent traffic management platform is a comprehensive traffic management platform specially developed for urban traffic command center and based on GIS technologies. It realizes data sharing and interaction among traffic signal control, red light violation snapshot, traffic flow testing, traffic direction, gate monitoring, GPS positioning, policy alarm system, and basic traffic data for the purposes of surveillance, control, management, linkage, preplan and coordination. It functions as an interface of all ITS subsystems and is the main element for the successful integration of intelligent traffic management system. The intelligent traffic management platform accomplishes such tasks as acquisition of road visual images, intersection traffic violation evidences and records of vehicles passing through major urban entrances and exits, analysis of traffic flow conditions, information of police distribution situation, process of traffic accident data, and accomplishment of system linkage and traffic management command. It is the key integral element of the whole intelligent traffic management system.
Dynamic Traffic Information Service Platform
Our dynamic traffic information service platform covers traffic information collection, processing, distribution and operation. By utilizing arithmetic models based on the floating cars, the system provides complete dynamic road traffic flow information and traffic event information collection, processing and distribution. The system provides various communications channel distribution means based on GPRS, EDGE, CDMA, 3G, RDS-TMC, DAB/DMB, CMMB, Internet and call center. Such dynamic traffic information products can be applicable for in-car GPS equipments, personal navigation devices (PND), intelligent handsets (Windows Mobile/S60/KJAVA), UMPC, Internet and other terminals.
Intelligent Public Transport System
The bus traffic systems in the cities of China are facing more and more severe challenges. With the growth of urban economy and the increase of private vehicle ownerships, traffic congestions are worsening in cities , resulting in the increase of time spent on outgoing by bus, the decrease of service level. In addition, due to the traffic congestion and increase of gas price, the operation costs for bus traffic rise. Our intelligent bus traffic system reconstructs traditional bus traffic systems with information technology, which technically carries out the strategy of bus traffic routes, improves the service level and management level of urban bus traffic system. The objective of intelligent bus system is to realize efficiency in public transportation system in cities, to achieve efficient utilizations of land resources and energy, to ensure safe operation of bus systems and increase quality of passenger transportation.
Palmcity Navigation Engine
Our PlamCity Explore Navigation Engine is an internet and mobile application based open navigation system, which integrates mapping and navigation into Windows CE (Windows Mobile) and internet applications. By integrating map data, point of interest data storage and management, navigation application development and navigation application framework, PalmCity Explorer Navigation Engine helps navigation application developers and navigation system manufacturers develop unique products and services.
Comprehensive Location Based Service Platform
Our comprehensive location based service platform is a comprehensive transportation information service platform based on GIS, GPS, ITS and communication technologies. By integrating the latest e-maps of China, highway and city road information, vacant parking spaces, environment and weather information, the system enables real time traffic information, collection, transmission and reporting so as to provide navigation, bus transfers, real time road conditions and location search tools.
We provide full range digital services to many cities in China with the model of “Planning-Construction-Operation”. We analyze different requirements of different regions or cities and designs specific information technology systems and digital constructions based on unique requirements. Our typical clients in this segment are local governments, public service departments and enterprises.
2-D and 3-D GIS
We provide software platforms that utilize two-dimensional GIS. Two-dimensional GIS defines and presents special data utilizing an “X” and “Y” axis. Starting from the 1960s, two-dimensional GIS was widely applied in a variety of sectors, including land management, power, telecommunications and city planning. We also provide software platforms that utilize three-dimensional GIS. Three-dimensional GIS defines and presents special data utilizing an “X”, “Y” and “Z” axis. Compared with two-dimensional GIS, three-dimensional GIS defines special data in a more accurate manner, and can present both the plane and the vertical spatial relation. Moreover, three-dimension GIS can present and analyze more complicated spatial objectives than Computer Aided Design (CAD) and other visualized software. Three-dimensional GIS is better suited for exploration, resource assessment, disaster warning, and production management. It is widely applied in many sectors such as in natural resources (i.e. mineral resources, water resources, etc.) and geology.
The Markets for Our Products and Services
We have been marketing and selling our products and services to four main submarkets within the government and regulated sectors in China. These segments are Highway Information Systems; Urban Intelligent Transportation Systems; Digital City, and Land & Resources. Having built a customer base over the years, our strategy is to not only deliver high quality products, but also to provide ongoing value-added services so as to take advantage of any maintenance requirements or technology upgrades that may become necessary in the future. We continue to penetrate these submarkets and believe that we can take advantage of our experience by widening our scope of products and services to include data collection and application service operation.
Highway Information Systems
Our specially designed systems process and store national highway network data and travelers’ information, such as highway information management systems, which perform functions of archiving and retrieving highway data and provide transportation analysis tools. Decision support, predictive information, and performance monitoring are some of ITS applications enabled by highway ITS information management systems. In addition, ITS information management systems can assist in transportation planning, research, and safety management. Our major clients in this segment include the Ministry of Communication, traffic management bureaus, highway management bureaus, and municipal construction committees.
Urban Intelligent Transportation Systems
Key ITS applications for urban traffic management include incident management, signal control, traveler information, and traffic surveillance, intelligent parking indication system. Urban ITS is a combination of basic traffic data, electronic technology, wireless and wire communication technologies, which relies on computer and communication technologies to improve safety and efficiency of urban traffic networks. Traffic surveillance provides monitoring functions in the urban ITS. Most metropolitan areas use loop detectors for traffic surveillance, and many use closed circuit televisions. There are also other types of surveillance tools, such as radar, lasers, or video image processing equipments. The use of vehicles equipped with toll tags or global positioning systems as probes, to determine travel times and locations, is also growing in use. Incident management provides real time incident reporting functions in urban ITS, and it is commonly used by traffic management centers in large metropolitan areas and cities. In some large cities, such as Los Angeles, traffic signal control is also centralized in the traffic management center. In many situations, traffic signal control systems use traffic responsive signals to manage the traffic within urban areas. Such responsive signals can be single signals or a group of interconnected signals. Urban traffic management centers utilize all traffic condition information collected from their ITS to give feedbacks and suggestions to travelers. Such information may be provided directly to the public or to organizations who provide it to users through radio broadcast, internet, or other means. Some major types of traveler information include pre-trip information, en-route driver information, en-route transit information and route guidance.
Digital City sector is designed to aid the Chinese government’s initiative to outfit all major cities with broadband, wireless internet access, and information technology infrastructure. Many cities in China, especially in southern China, have experienced rapid economic developments since early 90s. However, the information infrastructures construction in these cities does not match their economy developments. We are one of the pioneers to develop the “Digital City” concept in China . We provide full range digital services to many cities in China with the model of “Planning-Construction-Operation”. We analyze different requirements of different regions or cities and designs specific information technology systems based on unique requirements. Our typical clients in this segment are local governments, public service departments and enterprises.
Land & Resources
The average IT spending in city geographical and land resources managements for each city in China is about RMB 60 million (approximately $8.8 million). Based on China’s 11th 5-year Plan, there are about 100 cities planning to complete GIS construction, which will lead to a RMB6 billion (approximately $880 million) market in China. Land resources systems cover planning, analysis, statistics and construction management for mineral resources. In this business line, we have developed a city geological information analysis system that provides tools to analyze the geological environment based on the integration of a variety of geological information, such as determining the underground structure for city planning and construction. In addition, we have created a disaster forecast system and a mineral resources assessment system that provides a platform to assess the reserves and then help to make decisions regarding the development of the mineral resources by setting up assessment models of mineral resources.
Our Intellectual Property>
The following table illustrates the title of different copyright that we own, their registration numbers, first publication dates and issuance dates:
Research and Development
In 2008 and 2007, our research and development expenses amounted to approximately $2.60 million and $0.96 million, respectively. These expenses were mainly composed of staff costs and research and development equipment purchasing expenses.
Our Research and Development (R&D) Department consists of two departments, one is internal and the other is external, which involves our strategic relationship with the GeoSIS Laboratory at Peking University.
Internal R&D Department
Our internal R&D department consists of 140 researchers with extensive experience in the GIS and transportation information industry. Many of these researchers have worked at multinational corporations.
The primary focus of the internal R&D department is to analyze customer demands and develop application software products, with the use of the most highly advanced software development tools available today.
Our research department is also responsible for monitoring developments in the market for our services so that they can develop new products or improve upon existing products by adopting new technologies and skills.
In addition, the department is responsible for creating training and support manuals and creating new processes for implementation of our software products.
Strategic R&D Partnership with Peking University
PKU was established in connection with the Peking University’s GeoSIS Laboratory in order to provide university researchers with real life opportunities to test and implement the discoveries created at the University. On August 6, 2005, PKU entered into a cooperation agreement (the “Cooperation Agreement”), with Earth and Space College of Peking University, pursuant to which PKU obtained the access to the university’s GeoSIS Research Lab, which houses over thirty PhDs and researchers to support PKU’s research and development initiatives. Under the Cooperation Agreement, we pay for all R&D expenses of the GeoSIS Laboratory. The Cooperation Agreement has a three-year term that has been automatically renewed for an additional three year.
Our Major Customers
The following table provides information on our most significant clients in fiscal year 2008.
TOP TEN CLIENTS IN 2008
Because our operating VIE entities are located in the PRC, our business are regulated by the national and local laws of the PRC. There are no specific rules or regulations for a company engaged in software development other than mapping which is highly regulated in China.
In addition, we and our PRC subsidiaries are considered foreign persons or foreign-invested enterprises under PRC laws, and therefore subject to foreign ownership restrictions in connection with our online services, advertising in taxies, and security and surveillance related businesses:
On December 11, 2001, the State Council of China promulgated the Regulations on the Administration of Foreign Invested Telecommunication Enterprises (the “FITE Regulations”), which became effective on January 1, 2002. Under the FITE Regulations, a foreign entity is prohibited from owning more than 50% of equity of a provider of value-added telecommunications services in China, which include internet content provision services. In addition, the current Catalogue of Industries for Guiding Foreign Investment (Revised 2007) prohibits a foreign investor from investing in businesses such as news websites and web streaming audio-visual services. As a result, if we or our former Chinese subsidiaries had invested directly in the value-added telecommunications services in China, we would have had at most 50% of the ownership of the business and thus only consolidated no more than 50% of the revenues generated from such business.
For an advertising business involving foreign investment, there have been rigid overseas operation requirements on the foreign investors under the current Chinese laws. Pursuant to the Provisions on Administration of Foreign Invested Advertising Enterprises promulgated by the State Administration for Industry & Commerce and the Ministry of Commerce of China on March 2, 2004, for a wholly foreign owned advertising enterprise, the foreign investors must have at least three years of direct operations in the advertising business outside of China. In case of a joint venture, foreign investors must have at least two years of direct operations in the advertising business outside of China. However, a domestic company without direct foreign investment is not ubject to any of these restrictions.
Security and Surveillance Related Business
While there is no Chinese law or regulation specifically prohibiting foreign investment in the security and surveillance related business in China, the nature of this business implies that a vast majority of the customers of this business are governmental entities. Maintaining the confidentiality of sensitive information about national security and other various governmental affairs is one of the most important concerns of these government customers. Therefore, as a practicable matter, governmental entities are more willing to have business relations with purely domestic companies than a company involving foreign investment where confidential governmental information is concerned.
In order to comply with these legal restrictions, on February 3, 2009, we conducted the Restructuring and entered into the Contractual Arrangement with the VIE Entities. These arrangements enable us to operate these restricted businesses through these VIE Entities in which we do not hold a direct equity interest. For more information on the regulatory and other risks associated with our contractual agreements related to our VIE Entities, please see the discussion below Item 1A, “Risk Factors.”
We are also subject to PRC’s foreign currency regulations. The PRC government has controlled Renminbi reserves primarily through direct regulation of the conversion of Renminbi into other foreign currencies. Although foreign currencies, which are required for “current account” transactions, can be bought freely at authorized PRC banks, the proper procedural requirements prescribed by PRC law must be met. At the same time, PRC companies are also required to sell their foreign exchange earnings to authorized PRC banks and the purchase of foreign currencies for capital account transactions still requires prior approval of the PRC government.
Competition in China’s transportation information industry is very fragmented and consists of a combination of a few foreign competitors and many domestic transportation information technology companies. Whereas most international competitors seek to provide component software for the industry, our focus is on developing application software and services for the Chinese government and regulated sectors.
There are several competitive factors in the transportation information industry in China. We believe customers are generally looking for a provider to have strong research and development, a quality brand name built upon a successful record of accomplishment and a superior management team that can execute. Compared to our competitors, we believe we have the following competitive advantages over most of our competitors:
Leading-Edge R&D Team - Our research and development team has a strong and extensive technology background and has been an early entrant into the three-dimensional GIS market. The head of our research and development team was the lead engineering architect of the first GIS platform software (Chinese Excellence Software Award, 1995) platform, the first and only three-dimensional GIS platform software in China.
Award Winning Technology - Since the inception, we have won over nine product awards, including the National Transportation Planning System and Digital City Program award. Such award winning technology gives the Company a great advantage and gives customers a sense of security that they are purchasing a quality product.
Application Experience - We have successfully built a track record with a customer base in various market segments including transportation, land resource and city geography to name a few. We plan to leverage our experience to obtain new and recurring business.
Brand Image - Our affiliation with Peking University has made us a more recognizable brand in the industry. Our brand is recognized for quality products and application experience.
Superior Management - Members of our executive management team are the first GIS software developers in China.
Operational and Quality Management - We are ISO9000 certified and conduct internal performance assessment system 3 times a year.
We experience competition from both foreign and domestic Chinese competitors. The following is a description of some of our major competitors:
With more than 90,000 instances sold in over 60 countries worldwide, its products position to the traffic, security and environmental management markets.
The products offered by our foreign competitors are priced higher than our products. In addition, their software cannot be applied in China without significant modification due to differing industry standards and background. For these reasons, we do not foresee much competition from these international competitors in the area of transportation information application software.
Domestic Chinese Competitors
NavInfo is a leading company in China’s vehicle navigable map market and is an all-round big player in the fields of portable navigation, (location based services) LBS and Internet–based location services and traffic information services. Currently, NavInfo map data have been mainly applied in vehicle navigation market and also applied in portable navigation market, Internet-based location service providers and mobile phone operators in China.
Since we are in the business of developing software applications and providing related services, we do not utilize any significant amount of raw materials. All of the raw materials needed for our business are readily available from several different suppliers and at market driven prices. The company only purchases computers and other software in order to provide its services and software applications to customers.
As of December 31, 2008, we employed a total of 340 full-time employees. The following table sets forth the number of our employees by function as of December 31, 2008.
Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any work stoppages. We are required under PRC law to make contributions to the employee benefit plans at specified percentages of the after-tax profit. In addition, we are required by the PRC law to cover employees in China with various types of social insurance. We believe that we are in material compliance with the relevant PRC laws.
We believe that we maintain a satisfactory working relationship with our employees and we have not experienced any significant labor disputes or any difficulty in recruiting staff for our operations.
Our results of operations are not materially affected by seasonality and we do not expect seasonality to cause any material impact on our operations in the future.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, together with all of the other information included in this report. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline. You should also refer to the other information about us contained in this report, including our financial statements and related notes.
RISKS RELATED TO OUR BUSINESS
In order to comply with PRC regulatory requirements, we operate our businesses through companies with which we have contractual relationships but in which we do not have controlling ownership. If the PRC government determines that our agreements with these companies are not in compliance with applicable regulations, our business in the PRC could be materially adversely affected.>
The Chinese government restricts foreign investment in certain business segments including online services, taxi advertising, and security and surveillance related businesses. Accordingly we transferred all of our indirect equity interests in PKU and PKU’s subsidiaries to the affiliated Group Company and as a result, PKU and PKU’s subsidiaries became direct and indirect subsidiaries of the Group Company, which is wholly owned by the Group Company Shareholders who are all Chinese citizens. At the same time, we are able to control these VIE Entities and operate these businesses through contractual arrangements with the respective companies and their individual owners, but we have no equity control over these companies.
Although we believe the Restructuring and our current business operations are in compliance with the current laws in China, we cannot be sure that the PRC government would view our operating arrangements to be in compliance with PRC regulations that may be adopted in the future. If we are determined not to be in compliance, the PRC government could levy fines, revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, require us to restructure our business, corporate structure or operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our business. As a result, our business in the PRC could be materially adversely affected.
We rely on contractual arrangements with our VIE Entities for our operations, which may not be as effective in providing control over these entities as direct ownership.>
Our operations are dependent on our VIE Entities in which we have no equity ownership interest and must rely on contractual arrangements pursuant to the Restructuring Documents to control and operate the businesses of the VIE Entities. These contractual arrangements may not be as effective in providing control over these entities as direct ownership. For example, the VIE Entities may be unwilling or unable to perform their obligations under our commercial agreements with them, including payment of annual development and consulting fees under the Service Agreement as they become due, we will not be able to conduct our operations in the manner currently planned. In addition, the VIE Entities may seek to renew their agreements on terms that are disadvantageous to us. Although we have entered into a series of agreements that provide us with substantial ability to control the VIE Entities, we may not succeed in enforcing our rights under them by relying on legal remedies under Chinese law, which may not be adequate. In addition, if we are unable to renew these agreements on favorable terms when these agreements expire, or to enter into similar agreements with other parties, our business may not be able to operate or expand, and our operating expenses may significantly increase.
The shareholders of the Group Company may have potential conflicts of interests with us, which may adversely affect our business.
We operate our businesses in China though the Group Company, which is wholly owned by our four Chinese affiliates: Shudong Xia, our Chairman, CEO and President and the beneficial owner of approximately 43% of the Company’s outstanding capital stock, Zhiping Zhang, our Vice President of Research and Development, Zhibin Lai, our Vice President and Wei Gao, the designee of SAIF Partners III L.P., our 11% shareholder. Conflicts of interests between their duties to us and to the Group Company and its subsidiaries may arise. We cannot assure you that when conflicts of interest arise, any or all of these persons will act in the best interests of our company or that any conflict of interest will be resolved in our favor. These conflicts may result in management decisions that could negatively affect our operations and potentially result in the loss of opportunities.
Our arrangements with the VIE Entities and its shareholders may be subject to a transfer pricing adjustment by the PRC tax authorities which could have an adverse effect on our income and expenses.
We could face material and adverse tax consequences if the PRC tax authorities determine that our contracts with the VIE Entities and its shareholders were not entered into based on arm’s length negotiations. Although our contractual arrangements are similar to other companies conducting similar operations in China, if the PRC tax authorities determine that these contracts were not entered into on an arm’s length basis, they may adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. Such an adjustment may require that we pay additional PRC taxes plus applicable penalties and interest, if any.
The exercise of our option to purchase part or all of the equity interests in the VIE Entities under the Option Agreement might be subject to approval by the PRC government. Our failure to obtain this approval may impair our ability to substantially control the VIE Entities and could result in actions by VIE Entities that conflict with our interests.
Our Option Agreement with the VIE Entities gives our Chinese subsidiary, Oriental, the option to purchase all or part of the equity interests in the VIE Entities, however, the option may not be exercised by Oriental if the exercise would violate any applicable laws and regulations in China or cause any license or permit held by, and necessary for the operation of the VIE Entities, to be cancelled or invalidated. Under the laws of China, if a foreign entity, through a foreign investment company that it invests in, acquires a domestic related company, China’s regulations regarding mergers and acquisitions would technically apply to the transaction. Application of these regulations requires an examination and approval of the transaction by China’s Ministry of Commerce (“MOFCOM”), or its local counterparts. Also, an appraisal of the equity or assets to be acquired is mandatory. However, our local PRC counsel has advised us that Beijing and other local counterparts of MOFCOM hold the view that such a transaction would not require their approval. Therefore, we do not believe at this time that an approval and an appraisal are required for Oriental to exercise its option to acquire the VIE Entities in Beijing. In light of the different views on this issue, however, it is possible that the central MOFCOM office in Beijing will issue a standardized opinion imposing the approval and appraisal requirement. If we are not able to purchase the equity of the VIE Entities, then we will lose a substantial portion of our ability to control the VIE Entities and our ability to ensure that the VIE Entities will act in our interests.
A termination of our relationship with Peking University could have a negative impact on our future operating results.
PKU has historically been able to successfully leverage the marketability and resources offered by its strategic partner and investor, Peking University. PKU’s affiliation with Peking University helps to create brand awareness for its products and services and also provides access to the university’s GeoGIS Laboratory, which houses over thirty PhDs and researchers to support PKU’s research and development initiatives. A termination of the relationship/strategic partnership with Peking University could have a negative impact on our future operating results.
The recent global financial crisis could negatively affect our business, results of operations, and financial condition.
The recent credit crisis and turmoil in the global financial system may have an adverse impact on our business and our financial condition, and we may face challenges if conditions in the financial markets do not improve. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise capital, which could have an impact on our flexibility to react to changing economic and business conditions. In addition, these economic conditions also impact levels of government and consumer spending, which have recently deteriorated significantly and may remain depressed for the foreseeable future. It is uncertain how long the global crisis in the financial services and credit markets will continue and how much of an impact it will have on the global economy in general or the Chinese economy in particular. If demand for our products and services fluctuates as a result of economic conditions or otherwise, our revenue and gross margin could be harmed.
We rely heavily on sales to the Chinese government and a significant decline in overall government expenditures or a delay in the payment of our invoices by the government could have a negative impact on our future operating results.
Historically, substantially all of our sales of our products have been to the Chinese government entities at both central and local levels. Sales to the Digital City, Transportation and Land & Resources sectors of the Chinese government accounted for an aggregate approximately 55% and 60% of our sales for the years ended December 31, 2008 and 2007, respectively. We believe that the success and growth of our business for the foreseeable future will continue to depend on our ability to win government contracts. Many of our government customers are subject to budgetary constraints and our continued performance under these contracts, or award of additional contracts from these agencies, could be jeopardized by spending reductions or budget cutbacks at these agencies. Our operating results may also be negatively impacted by other developments that affect these government programs generally, including the following:
We rely on our management to understand and react to our rapidly evolving and highly competitive GIS software development and application total solution industry and our failure to react to such changes or to introduce new products and product enhancements could adversely affect our business.
The Chinese GIS industry is nascent and rapidly evolving. Therefore, it is critical that our management is able to understand industry trends and make good strategic business decisions. If our management is unable to identify industry trends and act in response to such trends in a way that is beneficial to us, our business will suffer.
In addition, we expect that a significant portion of our future revenue will be derived from sales of newly-introduced products. The market for our products is characterized by rapidly changing technology, evolving industry standards and changes in customer needs. If we fail to introduce new products or to modify or improve our existing products in response to changes in technology, industry standards or customer needs, our products could rapidly become less competitive or obsolete. We must continue to make significant investments in research and development in order to continue to develop new products, enhance existing products and achieve market acceptance for such products. However, there can be no assurance that development stage products will be successfully completed or, if developed, will achieve significant customer acceptance.
If we are unable to successfully develop and introduce competitive new products and enhance our existing products, our future results of operations would be adversely affected. Our pursuit of necessary technology may require substantial time and expense. We may need to license new technologies to respond to technological change. These licenses may not be available to us on terms that we can accept or may materially change the gross profits that we are able to obtain on our products. We may not succeed in adapting our products to new technologies as they emerge. Development and manufacturing schedules for technology products are difficult to predict and there can be no assurance that we will achieve timely initial customer shipments of new products. The timely availability of these products in volume and their acceptance by customers are important to our future success. Any future delays, whether due to product development delays, manufacturing delays, lack of market acceptance, delays in regulatory approval, or otherwise, could have a material adverse effect on our results of operations.
We may not be able to adequately protect our proprietary intellectual property and technology, which may harm our competitive position and result in increased expenses incurred to enforce our rights.
We rely on a combination of copyright, trade secret laws, non-disclosure agreements and other confidentiality procedures and contractual provisions to establish, protect and maintain our proprietary intellectual property and technology and other confidential information. Some of these technologies are important to our business and are not protected by patents. Despite our efforts, the steps we have taken to protect our proprietary intellectual property and technology and other confidential information may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights. Protecting against the unauthorized use of our products and other proprietary rights is also expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business, operating results and financial condition.
Product branding is important to us and if our brands are misappropriated such that our reputation could be harmed, this could result in lower sales having a negative impact on our financial results.
We rely upon a combination of licensing and contractual covenants to establish and protect the brand names of our products. In many market segments, our reputation is closely related to our brand names. Monitoring unauthorized use of our brand names is difficult and we cannot be certain that the steps we have taken will prevent their unauthorized use, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Our brand names may be misappropriated or utilized without our consent and such actions may have a material adverse effect on our reputation and on the results of our operations.
If we are unable to compete effectively with existing or new competitors, our resulting loss of competitive position could result in price reductions, fewer customer orders, reduced margins and loss of market share.
The markets for our products are highly competitive and we expect competition to increase in the future. Some of our competitors have significantly greater financial, technical and marketing resources than we do. These competitors may be able to respond more rapidly to new or emerging technologies or changes in customer requirements. They may also be able to devote greater resources to the development, promotion and sale of their products. Increased competition could result in price reductions, fewer customer orders, reduced margins and loss of market share. Our failure to compete successfully against current or future competitors could seriously harm our business, financial condition and results of operations.
Our products are complex and errors or defects could result in the rejection of our products and damage to our reputation, as well as lost revenues and increased costs.
Products as sophisticated as ours are likely to contain undetected errors or defects, especially when first introduced or when new models or versions are released. Our products may not be free from errors or defects after commercial shipments have begun, which could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources and increased customer service and support costs and warranty claims. Any of these results could harm our business.
We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have the operating effectiveness of our internal controls attested to by our independent auditors.>
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports, including Form 10-K. In addition, the independent registered public accounting firm auditing a company’s financial statements must also attest to the operating effectiveness of the company’s internal controls. Under current law, we are subject to these requirements beginning with our annual report for the fiscal year ended December 31, 2007, although the auditor attestation is not required until our annual report for the fiscal year ending December 31, 2009, assuming our filing status remains as a smaller reporting company. A report of our management is included under Item 9A(T) of this Annual Report on Form 10-K. Our management has concluded that our internal controls over our financial reporting are effective for the period covered by this Annual Report. However, in the future, our management may conclude that our internal controls over our financial reporting are not effective due to the identification of one or more material weaknesses, or our independent registered public accounting firm may issue an adverse opinion on our internal control over financial reporting if one or more material weaknesses are identified. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements.
We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the Foreign Corrupt Practices Act could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act (the “FCPA”), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We have operations, agreements with third parties and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants, sales agents or distributors of our company, because these parties are not always subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. Also, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
Since we depend heavily on key personnel, turnover of key employees and senior management could harm our business.
Our future business and results of operations depend in significant part upon the continued contributions of our key technical and senior management personnel, including Shudong Xia, our chief executive officer and president, our chief financial officer, Zhihai Mao and our vice presidents, Zhibin Lai, Zhiping Zhang, and Danxia Huang. We also depend in significant part upon our ability to attract and retain additional qualified management, technical, marketing and sales and support personnel for our operations. If we lose a key employee, or if a key employee fails to perform his or her current position, or if we are not able to attract and retain skilled employees as needed, our business could suffer. Significant turnover in our senior management could significantly deplete our institutional knowledge held by our existing senior management team. We depend on the skills and abilities of these key employees in managing the manufacturing, technical, marketing and sales aspects of our business, any part of which could be harmed by further turnover.
RISKS RELATED TO DOING BUSINESS IN CHINA
Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business.
We conduct substantially all of our operations and generate most of our revenue in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including:
As the PRC economy has been transitioning from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. While these measures may benefit the overall PRC economy, they may also have a negative effect on us.
Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise significant control over economic growth in China through the allocation of resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways.
Any adverse change in economic conditions or government policies in China could have a material adverse effect on the overall economic growth in China, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our business and prospects.
Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.
We conduct substantially all of our business through our VIE Entities in the PRC and they are subject to laws and regulations in China. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. In addition, all of our executive officers and all of our directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations.
If we are found to have failed to comply with applicable laws, we may incur additional expenditures or be subject to significant fines and penalties.
Our operations are subject to PRC laws and regulations applicable to us. However, many PRC laws and regulations are uncertain in their scope, and the implementation of such laws and regulations in different localities could have significant differences. In certain instances, local implementation rules and/or the actual implementation are not necessarily consistent with the regulations at the national level. Although we strive to comply with all the applicable PRC laws and regulations, we cannot assure you that the relevant PRC government authorities will not later determine that we have not been in compliance with certain laws or regulations. Our failure to comply with applicable PRC laws and regulations could subject us to administrative penalties and injunctive relief, as well as civil remedies, including fines, injunctions and recalls of our products. It is possible that changes to such laws or more rigorous enforcement of such laws or with respect to our current or past practices could have a material adverse effect on our business, operating results and financial condition.
The PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
Restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively.
All our sales revenue and expenses are denominated in RMB. Under PRC law, the RMB is currently convertible under the “current account,” which includes dividends and trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, Oriental may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside China that are denominated in foreign currencies.
Foreign exchange transactions by our PRC VIE Entities under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including SAFE. In particular, if Oriental borrows foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance the subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including MOFCOM, or their respective local counterparts. These limitations could affect their ability to obtain foreign exchange through debt or equity financing.
Fluctuations in exchange rates could adversely affect our business and the value of our securities.
The value of our common stock will be indirectly affected by the foreign exchange rate between U.S. dollars and RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue in the future as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Restrictions under PRC law on our PRC subsidiary’s ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our businesses.
Substantially all of our revenues are generated from our indirect PRC subsidiary, Oriental, after it receives payments from our VIE Entities under various services and other arrangements. However, PRC regulations restrict the ability of Oriental to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividend by Oriental only out of its accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Oriental is also required under PRC laws and regulations to allocate at least 10% of our annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. Any limitations on the ability of Oriental to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Future inflation in China may inhibit our ability to conduct business profitably in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products. Likewise, negative inflation could have an unfavorable effect on our business profitability in China.
Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of PKU constitutes a Round-trip Investment without MOFCOM approval.
On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006 (the “2006 M&A Rule”). According to the 2006 M&A Rule, a “Round-trip Investment” is defined as having taken place when a PRC business that is owned by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s). Under the 2006 M&A Rules, any Round-trip Investment must be approved by the MOFCOM, and any indirect arrangement or series of arrangements which achieves the same end result without the approval of MOFCOM is a violation of PRC law.
Prior to the consummation of the transactions contemplated by the Share Exchange Agreement on May 14, 2007, PKU was a PRC business whose majority shareholders were PRC individuals (the “PRC Individuals”). In addition, our BVI subsidiary Cabowise, was originally indirectly owned by the PRC Individuals, and Cabowise owned an option (the “Option”), to purchase the entire equity interest owned by the PRC Individuals in PKU. The Option was assigned to our wholly owned subsidiary, Oriental Intra-Asia by Cabowise on May 14, 2007. Thereafter, on May 14, 2007, as a condition to the closing of the share exchange transaction contemplated by the Share Exchange Agreement, Oriental Intra-Asia exercised the Option assigned to it from Cabowise and, as a result thereof, the PRC Individuals sold their equity interest in PKU for $2 million in cash to Oriental Intra-Asia (the “Acquisition”). Following the Acquisition, pursuant to the Share Exchange Agreement, on May 14, 2007, we issued 10,841,492 shares of common stock to the shareholders of Cabowise in exchange for all of the issued and outstanding capital stock of Cabowise (the “Share Exchange”). As a result of these transactions, the PRC Individuals are now our controlling shareholders. The Acquisition has been registered with the competent administration of industry and commerce authorities (“AIC”), in Beijing. Thereafter, the PRC Individuals made filings with the Beijing SAFE, to register the Company and its non-PRC subsidiaries to qualify them as SPVs, pursuant to Circular 75 and Circular 106.
The PRC regulatory authorities may take the view that the Acquisition and the Share Exchange are part of an overall series of arrangements which constitute a Round-trip Investment, because at the end of these transactions, the PRC Individuals became majority owners and effective controlling parties of a foreign entity that acquired ownership of PKU. The PRC regulatory authorities may also take the view that the registration of the Acquisition with the relevant AIC in Beijing and the filings with the Beijing SAFE may not be evidence that the Acquisition has been properly approved because the relevant parties did not fully disclose to the AIC, SAFE or MOFCOM of the overall restructuring arrangements, the existence of the Share Exchange and its link with the Acquisition. The PRC legal counsel of PKU has opined that the Acquisition did not violate any PRC law, which would include the 2006 M&A Rules. We, however, cannot assure you that the PRC regulatory authorities, MOFCOM in particular, may take the same view as the PRC legal counsel. If the PRC regulatory authorities take the view that the Acquisition constitutes a Round-trip Investment under the 2006 M&A Rules, we cannot assure you we may be able to obtain the approval required from MOFCOM.
If the PRC regulatory authorities take the view that the Acquisition constitutes a Round-trip Investment without MOFCOM approval, they could invalidate our acquisition and ownership of PKU. Additionally, the PRC regulatory authorities may take the view that the Acquisition constitutes a transaction which requires the prior approval of the China Securities Regulatory Commission (“CSRC”), before MOFCOM approval is obtained. We believe that if this takes place, we may be able to find a way to re-establish control of PKU’s business operations through a series of contractual arrangements rather than an outright purchase of PKU. But we cannot assure you that such contractual arrangements will be protected by PRC law or that the registrant can receive as complete or effective economic benefit and overall control of PKU’s business than if the Company had direct ownership of PKU. In addition, we cannot assure you that such contractual arrangements can be successfully effected under PRC law. If we cannot obtain MOFCOM or CSRC approval if required by the PRC regulatory authorities to do so, and if we cannot put in place or enforce relevant contractual arrangements as an alternative and equivalent means of control of PKU, our business and financial performance will be materially adversely affected.
The M&A Rule establishes more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
The M&A Rule establishes additional procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the PRC Ministry of Commerce be notified in advance of any change-of-control transaction and in some situations, require approval of the PRC Ministry of Commerce when a foreign investor takes control of a Chinese domestic enterprise. In the future, we may grow our business in part by acquiring complementary businesses, although we do not have any plans to do so at this time. The M&A Rule also requires PRC Ministry of Commerce anti-trust review of any change-of-control transactions involving certain types of foreign acquirers. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the PRC Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
You may have difficulty enforcing judgments against us.
We are a Nevada holding company and most of our assets are located outside of the United States. Most of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.
RISKS RELATED TO THE MARKET FOR OUR STOCK GENERALLY
The market price of our common stock is volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings.
The market price of our common stock is volatile, and this volatility may continue. For instance, between January 1, 2008 and December 31, 2008, the closing price of our common stock, as reported on the markets on which our securities have traded, ranged between $3.05 and $8.30. Numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors include:
Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources. Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, since mid-2008, the securities markets in the United States have experienced a significant decline in share prices. These market fluctuations may adversely affect the price of our common stock and other interests in our company at a time when you want to sell your interest in us.
Although publicly traded, the trading market in our common stock has been substantially less liquid than the average trading market for a stock traded on the Nasdaq Stock Market and this low trading volume may adversely affect the price of our common stock.
Our common stock started trading on the Nasdaq Capital Market under the symbol “CTFO” in July 2008. The trading market in our common stock has been substantially less liquid than the average trading market for companies traded on the Nasdaq stock market. Limited trading volume will subject our shares of common stock to greater price volatility and may make it difficult for you to sell your shares of common stock at a price that is attractive to you.
We may be subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. If our common stock becomes a “penny stock”, we may become subject to Rule 15g-9 under the Exchange Act (the “Penny Stock Rule”). This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.
Certain of our stockholders hold a significant percentage of our outstanding voting securities and accordingly may make decisions regarding our daily operations, significant corporate transactions and other matters that other stockholders may believe are not in their best interests.
Shudong Xia, our chief executive officer and president, is the beneficial owner of approximately 43.12% of our outstanding voting securities. As a result, he possesses significant influence over the election of our board of directors and significant corporate transactions. His ownership may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer. Other stockholders may believe that these future decisions made by Mr. Xia are not in their best interests.
Certain provisions of our Articles of Incorporation may make it more difficult for a third party to effect a change-of-control.
Our Articles of Incorporation authorizes our board of directors to issue up to 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the board of directors without further action by the stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.
All land in China is owned by the State or collectives. Individuals and companies are permitted to acquire land use rights for general or specific purposes. In the case when land is used for industrial purposes, the land use rights are granted for a period of 50 years. The rights may be renewed at the expiration of the initial and any subsequent terms according to the relevant Chinese laws. Granted land use rights are transferable and may be used as security for borrowings and other obligations.
We do not have any land use rights directly from the PRC. Instead, we lease the space where our executive offices are located. We have entered into a lease agreement with Mr. Zhao Li for our rental of space at 7th floor of the E-Wing Center. Under this lease, we have the right to use 517 square meters of office space in the E-Wing Center. We pay a total monthly rental of RMB 50,000 under this lease agreement (approximately $7,300). This lease expires on December 31, 2010. On June 2, 2007, we entered into a real property purchase agreement with Zhao Li, pursuant to which Mr. Zhao agreed to sell the facility to us for a purchase price of RMB 9,747,000 (approximately $1,429,885). We have paid $1,249,745 to Mr. Zhao by December 31, 2008.
We believe that our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
On December 30, 2008, the following stockholders of the Company owning the majority of the issued and outstanding shares of our common stock, constituting the sole class of voting securities of the Company, executed and delivered to the Company their written consent, in lieu of shareholder meeting, approving the Restructuring Documents and the Restructuring contemplated thereby, which would have been the requisite vote under Nevada law if shareholder approval were required under Nevada law to approve the Equity Transfer. For more information, you may refer to our Definitive Information Statement on Schedule 14C filed with the SEC on January 12, 2009.
Market for Our Common Stock
Since July 31, 2008, our common stock has been listed on the Nasdaq Capital Market under the symbol “CTFO.” Prior to that date, our common stock had been quoted on the Over-the-Counter Bulletin Board under the symbol “CTFO.OB.”
The following table sets forth, for the quarters indicated, the range of closing high and low bid prices of our common stock as reported by the Over-the-Counter Bulletin Board and the quarterly high and low closing sale prices as reported by NASDAQ, as applicable. These prices reported by the Over-the-Counter Bulletin Board do not include retail markup, markdown or commission and may not represent actual transactions.
Approximate Number of Holders of Our Common Stock
On March 23, 2009, there were approximately 106 stockholders of record of our common stock. The number of record holders does not include persons who held our common stock in nominee or “street name” accounts through brokers.
We have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our board of directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our stockholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
Securities Authorized for Issuance Under Equity Compensation Plans
We currently do not have any equity compensation plans.
This subsection of management’s discussion and analysis is an overview of the important factors that management focuses on in evaluating our business, our financial condition our operating performance, our overall business strategy and our earnings for the periods covered.
We are a holding company that only operates through our Chinese VIE Entities, through which we primarily focused on providing transportation information services and products in the Chinese market. We aim to become the largest transportation information products and comprehensive solutions provider, as well as the largest integrated transportation information platform and commuter traffic platform builder and operator in China. In addition, we are developing our transportation system to include electronic toll collection and real time traffic reporting.
Historically, the Company has segmented its services into three specific areas: transportation, land and resources, and digital city. Our transportation solutions track and store a variety of traffic information for various government entities, private sectors clients and individual users. The land and resources segment enables municipal governments to assess the efficiency of land use and the management of natural resources. The digital city sector is designed to aid the Chinese government’s initiative to outfit all major cities with broadband and wireless internet access.
Due to the substantial market demand for transportation information products in China, we have decided to devote more energy and resources to our transportation segment since late 2007, and expects that this segment will become a major driver of our future development. Our transportation products and solutions are targeted for transportation management authorities under the management of the Ministry of Communication and the general public.
Industry Wide Factors that are Relevant to Our Business
The transportation information industry in China is in the process of rapid and continuous development. We believe that the trend in China’s transportation information industry is the continuous increase of Chinese government’s and public demand for advanced transportation information products and services to support more effective and efficient transportation networks in China. One result of this trend is the growing amount of governmental spending in the sector of transportation. We believe this trend will impact favorably on the demand for our transportation information products and services, and accordingly result in the growth in sales of our transportation products and services.
The development of transportation information products and solutions that are “Made in China” has grown rapidly since 2000. As a leading company in transportation information products and solutions in China, our sales revenues have a high correlation to the high speed growth of the transportation information industry in China generally. Our sales compounded annual growth rate has been at approximately 71% for the past four years and our earnings compounded annual growth rate has also been at about 71% over the same period. Therefore, we believe that our sales over the next five years will grow in close correlation with the rapid growth of China’s transportation information industry.
One main factor that management considers when estimating our future growth is the potential revenue from larger government projects in the transportation sector of the Chinese government based on annual budget reports issued by relevant governmental sectors at both central and local levels. We expect that these potential new projects will create revenues from new transportation information product sales and services. We expect to bid on large projects in the transportation sector going forward.
The growing use of GPS and location-based service in China also has a material impact on our industry. We believe that “Made in China” transportation information products and services will have a distinct advantage over similar products and services provided in developed countries, where development costs are generally higher. The Chinese economy is developing at a rapid pace. As a result, there is a growing consumer market that is developing in China. We also believe that the worldwide perception of the quality level of Chinese products is improving.
Our industry is also experiencing a significant increase in competition. This increased level of competition puts pressure on the sales prices of our products, which results in lower margins for us.
Results of Operations
Fiscal Year ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007
The following tables set forth key components of our results of operations for the periods indicated, in dollars and percentage of revenues and key components of our revenue for the periods indicated in dollars.
Revenues. Revenues increased approximately 17.5 million, or 147.55% to approximately $29.4 million for the year ended December 31, 2008, from approximately $11.9 million in 2007. This increase was attributable to the increased sales of our products and the applications of our products in the Transportation, Land & Resources and Digital City sectors in 2008 compared to 2007. We believe that such sales increased as a result of the growing recognition of our brand name and technology as well as the rapidly developing market opportunities in the transportation information sector in China. During 2008, the Company achieved a win rate of approximately 90 percent for project bids and also were able to secure more contracts from recurring clients.
The following table illustrates the revenues from the Chinese government sectors and regulated industries in which we sell our products and services for the periods indicated. The table also provides the percentage of total revenues represented by each listed sector.
As the table above indicates, the Transportation and Digital City sectors accounted for an aggregate of 85.25% and 85.55% of our sales for the years ended December 31, 2008 and 2007, respectively. Sales in Land & Resources account for less than 12% of total sales over each of periods indicated above. Our success ratio when bidding on new contracts, was approximately 90% during the year ended December 31, 2008.
Cost of Goods Sold. Our cost of goods sold increased approximately $7.26 million, or 129.27%, to approximately $12.87 million for the year ended December 31, 2008, from approximately $5.61 million in 2007. This increase was mainly due to the increase in sales generally. As a percentage of revenues, the cost of goods sold decreased to 43.81% during the year ended December 31, 2008 from 47.30% in 2007, a result of the execution of higher margin contracts, which resulted in the increase in lower cost software component sales as a percentage of total sales during 2008.
The following table illustrates in detail the items constituting our costs of goods sold.
Gross Profit. Our gross profit increased approximately $10.25 million, or 163.96%, to approximately $16.5 million for the year ended December 31, 2008, from approximately $6.25 million in 2007. Gross profit as a percentage of revenues was 56.19% for the year ended December 31, 2008, an increase of 3.49% from 52.70% in 2007. The increase was mainly due to the increase in sales of higher margin software components as a percentage of total sales during 2008.
Selling Expenses. All of our products are sold into the domestic China market through contracts commissioned by the Chinese government. Various government entities and agencies either invite us to bid for a specific contract or award a contract to us on a no bid basis. This type of procurement process accounts for more than 70% of our total sales. We are often invited to bid on contracts through our professional relationships and are awarded repeat business. As a result, we have not invested heavily in establishing a substantial marketing program. We promote our products by developing relationships through Peking University, professional relationships with various agencies and municipalities within the Chinese government and in participation in industry trade exhibitions. Our marketing expenses therefore are relatively low in comparison to those of our competitors who do not have a record of performance and brand recognition or well-established government contacts.
Selling expenses, including sales representative commissions, promotion fees, salesperson salaries and expenses increased approximately $0.92 million, or 278.79%, to $1.25 million for the year ended December 31, 2008, from $0.33 million in 2007. As a percentage of revenues, selling expenses increased to 4.26% for the year ended December 31, 2008, from 2.74% in 2007. The increase of selling expenses was mainly attributable to our expanded operations and sales volume for the year ended December 31, 2008.
Administrative Expenses. Our administrative expenses were approximately $3.83 million (13.04% of total sales) and approximately $1.07 million (9.07% of total sales) for the years ended December 31, 2008 and 2007, respectively. The increase of administrative expenses was mainly attributable to the increased staffing and more expenses associated with being a public company.
Income Taxes. Income Taxes. China TransInfo Technology Corp. is subject to the United States federal income tax at a tax rate of 34%. No provision for income taxes in the United States has been made as China TransInfo Technology Corp. had no United States taxable income in 2008 fiscal year.
Our wholly owned subsidiary Cabowise was incorporated in the BVI and, under the current laws of the BVI, is not subject to income taxes. Our wholly owned subsidiary Intra-Asia Entertainment Corporation (Delaware) was incorporated in Delaware. No provision for state income taxes in Delaware has been made as Intra-Asia Entertainment Corporation (Delaware) had no Delaware taxable income in 2008. Our wholly owned subsidiary Intra-Asia Entertainment (China) Limited (Hong Kong) was incorporated in Hong Kong and, under the current laws of Hong Kong, is not subject to income taxes. Our wholly owned subsidiary Intra-Asia Entertainment (Asia-Pacific) Limited (Samoa) was incorporated in Samoa and, under the current laws of Samoa, is not subject to income taxes.
Our former Chinese operating subsidiaries enjoy certain special or preferential tax treatments regarding foreign enterprise income tax in accordance with the “Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises” and its implementing rules. Accordingly, our former Chinese operating subsidiaries have been entitled to tax concessions whereby the profit for its first two financial years beginning with the first profit-making year (after setting off tax losses carried forward from prior years) is exempt from income tax in the PRC and the profit for each of the subsequent three financial years is taxed at 50% of the prevailing tax rates set by the relevant tax authorities. However, on March 16, 2007, the National People’s Congress of China passed the new Enterprise Income Tax Law (“EIT Law”), and on November 28, 2007, the State Council of China passed the Implementing Rules for the EIT Law (“Implementing Rules”), which took effect on January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the FEIT, and its associated preferential tax treatments, beginning January 1, 2008.
Despite these changes, the EIT Law gives existing FIEs a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. We are expecting that the measures to implement the grandfather period will be enacted by the Chinese government in the coming months and will assess what the impact of the new regulations are at that time. The discontinuation of any such special or preferential tax treatment or other incentives would have an adverse affect on any organization’s business, fiscal condition and current operations in China.
In addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to an EIT of 25.0% on its global income. The Implementing Rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then the organization’s global income will be subject to PRC income tax of 25.0%.
Our VIE Entity, PKU, Zhangcheng Media, Xinjiang Zhangcheng, China TranWiseway, and Dajian Zhitong are subject to Chinese enterprises income tax (“EIT”), at a rate of 25% of the assessable profits. As approved by the local tax authority in the PRC, Beijing Tian Hao and Beijing Zhangcheng are entitled to a two-year exemption from EIT, commencing from the first cumulative profit-making year. Shanghai Yootu is subject to a special EIT at 2.5% of its taxable revenue in 2008. For the year ended December 31, 2007, we recognized income tax expense of $0.45 million while in 2008, we recognized an income tax expense of $0.06 million. All those tax expenses mainly resulted from the decrease in deferred tax assets during 2008.
Net Income. Net income increased approximately $6.67 million, or 150.85%, to $11.09 million in 2008 from approximately $4.42 million in 2007, as a result of the factors described above.
Liquidity and Capital Resources
As of December 31, 2008, we had cash and cash equivalents (excluding restricted cash) of approximately $16.12 million and restricted cash of approximately $1.21 million. The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.
Net cash provided by operating activities was approximately $2.51 million in fiscal year ended December 31, 2008, which is an increase of approximately $2.42 million from approximately $0.09 million net cash provided by operating activities in fiscal year ended December 31, 2007. Such increase of net cash provided by operating activities was primarily attributable to the increase of our sales and net profit as well as the increase in accounts and notes payable for 2008 compared to 2007.
Our main uses of cash for investing activities are payments relating to the acquisition of property, plant and equipment.
Net cash used in investing activities was approximately $10.4 million in fiscal year 2008, a decrease of $14.65 million from the $4.25 million net cash provided by investing activities in fiscal year 2007. Such decrease of net cash provided by investing activities was primarily attributable to the purchases of GPS and LED screen equipment for our taxi media business as well as the acquisition of China TranWiseway, Dajian Zhitong and Shanghai Yootu during 2008.
Net cash provided by financing activities for the fiscal year ended December 31, 2008 was approximately $16.87 million, while in the same period of 2007 we had approximately $1.05 million net cash provided by financing activities. Such change was mainly attributable to the facts that we raised $15 million in