UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 20-F
 
      ¨
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
       ¨
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal year ended _________________
 
OR
 
      x
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from  December 1, 2009 to September 30, 2010
 
      ¨
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report             
 
Commission file number: 005-85665
 


Kingtone Wirelessinfo Solution Holding Ltd
 (Exact name of Registrant as specified in its charter)
 
Not applicable
(Translation of Registrant’s name into English)
 
British Virgin Islands
 
3rd Floor, Borough A, Block A. No.181, South Taibai Road, Xi’an,
Shaanxi Province,
People’s Republic of China 710065
(Jurisdiction of incorporation or organization)
  
(Address of principal executive offices)
 
Ms. Ying Yang
3rd Floor, Borough A, Block A. No.181, South Taibai Road, Xi’an, Shaanxi Province,
People’s Republic of China 710065
Tel: (86) 29-88266368
(Name, telephone, facsimile number and address of company contact person)

 
 

 
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Ordinary shares, par value $.001 per share
 
None
     
American Depositary Shares, each representing
 
Nasdaq Capital Market
one Ordinary Share
   
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
 
none
(Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 
none
(Title of Class)
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. — 14,000,000 Ordinary Shares, including 4,000,000 Ordinary Shares represented by 4,000,000 American Depositary Shares outstanding as of September 30, 2010.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨    Yes     x   No
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.     ¨   Yes     x   No
 
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.     x   Yes     ¨   No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ¨   Yes    ¨    No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer   ¨                  Accelerated filer   ¨                  Non-accelerated filer   x
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
 
U.S. GAAP   x
    
International Financial Reporting Standards as issued
by the International Accounting Standards Board   ¨
  
Other   ¨
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17   ¨     Item 18   ¨
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨   Yes     x   No

 
 

 

In this annual report:

 
·
References to the “Company”, “we”, “our” and “us” are to Kingtone Wirelessinfo Solution Holding Ltd and its consolidated subsidiaries and variable interest entity, except as the context otherwise requires;

 
·
References to an “ADS” are to an American Depositary Share, each of which represents one of our Ordinary Shares with a par value of $.001 per share; and

 
·
References to a particular “fiscal” year, such as “fiscal 2010”, are to our fiscal year ended on September 30, of that year.
 
Special Note Regarding Forward-looking Statements

This annual report contains forward-looking statements that involve risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report. These forward-looking statements include:
 
 
·
our expansion plans;
 
 
·
our anticipated growth strategy;
 
 
·
our plans to recruit more employees;
 
 
·
our plans to invest in research and development to enhance our product or service lines;
 
 
·
our future business development, results of operations and financial condition;
 
 
·
expected changes in our net revenues and certain cost or expense items;
 
 
·
our ability to attract and retain customers; and
 
 
·
trends and competition in the enterprise mobile software application market.

You should read this annual report thoroughly with the understanding that our actual future results may be materially different from, and/or worse, than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this annual report include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

This annual report also contains estimates, projections and statistical data related to the enterprise mobile software and IT services market in China. This market data, including data from IDC, a leading provider of market data and intelligence, speaks as of the date it was published and includes projections that are based on a number of assumptions and are not representations of fact. The enterprise mobile software and IT services market may not grow at the rates projected by the market data, or at all. The failure of the market to grow at the projected rates may materially and adversely affect our business and the market price of our ADSs. In addition, the rapidly changing nature of the software and IT services market subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data proves to be incorrect, actual results may differ from the projections based on these assumptions.
 
You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
 
 

 
 
TABLE OF CONTENTS
 
Part I
   
5
     
Item 1.
     
Identity of Directors, Senior Management and Advisers.
 
5
             
Item 2.
     
Offer Statistics and Expected Timetable.
 
5
             
Item 3.
     
Key Information.
 
5
             
   
A.
 
Selected Financial Data.
 
5
             
   
B.
 
Capitalization and Indebtedness.
 
7
             
   
C.
 
Reasons for the Offer and Use of Proceeds.
 
7
             
   
D.
 
Risk Factors.
 
7
             
Item 4.
     
Information on the Company.
 
25
             
   
A.
 
History and Development of the Company.
 
25
             
   
B.
 
Business Overview.
 
26
             
   
C.
 
Organizational Structure.
 
37
             
   
D.
 
Property, Plants and Equipment.
 
39
             
Item 4A.
     
Unresolved Staff Comments.
 
 
             
Item 5.
     
Operating and Financial Review and Prospects.
 
40
             
   
A.
 
Operating Results.
 
40
             
   
B.
 
Liquidity and Capital Resources.
 
53
             
   
C.
 
Research and Development, Patents and Licenses, etc.
 
53
             
   
D.
 
Trend Information.
 
53
             
   
E.
 
Off-balance Sheet Arrangements.
 
54
             
   
F.
 
Tabular Disclosure of Contractual Obligations.
 
55
 
2

 
Item 6.
     
Directors, Senior Management and Employees.
 
55
             
   
A.
 
Directors and Senior Management.
 
55
             
   
B.
 
Compensation.
 
57
             
   
C.
 
Board Practices.
 
60
             
   
D.
 
Employees.
 
63
             
   
E.
 
Share Ownership.
 
63
             
Item 7.
     
Major Shareholders and Related Party Transactions.
 
65
             
   
A.
 
Major Shareholders.
 
65
             
   
B.
 
Related Party Transactions. Business Relationships.
 
65
             
   
C.
 
Interests of Experts and Counsel.
 
67
             
Item 8.
     
Financial Information.
 
67
             
   
A.
 
Consolidated Statements and Other Financial Information. Financial Statements.
 
67
             
   
B.
 
Significant Changes.
 
68
             
Item 9.
     
The Offer and Listing.
 
68
             
   
A.
 
Offer and Listing Details.
 
68
             
   
B.
 
Plan of Distribution.
 
68
             
   
C.
 
Markets.
 
68
             
   
D.
 
Selling shareholders.
 
69
             
   
E.
 
Dilution.
 
69
             
   
F.
 
Expenses of the issue.
 
69
             
Item 10.
     
Additional Information.
 
69
             
   
A.
 
Share Capital.
 
69
             
   
B.
 
Memorandum and Articles of Association
 
69
             
   
C.
 
Material Contracts.
 
69
             
   
D.
 
Exchange Controls.
 
69
 
3

 
   
E.
 
Taxation.
 
73
             
   
F.
 
Dividends and Paying Agents.
 
79
             
   
G.
 
Statement by Experts.
 
79
             
   
H.
 
Documents on Display.
 
79
             
   
I.
 
Subsidiary Information.
 
79
             
Item 11.
     
Quantitative and Qualitative Disclosures about Market Risk.
 
79
             
Item 12.
     
Description of Securities Other than Equity Securities.
 
80
             
Part II
         
82
             
Item 13.
     
Defaults, Dividend Arrearages and Delinquencies.
 
82
             
Item 14.
     
Material Modifications to the Rights of Security Holders and Use of Proceeds.
 
82
             
Item 15.
     
Controls and Procedures.
 
83
             
Item 16A.
     
Audit Committee Financial Expert.
 
83
             
Item 16B.
     
Code of Ethics.
 
83
             
Item 16C.
     
Principal Accountant Fees and Services.
 
84
             
Item 16D.
     
Exemptions from the Listing Standards for Audit Committees.
 
84
             
Item 16E.
     
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
 
84
             
Item 16F.
     
Change in Registrant’s Certifying Accountant.
 
84
             
Item 16G.
     
Corporate Governance.
 
84
             
Part III
           
             
Item 17.
     
Financial Statements.
 
84
             
Item 18.
     
Financial Statements.
 
84
             
Item 19.
     
Exhibits.
 
86
             
Index to Consolidated Financial Statements
 
F-1
 
 
4

 

PART I

  ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.

Not applicable.

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE.

Not applicable .

ITEM 3.  KEY INFORMATION.

A.   SELECTED FINANCIAL DATA.
 
Kingtone Wirelessinfo Solution Holding Ltd and its consolidated subsidiaries (“Kingtone Wireless”) and Xi’an Kingtone Information Technology Co., Ltd., a PRC limited liability company (“Kingtone Information”), which was incorporated in Xi’an, Shaanxi province, China on December 28, 2001, are under common control from the earliest date presented. On October 27, 2009, we were incorporated with a fiscal year end of November 30, and on December 15, 2009, we consummated a number of related transactions to acquire contractual control of Kingtone Information (the “Reorganization”).   The selected financial data are solely those of Kingtone Information for the fiscal years ended November 30, 2006, 2007 and 2008 and for the subsequent period ended October 26, 2009, and then they are combined with Kingtone Wireless through December 15, 2009, the date of the Reorganization, and they are consolidated with Kingtone Wireless following the date of the Reorganization.
 
In March 2010, we changed our fiscal year end from November 30 to September 30 to have the same fiscal year end as Kingtone Information. The consolidated and combined balance sheets as of September 30, 2010 are presented as transition financial statements with the beginning balance as of November 30, 2009 in our consolidated and combined financial statements. As we and our wholly-owned subsidiaries had no operations from October 1, 2009 to November 30, 2009, except for our initial capitalization and our preparation for our initial public offering, the statements of income and comprehensive income for the years ended September 30, 2009, 2008, 2007 and 2006 are the same as those for the fiscal years ended November 30, 2009, 2008, 2007 and 2006, respectively.

The selected financial data for fiscal years 2010, 2009 and 2008, have been derived from our audited combined and consolidated financial statements. The selected financial data for our fiscal year ended September 30, 2007 and  2006 have been derived from our books and records and is unaudited. The selected consolidated and combined financial data should be read in conjunction with our audited financial statements and the accompanying notes and “Item 5 – Operating and Financial Review and Prospects.” Our consolidated and combined financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods. You should not view our historical results as an indicator of our future performance.
 
 
5

 

Kingtone Wirelessinfo Solution Holding Ltd and Subsidiaries
Selected Consolidated and Combined Statements of Income and Comprehensive Income Data
 
For the Years Ended September 30,
 
  
 
2010
   
2009
   
2008
   
2007
   
2006
 
   
Audited
   
Audited
   
Audited
   
Unaudited
   
Unaudited
 
   
Consolidated and
Combined
   
Consolidated and
Combined
                   
   
($ in Thousands, Except per Share Data)
 
Total revenues
  $ 14,506     $ 11,240     $ 4,286     $ 4,012     $ 1,472  
Cost of revenues
    2,352       3,894       1,621       2,972       775  
Gross profit
    12,154       7,346       2,665       1,040       697  
Operating expenses:
                                       
Selling and marketing
    341       350       301       239       237  
General and administrative
    1,635       537       355       644       504  
Research and development
    179       139       79       0       0  
Total operating expenses
    2,155       1,026       735       883       740  
Operating income (loss)
    9,999       6,320       1,930       157       (44 )
Subsidy income
    44       307       163              
Interest expense
    (218 )     (340 )     (531 )     (608 )     (506 )
Other income (expense)
    20       (55 )     (356 )           2  
Income before income tax expense
    9,845       6,232       1,206       (451 )     (547 )
Income tax expenses
    1,608       935       191              
Net income(loss)
  $ 8,237     $ 5,297     $ 1,015     $ (451 )   $ (547 )
Other comprehensive income
                                       
Foreign currency translation gain
    598       22       544       267       -  
Comprehensive income
  $ 8,835     $ 5,319     $ 1,559     $ (184 )   $ (547 )
Earnings (loss) per share:
                                       
Basic
  $ 0.71     $ 0.53     $ 0.10     $ (0.05 )   $ (0.05 )
Diluted
  $ 0.71     $ 0.53     $ 0.10     $ (0.05 )   $ (0.05 )
Weighted average ordinary shares:
                                       
Basic
    11,527,473       10,000,000       10,000,000       10,000,000       10,000,000  
Diluted
    11,527,473       10,000,000       10,000,000       10,000,000       10,000,000  
 
 
6

 

Kingtone Wirelessinfo Solution Holding Ltd and Subsidiaries
Selected Consolidated and Combined Balance Sheets Data
 
   
As of September 30,
   
As of November 30
 
  
 
2010
   
2009
   
2008
   
2007
   
2006
 
   
Audited
   
Audited
   
Audited
   
Unaudited
   
Unaudited
 
   
Consolidated and
Combined
   
Consolidated
and Combined
                   
  
       
($ in Thousands)
 
Cash and bank deposits
    14,909       344       9       7       98  
Total current assets
    23,806       4,014       12,884       17,360       11,745  
Total assets
    38,073       17,907       14,677       18,687       13,833  
Advances from customers
    371       1,398       2,817       3,168       315  
Dividend payable
    772       1,117                    
Total current liabilities
    5,306       8,781       6,953       13,601       8,794  
Total shareholders’ equity
    32,767       9,126       7,724       5,086       5,039  
Total liabilities and shareholders’ equity
    38,073       17,907       14,677       18,687       13,833  
 
B.  CAPITALIZATION AND INDEBTEDNESS.
 
Not applicable.
 
C.  REASONS FOR THE OFFER AND USE OF PROCEEDS.
 
Not applicable.
 
D.  RISK FACTORS.

An investment in our ADSs involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all other information contained in this annual report, including the matters discussed under “Special Note Regarding Forward-Looking Statements,” before you decide to invest in our ADSs. You should pay particular attention to the fact that we are a holding company with substantial operations in China and are subject to legal and regulatory environments that in many respects differ from those of the United States. If any of the following risks, or any other risks and uncertainties that are not presently foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects would be materially and adversely affected. You should also consider all other information contained in this annual report before deciding to invest in our ADSs.

Risks Related to Our Company and Our Industry

If demand for enterprise remote and mobile connectivity does not continue to expand in China, we may experience a shortfall in revenues or earnings or otherwise fail to meet public market expectations.

The growth of our business is dependent, in part, upon the increased migration by enterprises to wireless connectivity services in China and our ability to capture a higher proportion of this market. If the demand in China for enterprise connectivity services does not continue to grow, or grows in ways that do not use our services, then we may not be able to grow our business, maintain our profitability or meet public market expectations. Increased usage of enterprise connectivity services depends on numerous factors, including:
 
 
·
the willingness of enterprises to make additional information technology expenditures;

 
·
the availability of security products necessary to ensure data privacy over the public networks;

 
·
the quality, cost and functionality of these services and competing services;

 
·
the increased adoption of wired and wireless broadband access methods;

 
·
the proliferation of electronic devices such as handhelds and smart-phones and related applications; and

 
·
the willingness of enterprises to invest in our services during the current world-wide economic crisis.
 
 
7

 

We face intense competition from other software development and IT service companies and, if we are unable to compete effectively, we may lose customers and our revenues may decline.

The market for software products and IT services, including wireless IT application products and solutions, is highly competitive and subject to rapid changes in technology. In the future, we expect significant competition from both established and emerging software companies. In addition, our growth opportunities in new product markets could be limited to the extent established and emerging software companies enter or have entered those markets. We believe the principal competitive factors in our markets are industry experience, quality of the products and services offered, reputation, marketing and selling skills, as well as price. We face significant competition from various competitors, including:
 
 
·
other Chinese wireless data communication and exchange software application and service providers, such as Beijing Silu Innovation Technology Co., Ltd. and Cyber Technologies (Suzhou) Co., Ltd.;

 
·
other Chinese software developers and IT service providers, that may decide to add wireless data communication and exchange programming capability;

 
·
telecommunication equipment producers and suppliers; and

 
·
multi-national service providers.

Many of our current and prospective competitors have significantly greater financial, marketing, service, support, technical and other resources than we do. As a result, they may be able to adapt more quickly than us to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products. Announcements of competing products by large competitors or other vendors could result in the cancellation of orders by customers in anticipation of the introduction of such new products. In addition, some of our competitors currently make complementary products that are sold separately. Such competitors could decide to enhance their competitive position by bundling their products to attract customers seeking integrated, cost-effective software applications. We also expect competition to increase as a result of software industry consolidations, which may lead to the creation of additional large and well-financed competitors. Increased competition is likely to result in price reductions, fewer customer orders, reduced margins and loss of market share.

We may be unable to effectively manage our rapid growth, which could place significant strain on our management personnel, systems and resources. We may not be able to achieve anticipated growth, which could materially and adversely affect our business and prospects.

We have experienced rapid growth in our application implementations and revenues recently. Our sales grew to $14.51 million in fiscal 2010 from $11.24 million in fiscal 2009. With the forecasted increased market demand for wireless information management applications created by the recent deployment of 3G networks, we are actively developing our business and expanding our workforce to pursue existing and potential market opportunities.

Our rapid growth places a significant strain on our management personnel, system and resources. To accommodate our growth, we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems, all of which require substantial management efforts. We also will need to continue to expand, train, manage and motivate our workforce and manage our customer relationships. Moreover, as we introduce new solutions or services or enter into new markets, we may face new market, technological and operational risks and challenges with which we are unfamiliar or cannot foresee. All of these endeavors will involve risks and require substantial management efforts and skills. As a result of any of these problems associated with growth, our business, results of operations and financial condition could be materially and adversely affected. Furthermore, we may not be able to achieve anticipated growth, which could materially and adversely affect our business and prospects.

We may undertake acquisitions, investments, joint ventures or other strategic alliances, which could have a material adverse effect on our ability to manage our business. In addition, such undertakings may not be successful.

Our strategy includes plans to grow both organically and through acquisitions, participation in joint ventures or other strategic alliances. Joint ventures and strategic alliances may expose us to new operational, regulatory and market risks, as well as risks associated with additional capital requirements. We may not be able, however, to identify suitable future acquisition candidates or alliance partners. Even if we identify suitable candidates or partners, we may be unable to complete an acquisition or alliance on terms commercially acceptable to us. If we fail to identify appropriate candidates or partners, or complete desired acquisitions, we may not be able to implement our strategies effectively or efficiently.
 
 
8

 

In addition, our ability to successfully integrate acquired companies and their operations may be adversely affected by a number of factors. These factors include:
 
 
·
diversion of management’s attention;

 
·
difficulties in retaining customers of the acquired companies;

 
·
difficulties in retaining personnel of the acquired companies;

 
·
entry into unfamiliar markets;

 
·
unanticipated problems or legal liabilities; and

 
·
tax and accounting issues.

If we fail to integrate acquired companies efficiently, our earnings, revenues growth and business could be negatively affected.

Due to intense competition for highly-skilled personnel, we may fail to attract and retain enough sufficiently trained employees to support our operations; our ability to bid for and obtain new projects may be negatively affected and our revenues could decline as a result.

The IT industry relies on skilled employees, and our success depends to a significant extent on our ability to attract, hire, train and retain qualified employees. Wireless information management application development is a relatively new area in the IT industry. There is a small pool of experienced developers. As the market demand picks up and more IT companies enter this market, there is significant competition in China for professionals with the skills necessary to develop the products and perform the services we offer to our customers. Increased competition for these professionals, in the wireless information management application development areas or otherwise, could have an adverse effect on us if we experience significant increase in the attrition rate among employees with specialized skills, which could decrease our operating efficiency and productivity and could lead to a decline in demand for our services.

In addition, our ability to serve existing customers and business partners and obtain new business will depend, in large part, on our ability to attract, train and retain skilled personnel that enable us to keep pace with growing demands for wireless information management application, evolving industry standards and changing customer preferences. Our failure to attract, train and retain personnel with the qualifications necessary to fulfill the needs of our existing and future customers or to assimilate new employees successfully could have a material adverse effect on our business, financial condition and results of operations. Our failure to retain our key personnel on business development or find suitable replacements of the key personnel upon their departure may lead to shrinking new implementation projects, which could materially adversely affect our business.

Our business depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.

Our future success heavily depends upon the continued services of our senior executives and other key employees. In particular, we rely on the expertise and experience of Mr. Tao Li, our chairman. In addition, we rely on Mr. Peng Zhang, our chief executive officer, Ms. Ying Yang, our chief financial officer, and Mr. Pengguo Xi, our chief technology officer, to run our business operations. If one or more of our senior executives or key employees is unable or unwilling to continue in his or her present position, we may not be able to replace such employee easily, or at all, we may incur additional expenses to recruit, train and retain replacement personnel, our business may be severely disrupted, and our financial condition and results of operations may be materially adversely affected.
 
 
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If Mr. Li’s other professional duties interfere or conflict with his duties for our company, our business, results of operations and financial condition could be materially and adversely affected.

Mr. Li, our chairman, currently serves as the chairman and chief executive officer of China Green Agriculture, Inc. (“CGA”), a producer of humic acid based compound fertilizer in the PRC whose common stock is listed on the New York Stock Exchange. Mr. Li’s duties as chairman and chief executive officer of CGA require the devotion of a substantial amount of his professional time and attention. Li currently devotes approximately 70% of his professional time to his duties for CGA. Similarly, our success and the execution of our growth strategy will require his significant efforts and the devotion of a substantial amount of his professional time and attention. If the performance of his duties on behalf of CGA interfere or conflict with his duties as chairman of our company, we may not be able to achieve our anticipated growth and our business, results of operations and financial condition could be materially adversely affected.
 
Our business could suffer if our executives and directors compete against us and our non-competition agreements with them cannot be enforced.

If any of our senior executives or key employees joins a competitor or forms a competing company, we may lose customers, know-how and key professionals and staff members to them. Also, if any of our business development managers who keep a close relationship with our customers and business partners joins a competitor or forms a competing company, we may lose customers, and our revenues may be materially adversely affected. Most of our executives have entered into employment agreements with us that contain non-competition provisions. However, if any dispute arises between our executive officers and us, such non-competition provisions may not be enforceable, especially in China, where all of these executive officers and key employees reside, in light of the uncertainties with China’s legal system. See “Risk Factors — Risks Related to Doing Business in China — Uncertainties with respect to the PRC legal system could adversely affect us.”

A significant portion of the software development, ongoing system support and enhancement service revenues we generate are fixed amounts according to our sales contracts. If we fail to accurately estimate costs and determine resource requirements in relation to our projects, our margins and profitability could be materially and adversely affected.

A significant portion of the software development, ongoing system support and enhancement service revenues we generate are fixed amounts according to our sales contracts or bids we submit. Our projects often involve complex technologies and must often be completed within compressed timeframes and meet increasingly sophisticated customer requirements. We may be unable to accurately assess the time and resources required for completing projects and price our projects accordingly. If we underestimate the time or resources required, we may experience cost overruns and mismatches in project staffing. Conversely, if we over-estimate requirements, our bids may become uncompetitive and we may lose business as a result. Furthermore, any failure to complete a project within the stipulated timeframe could expose us to contractual and other liabilities and damage our reputation.

Our computer networks may be vulnerable to security risks that could disrupt our services and adversely affect our results of operations.

Our computer networks may be vulnerable to unauthorized access, computer hackers, computer viruses and other security problems caused by unauthorized access to, or improper use of, systems by third parties or employees. A hacker who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. Computer attacks or disruptions may jeopardize the security of information stored in and transmitted through computer systems of our customers. Actual or perceived concerns that our systems may be vulnerable to such attacks or disruptions may deter telecom operators and consumers from using our solutions or services. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches, which could adversely affect our results of operations.

If we do not continually enhance our solution and service offerings, we may have difficulty in retaining existing customers and attracting new customers.

We believe that our future success will depend, to a significant extent, upon our ability to enhance our existing solutions and to introduce new solutions and features to meet the requirements of our customers in a rapidly developing and evolving market. We currently devote significant resources to refining and expanding our base software modules and to developing solutions that operate in accordance with our customers’ networks and systems. Unexpected technical, operational, distribution or other problems could delay or prevent the introduction of one or more of these products or services, or any products or services that we may plan to introduce in the future. Our present or future products may not satisfy the evolving needs of the telecom industry, and these solutions and services may not achieve anticipated market acceptance or generate incremental revenue. If we are unable to anticipate or respond adequately to the need for solutions and service enhancements due to resource, technological or other constraints, our business, financial condition and results of operations could be materially and adversely affected.
 
 
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If we are unable to develop competitive new products and service offerings our future results of operations could be adversely affected.

Our future revenue stream depends to a large degree on our ability to utilize our technology in a way that will allow us to offer new types of software applications and services to a broader client base. We will be required to make investments in research and development in order to continue to develop new software applications and related service offerings, enhance our existing software applications and related service offerings and achieve market acceptance of our software applications and service offerings. We may incur problems in the future in innovating and introducing new software applications and service offerings. Our development-stage software applications may not be successfully completed or, if developed, may not achieve significant customer acceptance. If we are unable to successfully define, develop and introduce competitive new software applications, and enhance existing software applications, our future results of operations would be adversely affected. Development schedules for software applications are difficult to predict. The timely availability of new applications and their acceptance by customers are important to our future success. A delay in new the development of new applications could have a significant impact on its results of operations.

Changes in technology could adversely affect our business by increasing our costs, reducing our profit margins and causing a decline in our competitiveness.

China’s wireless telecom industry, in which we operate, is characterized by rapidly changing technology, evolving industry standards, frequent new services and solutions introductions and enhancements as well as changing customer demands. New solutions and new technologies often render existing solutions and services obsolete, excessively costly or otherwise unmarketable. As a result, our success depends on our ability to adapt to the latest technological progress, such as the 3G standard and technologies, and to develop or acquire and integrate new technologies into our software solutions and IT-related services. Advances in technology also require us to commit substantial resources to developing or acquiring and then deploying new technologies for use in our operations. We must continuously train personnel in new technologies and in how to integrate existing hardware and software systems with these new technologies. We may not be able to adapt quickly to new technologies or commit sufficient resources to compete successfully against existing or new competitors in bringing to market solutions and services that incorporate these new technologies. We may incur problems in the future in innovating and introducing new software applications and service offerings. Our development-stage software applications may not be successfully completed or, if developed, may not achieve significant customer acceptance. If we fail to adapt to changes in technologies and compete successfully against established or new competitors, our business, financial condition and results of operations could be adversely affected.

Returns on our investment in new technologies, such as 3G technology, and new solutions may not materialize as expected.

We have invested and will invest in the future a substantial amount of capital, manpower and other resources to develop new solutions and acquire technologies in preparation for the adoption by the wireless telecom industry in China of new standards and technologies, such as the 3G standard and technologies. However, our abilities to successfully develop and commercialize these new solutions and technologies are subject to a number of risks and uncertainties, including uncertainty surrounding the timing of the adoption of these new standards and technologies by China’s telecom industry and the receptiveness to these new technologies by their customer base, as well as our abilities to develop and market these new solutions cost-effectively and to deliver these solutions ahead of our competitors. Any of the above risks and uncertainties could jeopardize our ability to successfully realize a significant return on our investment in the 3G and other new technologies and solutions, if at all.
 
 
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Problems with the quality or performance of our solutions may cause delays in the introduction of new solutions or result in the loss of customers and revenues, which could have a material and adverse effect on our business, financial condition and results of operations.

Our software solutions are complex and may contain defects, errors or bugs when first introduced to the market or to a particular customer, or as new versions are released. Because we cannot test for all possible scenarios, our solutions may contain errors which are not discovered until after they have been installed, and we may not be able to timely correct these problems. These defects, errors or bugs could interrupt or delay completion of projects or sales to our customers. In addition, our reputation may be damaged and we may fail to acquire new projects from existing customers or new customers. Errors may occur when we provide systems integration and maintenance services. Some of the contracts with our customers do not have provisions setting forth limitations on liability for consequential damages. Even in cases where we have agreements with our customers that contain provisions designed to limit our exposure to potential claims and liabilities arising from customer problems, these provisions may not effectively protect us against such claims in all cases and in all jurisdictions. In addition, as a result of business and other considerations, we may undertake to compensate our customers for damages arising from the use of our solutions, even if our liability is limited by these provisions. Moreover, claims and liabilities arising from customer problems could also result in adverse publicity and materially and adversely affect our business, results of operations and financial condition. We currently do not carry any product or service liability insurance and any imposition of liability on us may materially and adversely affect our business and increase our costs, resulting in reduced revenues and profitability.
 
Our products may contain undetected software defects, which could negatively affect our revenues.

Our software products are complex and may contain undetected defects. In the past, we have discovered software defects in certain of our products and have experienced delayed or lost revenues during the period it took to correct these problems. Although we test our products, it is possible that errors may be found or occur in our new or existing products after we have commenced commercial shipment of those products. Defects, whether actual or perceived, could result in adverse publicity, loss of revenues, product returns, a delay in market acceptance of our products, loss of competitive position or claims against us by customers. Any such problems could be costly to remedy and could cause interruptions, delays, or cessation of our product sales, which could cause us to lose existing or prospective customers and could negatively affect our results of operations.

We may be subject to infringement, misappropriation and indemnity claims in the future, which may cause us to incur significant expenses, pay substantial damages and be prevented from providing our services or technologies.

Our success depends, in part, on our ability to carry out our business without infringing the intellectual property rights of third parties. Patent and copyright law covering software-related technologies and IT marketing is evolving rapidly and is subject to a great deal of uncertainty. Our self-developed or licensed technologies, processes or methods may be covered by third-party patents or copyrights, either now existing or to be issued in the future. Any potential litigation may cause us to incur significant expenses. Third-party claims, if successfully asserted against us may cause us to pay substantial damages, seek licenses from third parties, pay ongoing royalties, redesign our services or technologies, or prevent us from providing services or technologies subject to these claims. Even if we were to prevail, any litigation would likely be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

Additionally, most of our software development contracts signed with our customers contain indemnity clauses whereby we will indemnify our customers for any loss or damages suffered as a result of any third-party claims against them for any infringement of intellectual property rights in connection with the installation and use of the customized software solutions we develop for them. We may still be exposed to significant liabilities under these indemnity clauses to which we’ve agreed with our customers.

Our failure to protect our intellectual property rights may undermine our competitive position, and subject us to costly litigation to protect our intellectual property rights.

Any misappropriation of our technology or the development of competitive technology could seriously harm our business. We regard a substantial portion of our software solutions and systems as proprietary and rely on statutory copyright, trademark, patent, trade secret laws, customer license agreements, employee and third-party non-disclosure agreements and other methods to protect our proprietary rights. Nevertheless, these resources afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate. In particular, third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition and results of operations. In addition, intellectual property rights and confidentiality protection in China may not be as effective as in the United States, and policing unauthorized use of proprietary technology can be difficult and expensive. In addition, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. The outcome of any such litigation may not be in our favor. Furthermore, any such litigation may be costly and may divert management attention, as well as our other resources, away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all litigation costs in excess of the amount recoverable from other parties. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
 
 
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Our solutions incorporate a portion of, and work in conjunction with, third-party hardware and software solutions. If these third-party hardware or software solutions are not available to us at reasonable costs, or at all, our results of operations could be adversely impacted.

Although our solutions primarily rely on our own core technologies, some of our solutions incorporate a small portion of third-party hardware and software solutions. In addition, our solutions are designed to work in conjunction with the third-party hardware and software in our customers’ existing systems. If any third party were to discontinue making their solutions available to us or our customers on a timely basis, or increase materially the cost of their solutions, or if our solutions failed to properly function or interoperate with replacement hardware or software solutions, we may need to incur costs in finding replacement third-party solutions and/or redesigning our solutions to replace or function with or on replacement third-party solutions. Replacement solutions may not be available on terms acceptable to us or at all, and we may be unable to develop alternative solutions or redesign our solutions on a timely basis or at a reasonable cost. If any of these were to occur, our results of operations could be adversely impacted.

Our ability to sell our products is highly dependent on the quality of our service and support offerings, and our failure to offer high quality service could have a material adverse effect on our ability to market and sell our products.

Our customers depend upon our customer service and support staff to resolve issues relating to our products. High-quality support services are critical for the successful marketing and sale of our products. If we fail to provide high-quality support on an ongoing basis, our customers may react negatively and we may be materially and adversely affected in our ability to sell additional products to these customers. This could also damage our reputation and prospects with potential customers. Our failure to maintain high-quality support services could have a material and adverse effect on our business, results of operations and financial condition.

If we fail to establish or maintain an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our ADSs may, therefore, be adversely impacted .
We are subject to reporting obligations under the U.S. securities laws. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Beginning with our annual report on Form 20-F for the year ending September 30, 2011 , we are required to prepare a management report on our internal controls over financial reporting containing our management’s assessment of the effectiveness of our internal controls over financial reporting. Our management may conclude that our internal controls over our financial reporting are not effective. In addition, our independent registered public accounting firm will be required to attest to our management’s assessment of our internal controls over financial reporting in our annual report on Form 20-F for the year ending September 30, 2011.

Prior to our public offering in May 2010, we were a private company with a limited number of accounting personnel and we have accounted for our business using PRC accounting standards similar for small growing PRC companies. Our accounting staff has limited experience with U.S. GAAP standards and reporting requirements and the rules and regulations as promulgated by the U.S. Public Company Accounting Oversight Board, or PCAOB. Our current staff is not experienced in U.S. GAAP requirements and we may experience difficulties or problems in developing strong internal controls and internal documentation, accounting, auditing and reporting systems. It is possible that our weaknesses in these areas could lead to errors and mistakes that are damaging to our company. We have begun the process to improve our U.S. GAAP reporting capabilities and we plan to hire additional accounting personnel with U.S. GAAP experience to improve our ability to apply U.S. GAAP. We prepared and are in the process of implementing formal accounting policies and procedures to address key accounting areas for routine and non-routine transactions. We are working to implement these measures in fiscal 2011, although we cannot assure you that we will complete such implementation by then. The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments.
 
 
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We will continue to implement measures to identify and, if necessary, to remedy any material weaknesses and significant deficiencies to meet the deadline imposed by Section 404 of the Sarbanes-Oxley Act. If we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting. Moreover, effective internal controls over financial reporting are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the market price of our ADSs. Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act. We estimate that the cost of improving our U.S. GAAP reporting capabilities and establishing effective internal controls will be $250,000 to $350,000 per year, which includes the cost of hiring additional qualified accounting personnel.

We have very limited insurance coverage which could expose us to significant costs and business disruption.

We do not maintain any insurance coverage for our leased properties. Should any natural catastrophes such as earthquakes, floods, typhoons or any acts of terrorism occur in Shaanxi Province, where our head office is located and most of our employees are based, or elsewhere in China, we might suffer not only significant property damages, but also loss of revenues due to interruptions in our business operations, which could have a material adverse effect on our business, operating results or financial condition.

The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources, particularly if it affects our technology platforms which we depend on for delivery of our software and services, and could have a material adverse effect on our financial condition and results of operations.

We may be liable to our customers for damages caused by unauthorized disclosure of sensitive and confidential information, whether through our employees or otherwise.

We are typically required to manage, utilize and store sensitive or confidential customer data in connection with the products and services we provide. Under the terms of our customer contracts, we are required to keep such information strictly confidential. We seek to implement specific measures to protect sensitive and confidential customer data. We require our employees to enter into non-disclosure agreements to limit such employees’ access to, and distribution of, our customers’ sensitive and confidential information and our own trade secrets. We can give no assurance that the steps taken by us in this regard will be adequate to protect our customers’ confidential information. If our customers’ proprietary rights are misappropriated by our employees, in violation of any applicable confidentiality agreements or otherwise, our customers may consider us liable for that act and seek damages and compensation from us. However, we currently do not have any insurance coverage for mismanagement or misappropriation of such information by our employees. Any litigation with respect to unauthorized disclosure of sensitive and confidential information might result in substantial costs and diversion of resources and management attention.
 
We may face intellectual property infringement claims that could be time-consuming and costly to defend. If we fail to defend ourselves against such claims, we may lose significant intellectual property rights and may be unable to continue providing our existing products and services.

It is critical that we use and develop our technology and products without infringing upon the intellectual property rights of third parties, including patents, copyrights, trade secrets and trademarks. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. A successful infringement claim against us, whether with or without merit, could, among others things, require us to pay substantial damages, develop non-infringing technology, or re-brand our name or enter into royalty or license agreements that may not be available on acceptable terms, if at all, and cease making, licensing or using products that have infringed a third party’s intellectual property rights. Protracted litigation could also result in existing or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation, or could require us to indemnify our customers against infringement claims in certain instances. Also, we may be unaware of intellectual property registrations or applications relating to our services that may give rise to potential infringement claims against us. Parties making infringement claims may be able to obtain an injunction to prevent us from delivering our services or using technology containing the allegedly infringing intellectual property. Any intellectual property litigation could have a material adverse effect on our business, results of operations or financial condition.
 
 
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We have transferred intellectual property rights to a number of our customized software solutions to our customers in the past and may not own all these intellectual property rights. We may be subject to intellectual property infringement claims from these customers and others, which may force us to incur substantial legal expenses and, if determined adversely against us, may disrupt our business and materially and adversely affect our revenues and net income.

Our business involves the development and customization of software solutions for customers. While we retain ownership in the intellectual property rights underlying the core technologies required to develop our customized finished software solutions, in most cases, our contracts for custom-designed projects provided that our customers own, or share with us, intellectual property rights to the finished software solutions developed under such contracts. Under these circumstances, we may not have the right to reuse the related finished software in projects involving other customers nor can we unilaterally apply for copyright registrations, patents or other intellectual property rights for these software solutions. To the extent that we are unable to reuse the software and to the extent that the use of such software is important to the growth of our business with other customers, the inability to reuse such software could hinder the growth of our business. Furthermore, a portion of these contracts provide that our customers have ownership rights to any substantial improvements we subsequently make to the software solutions developed under these contracts. As a result, we may be subject to intellectual property infringement or profit sharing claims in the future from these customers. Any such claims could subject us to costly litigation and may require us to pay damages and develop non-infringing intellectual property, or acquire licenses to the intellectual property that is the subject of the alleged infringement. These could harm our reputation and materially and adversely affect our business and net income.
 
Seasonality and fluctuations in our customers’ annual IT budget and spending cycle and other factors can cause our revenues and operating results to vary significantly from quarter to quarter and from year to year.

Our revenues and operating results will vary significantly from quarter to quarter and from year to year due to a number of factors, many of which are outside of our control. A large number of our engineers take leave around the Chinese New Year holiday, which typically falls between late January and February of each year. The lack of man-hours during this holiday period usually leads to relatively lower revenues during the first calendar quarter. Due to the annual budget cycles of most of our customers, we may be unable to accurately estimate the demand for our solutions and services beyond the immediate calendar year, which could adversely affect our business planning. Moreover, our results will vary depending on our customers’ business needs from year to year. Due to these and other factors, our operating results have fluctuated significantly from quarter to quarter and from year to year. These fluctuations are likely to continue in the future, and operating results for any period may not be indicative of our future performance in any future period.
 
Our corporate actions are substantially controlled by our principal shareholders, who can cause us to take actions in ways you may not agree with.

Mr. Tao Li, our chairman, beneficially owns and has voting control over approximately 48.5% of our ordinary shares, and our officers and directors as a group beneficially own and have voting control over an aggregate of approximately 49.8% of our ordinary shares. These shareholders, acting individually or as a group, could exert control and substantial influence over matters such as electing directors, amending our constitutional documents, and approving acquisitions, mergers or other business combination transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our shares. Alternatively, our controlling shareholders may cause a merger, consolidation or change of control transaction even if it is opposed by our other shareholders, including those who purchase shares in this offering.

Risk Related to Doing Business in China

Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our services and materially and adversely affect our competitive position.

Substantially all of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. Although the Chinese economy is no longer a planned economy, the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. These government involvements have been instrumental in China’s significant growth in the past 30 years. The reorganization of the telecommunications industry encouraged by the PRC government has directly affected our industry and our growth prospect. In response to the recent global and Chinese economic downturn, the PRC government has adopted policy measures aimed at stimulating the economic growth in China. If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth or if any aspect of the PRC government’s policies limits the growth of the telecommunications industry in China or our industry or otherwise negatively affects our business, our growth rate or strategy, our results of operations could be adversely affected as a result.
 
 
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Our business benefits from certain government tax incentives. Expiration, reduction or discontinuation of, or changes to, these incentives will increase our tax burden and reduce our net income.

Under the PRC Enterprise Income Tax Law passed in 2007 and the implementing rules, both of which became effective on January 1, 2008, or the New EIT Law, a unified enterprise income tax rate of 25% and unified tax deduction standard is applied equally to both domestic-invested enterprises and foreign-invested enterprises, or FIEs. Enterprises established prior to March 16, 2007 eligible for preferential tax treatment in accordance with the then tax laws and administrative regulations shall gradually become subject to the New EIT Law rate over a five-year transition period starting from the date of effectiveness of the New EIT Law. However, certain qualifying high-technology enterprises may still benefit from a preferential tax rate of 15% if they own their core intellectual properties and they are enterprises in certain State-supported high-tech industries to be later specified by the government. As a result, if our PRC subsidiaries qualify as “high-technology enterprises,” they will continue to benefit from the preferential tax rate of 15%, subject to transitional rules implemented from January 1, 2008. Kingtone Information has been qualified as a “high-technology enterprise” for a three year period from November 21, 2008 and therefore it has benefited from the preferential tax rate of 15%, subject to transitional rules implemented on January 1, 2008. Otherwise, the applicable tax rate of our PRC subsidiaries may gradually increase to the unified tax rate of 25% by January 1, 2013 under the New EIT Law and the Implementing Rules. Currently, the value-added taxes we pay on our software products are refunded to us by the tax authorities as part of the PRC state policies to encourage the development of the PRC software industry. If Kingtone Information ceases to qualify as a “high-technology enterprise”, or if the refund of the value-added taxes ceases to apply, or the tax authorities change their position on our preferential tax treatments in the future, our future tax liabilities may materially increase, which could materially and adversely affect our financial condition and results of operations .

If we and/or Topsky were deemed a “resident enterprise” by PRC tax authorities, we and/or Topsky could be subject to tax on our global income at the rate of 25% under the New EIT Law and our non-PRC shareholders could be subject to certain PRC taxes.

Under the New EIT Law and the implementing rules, both of which became effective January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC may be considered a PRC “resident enterprise” and will be subject to the enterprise income tax at the rate of 25% on its global income as well as PRC enterprise income tax reporting obligations. The implementing rules of the New EIT Law define “de facto management” as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. However, as of the date of this annual report, no final interpretations on the implementation of the “resident enterprise” designation are available. Moreover, any such designation, when made by PRC tax authorities, will be determined based on the facts and circumstances of individual cases. Therefore, if we and/or Topsky were to be considered a “resident enterprise” by the PRC tax authorities, our and/or Topsky’s global income would be taxable under the New EIT Law at the rate of 25% and, to the extent we and/or Topsky were to generate a substantial amount of income outside of PRC in the future, we and/or Topsky would be subject to additional taxes. In addition, the dividends we pay to our non-PRC enterprise shareholders and gains derived by such shareholders or ADS holders from the transfer of our shares or ADSs may also be subject to PRC withholding tax at the rate up to 10%, if such income were regarded as China-sourced income.

Our holding company structure may limit the payment of dividends.

We have no direct business operations, other than our ownership of our subsidiaries and our contractual control of Kingtone Information. While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. As a result, there may be limitations on the ability of our PRC subsidiaries to pay dividends or make other investments or acquisitions that could be beneficial to our business, or otherwise fund and conduct our business.
 
 
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In addition, under the New EIT Law and the implementing rules that became effective on January 1, 2008, dividends generated from the business of our PRC subsidiaries after January 1, 2008 and payable to us and/or Topsky may be subject to a withholding tax rate of 10% if the PRC tax authorities subsequently determine that we and/or Topsky is a non-resident enterprise, unless there is a tax treaty with China that provides for a different withholding arrangement. Topsky, the direct holder of 100% of the equity interests of Softech, is organized in Singapore. Under the Notice of the State Administration of Taxation on Delivering the Table of Negotiated Dividends and Interest Rates to Lower Levels of People’s Republic of China, such dividend withholding tax rate is reduced to 5% if a Singapore resident enterprise owns over 25% of the PRC company distributing the dividends. As Topsky is a Singapore company and owns 100% of Softech, under the aforesaid notice, any dividends that Softech pays to Topsky will be subject to a withholding tax at the rate of 5%, provided that Topsky is not considered to be PRC tax resident enterprises. If, however, Topsky is regarded as a resident enterprise, the dividends payable to Topsky from Softech may be exempt from the PRC income tax, and the dividends payable from Topsky to us will be subject to a 10% PRC withholding tax (unless we are considered to be a PRC tax resident enterprise). Any such taxes could thus materially reduce the amount of funds available to us to meet our cash requirements, including the payment of dividends to our shareholders.
 
Uncertainties with respect to the PRC legal system could adversely affect us.

We conduct all of our business through our subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our May 2010 public offering to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

In utilizing the proceeds of our May 2010 public offering as an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Any loans to our PRC subsidiaries are subject to PRC regulations. For example, loans by us to our subsidiaries in China, which are FIEs, to finance their activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange, or SAFE. On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. The notice requires that RMB converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise. The foreign currency-denominated capital shall be verified by an accounting firm before converting into RMB. In addition, SAFE strengthened its oversight over the flow and use of RMB funds converted from the foreign currency-denominated capital of a foreign-invested company. To convert such capital into RMB, the foreign-invested company must report the use of such RMB to the bank, and the RMB must be used to the reported purposes. According to Circular 142, change of the use of such RMB without approval is prohibited. In addition, such RMB may not be used to repay RMB loans if the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Rules.
 
 
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We may also decide to finance our subsidiaries by means of capital contributions. These capital contributions must be approved by the PRC Ministry of Commerce, or MOFCOM, or its local counterpart. We may not be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiaries. If we fail to receive such approvals, our ability to use the proceeds of our May 2010 public offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.
 
Governmental control of currency conversion may affect the value of your investment.

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs or ordinary shares.

Fluctuation in the value of the RMB may have a material adverse effect on the value of your investment.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximate 23.7% appreciation of the RMB against the U.S. dollar between July 21, 2005 and September 30, 2010. Provisions on Administration of Foreign Exchange, as amended in August 2008, further changed China’s exchange regime to a managed floating exchange rate regime based on market supply and demand. Since reaching a high against the U.S. dollar in July 2008, however, the RMB has traded within a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high but never exceeding it. As a consequence, the RMB has fluctuated sharply since July 2008 against other freely-traded currencies, in tandem with the U.S. dollar. It is difficult to predict how long the current situation may continue and when and how it may change again as the People’s Bank of China may regularly intervene in the foreign exchange market to achieve economic policy goals. Substantially all of our revenues and costs are denominated in the RMB, and a significant portion of our financial assets are also denominated in RMB. We principally rely on dividends and other distributions paid to us by our subsidiaries in China. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs or ordinary shares in U.S. dollars. Any fluctuations of the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.

Softech’s contractual arrangements with Kingtone Information may result in adverse tax consequences to us.

We could face material and adverse tax consequences if the PRC tax authorities determine that Softech’s contractual arrangements with Kingtone Information were not made on an arm’s length basis and adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. A transfer pricing adjustment could result in a reduction, for PRC tax purposes, of adjustments recorded by Kingtone Information, which could adversely affect us by increasing Kingtone Information’s tax liability without reducing Softech’s tax liability, which could further result in late payment fees and other penalties to Kingtone Information for underpaid taxes.
 
 
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We control Kingtone Information through contractual arrangements which may not be as effective in providing control over Kingtone Information as direct ownership, and if Kingtone Information or its shareholders breach the contractual arrangements, we would have to rely on legal remedies under PRC law, which may not be available or effective, to enforce or protect our rights.

We conduct substantially all of our operations, and generate substantially all of our revenues, through contractual arrangements with Kingtone Information that provide us, through our ownership of Topsky and its ownership of Softech, with effective control over Kingtone Information. We have no direct ownership interest in Kingtone Information. We depend on Kingtone Information to hold and maintain contracts with our customers. Kingtone Information also owns substantially all of our intellectual property, facilities and other assets relating to the operation of our business, and employs the personnel for substantially all of our business. Neither our company nor Softech has any ownership interest in Kingtone Information. Although we believe that that each contract under Softech’s contractual arrangements with Kingtone Information is valid, binding and enforceable under current PRC laws and regulations in effect, these contractual arrangements may not be as effective in providing us with control over Kingtone Information as direct ownership of Kingtone Information would be. In addition, Kingtone Information may breach the contractual arrangements. For example, Kingtone Information may decide not to make contractual payments to Softech, and consequently to our company, in accordance with the existing contractual arrangements. In the event of any such breach, we would have to rely on legal remedies under PRC law. These remedies may not always be available or effective, particularly in light of uncertainties in the PRC legal system.
 
PRC laws and regulations governing our businesses and the validity of certain of our contractual arrangements are uncertain. If we are found to be in violation of such PRC laws and regulations, we could be subject to sanctions. In addition, changes in such PRC laws and regulations may materially and adversely affect our business.

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of Softech’s contractual arrangements with Kingtone Information. Softech is considered a foreign invested enterprise under PRC law. As a result, Softech is subject to PRC law limitations on its businesses and foreign ownership of Chinese companies. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.

If we were required to obtain the prior approval of the China Securities Regulatory Commission, or CSRC, of the listing and trading of our ADSs on the Nasdaq Capital Market, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies.

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and the SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective on September 8, 2006 (the “New M&A Rules”). This regulation, among other things, includes provisions that purport to require that an offshore special purpose vehicle formed for the purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several months to complete the approval process, if practicable at all. The application of this new PRC regulation remains unclear with no consensus currently existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement.
 
 
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Prior to our May 2010 initial public offering, our PRC counsel has advised us that, based on its understanding of the current PRC laws and regulations as well as the procedures announced on September 21, 2006: (i) Softech was directly incorporated by Topsky as a foreign investment enterprise under PRC law; therefore, there was no acquisition of the equity of a “PRC domestic company” as defined under the New M&A Rules; and (ii) the contractual arrangements between Kingtone Information and Softech are not clearly defined and considered as the transaction which shall be applied to the New M&A Rules. Therefore, we did not seek prior CSRC approval for our initial public offering.

However, if the CSRC required that we obtain its approval prior to the completion of our initial public offering and the listing of our ADSs on the Nasdaq Capital Market, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from our initial public offering into the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares.

Also, if the CSRC requires that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material adverse effect on the trading price of our shares.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute profits to us, or otherwise adversely affect us.

On October 21, 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005. According to Notice 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing such offshore company with assets or equity interests in an onshore enterprise located in the PRC, or an offshore special purpose company. An amendment to registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore special purpose company or overseas funds raised by such offshore company, or any other material change involving a change in the capital of the offshore special purpose company. Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or acquired control of offshore special purpose companies that have made onshore investments in the PRC in the past are required to have completed the relevant registration procedures with the local SAFE branch by March 31, 2006. To further clarify the implementation of Notice 75, the SAFE issued Circular 106 on May 29, 2007. Under Circular 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders or beneficial owners who are PRC residents in a timely manner.

Some of our current shareholders and/or beneficial owners may fall within the ambit of the SAFE notice and be required to register with the local SAFE branch as required under the SAFE notice. If so required, and if such shareholders and/or beneficial owners fail to timely register their SAFE registrations pursuant to the SAFE notice, or if future shareholders and/or beneficial owners of our company who are PRC residents fail to comply with the registration procedures set forth in the SAFE notice, this may subject such shareholders, beneficial owners and/or our PRC subsidiaries to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to our company, or otherwise adversely affect our business.

Risks Associated with our ADSs

The market price of our ADSs may be highly volatile, and you may not be able to resell at or above your initial purchase price.

There is a limited public market for our shares and ADSs. We cannot assure you that there will be an active trading market for our ADSs. You may not be able to sell your ADSs quickly or at the market price if trading in our ADSs is not active.
 
 
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The trading price of our ADSs may be volatile. The price of our ADSs could be subject to wide fluctuations in response to a variety of factors, including the following:
 
 
·
Introduction of new products, services or technologies offered by us or our competitors;

 
·
Failure to meet or exceed revenue and financial projections we provide to the public;

 
·
Actual or anticipated variations in quarterly operating results;

 
·
Failure to meet or exceed the estimates and projections of the investment community;

 
·
General market conditions and overall fluctuations in United States equity markets;

 
·
Announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

 
·
Disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 
·
Additions or departures of key management personnel;

 
·
Issuances of debt or equity securities;

 
·
Significant lawsuits, including patent or shareholder litigation;

 
·
Changes in the market valuations of similar companies;

 
·
Sales of our ADSs by us or our shareholders in the future;

 
·
Trading volume of our ADSs; and

 
·
Other events or factors, many of which are beyond our control.

In addition, the stock market in general, and the Nasdaq Capital Market and software products and services companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our ADS, regardless of our actual operating performance.

If our ADSs become subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.
 
If at any time we have net tangible assets of $5,000,000 or less and our ADSs have a market price per ADS of less than $5.00, transactions in our ADSs may be subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
 
 
·
make a special written suitability determination for the purchaser;

 
·
receive the purchaser’s written agreement to the transaction prior to sale;

 
·
provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and

 
·
obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.
 
 
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If our ADSs become subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our securities may be depressed, and you may find it more difficult to sell our securities.

Sales of a substantial number of ordinary shares or ADSs in the public market by our existing shareholders could cause the price of our ADSs to fall.

Sales of a substantial number of our ordinary shares or ADSs in the public market or the perception that these sales might occur, could depress the market price of our ADSs and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our ADSs.

All of our existing shareholders prior to our May 2010 offering were subject to lock-up agreements with the underwriters of the offering that restricted the shareholders’ ability to transfer ordinary shares or ADSs until expiration of the lock-up period in November 2010. The lock-up agreements limited the number of ordinary shares or ADSs that may be sold immediately following the public offering. Subject to certain limitations, approximately 10,000,000 of our total outstanding shares are now eligible for sale. Sales of ordinary shares by these shareholders could have a material adverse effect on the trading price of our ADSs.

Future sales and issuances of our ordinary shares or ADSs, or rights to purchase our ordinary shares or ADSs, including pursuant to our 2010 Omnibus Incentive Plan, could result in additional dilution of the percentage ownership of our shareholders and could cause the price of our ADSs to fall.

We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our shareholders may experience substantial dilution. We may sell ordinary shares, ADSs, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell ordinary shares, ADSs, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing shareholders, and new investors could gain rights superior to our existing shareholders.

We have broad discretion in the use of the net proceeds from our May 2010 public offering and may not use them effectively.

Our management has broad discretion in the application of the net proceeds of approximately $15.2 million from our May 2010 public offering, including for any of the purposes described in the prospectus relating to the offering, and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our shareholders.

We do not intend to pay dividends on our ordinary shares, so any returns will be limited to the value of our ADSs.

We have never declared or paid any cash dividend on our ordinary shares. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return shareholders will therefore be limited to the value of their ADSs.

As the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.

Our corporate affairs will be governed by our memorandum of association and articles of association, the BVI Business Companies Act, 2004, or the BVI Act, of the British Virgin Islands and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the BVI Act and the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law.
 
 
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As a result of all of the above, holders of our ADSs may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company.

British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.

British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
 
The laws of the British Virgin Islands provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the shareholders are dissatisfied with the conduct of our affairs.

Under the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, our memorandum of association and articles of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the memorandum of association and articles of association.

There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the company’s constituent documents. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum of association and articles of association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval of a majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.

Anti-takeover provisions in our memorandum of association and articles of association and our right to issue preference shares could make a third-party acquisition of us difficult.

Some provisions of our memorandum of association and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares.
 
 
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You may not have the same voting rights as the holders of our ordinary shares and must act through the depositary to exercise your rights.

Holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. Upon our written request, the depositary will mail to you a shareholder meeting notice which contains, among other things, a statement as to the manner in which your voting instructions may be given, including an express indication that such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received by the depositary from you on or before the response date established by the depositary. However, no voting instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary that (i) we do not wish such proxy given, (ii) substantial opposition exists, or (iii) such matter materially and adversely affects the rights of shareholders. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but you may not receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.
 
You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we may not, and under the deposit agreement for the ADSs, the depositary will not, offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are registered under the Securities Act, or the distribution of them to ADS holders is exempted from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to rely on an exemption from registration under the Securities Act to distribute such rights and securities. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

We may be a passive foreign investment company, of PFIC, which could lead to additional taxes for U.S. holders of our ADSs or ordinary shares.

We do not expect to be, for U.S. federal income tax purposes, a passive foreign investment company, or a PFIC, which is a foreign company for which, in any given taxable year, either at least 75% of its gross income is passive income, or investment income in general, or at least 50% of its assets produce or are held to produce passive income, for the current taxable year, and we expect to operate in such a manner so as not to become a PFIC for any future taxable year. However, because the determination of PFIC status for any taxable year cannot be made until after the close of such year and requires extensive factual investigation, including ascertaining the fair market value of our assets on a quarterly basis and determining whether each item of gross income that we earn is passive income, we cannot assure you that we will not become a PFIC for the current taxable year or any future taxable year. If we are or become a PFIC, a U.S. holder of our ADSs or ordinary shares could be subject to additional U.S. federal income taxes on gain recognized with respect to the ADSs or ordinary shares and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules. Non-corporate U.S. holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year.

 
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  ITEM 4.  INFORMATION ON THE COMPANY.

A .   HISTORY AND DEVELOPMENT OF THE COMPANY.

Overview

We are a holding company and conduct our operations through a contractually-controlled entity in the PRC named Xi’an Kingtone Information Technology Co., Ltd., a PRC limited liability company (“Kingtone Information”) that develops and provides mobile enterprise solutions in the PRC. In May 2010, we consummated an initial public offering of our American Depository Shares, or ADSs, for gross proceeds of $16 million, and our ADSs were listed on the Nasdaq Capital Market under the ticker symbol “KONE”.

Kingtone Information was incorporated in Xi’an in Shaanxi Province as a company limited by stocks on December 28, 2001. When it was incorporated, it had a registered capital of RMB 50 million and its name was Xi’an TechTeam Intelligent Technology Stock Co., Ltd. Kingtone Information increased its registered capital to RMB 56,000,000 on June 16, 2008 and changed its name to the current name on November 5, 2003. Kingtone Information is majority-owned by Mr. Tao Li, our chairman.

In December 2009, we consummated a number of related transactions through which we acquired control of Kingtone Information. Xi’an Softech Co., Ltd. (“Softech”), a company incorporated on November 27, 2009 under the laws of the PRC as a wholly foreign-owned enterprise (“WFOE”), entered into a series of agreements (the “Control Agreements”) with Kingtone Information and the shareholders of Kingtone Information pursuant to which Softech was granted full managerial and economic control over Kingtone Information, effectively rendering Kingtone Information a contractual subsidiary of Softech. We entered into this contractual-control relationship in order to comply with certain PRC regulations relating to the nature and sensitivity of certain aspects of Kingtone Information’s business; namely, its work on PRC government projects. See “Item 4. – Information on the Company – C.  Organizational Structure – Contractual Arrangements with Kingtone Information and Its Respective Shareholders” for further information on these contractual arrangements.

Softech is a wholly-owned subsidiary of Topsky Info-tech Holdings Pte Ltd. (“Topsky”), a company incorporated under the laws of Singapore on November 3, 2009. Topky, in turn, is our wholly-owned subsidiary. We were incorporated under the name ReiZii Capital Management Ltd. in the British Virgin Islands on October 27, 2009 and changed our name to Kingtone Wirelessinfo Solution Holding Ltd (“Kingtone Wireless”) on December 17, 2009.

Xtra Heights Management Ltd. (“Xtra”), which was incorporated in the British Virgin Islands on September 29, 2009, owned 6,806,250 shares of Kingtone Wireless, representing approximately 68.1% of the total issued and outstanding shares of Kingtone Wireless prior to our May 2010 public offering; SCGC Capital Holding Company Limited (“SCGC Capital”), which was incorporated in the British Virgin Islands on November 16, 2006, owned 1,060,714 shares of Kingtone Wireless, representing approximately 10.6% of the total issued and outstanding shares of Kingtone Wireless prior to our May 2010 public offering; Big Leap Enterprises Limited (“Big Leap”), which was incorporated in the British Virgin Islands on October 28, 2009, owns 1,060,714 shares of Kingtone Wireless, representing approximately 10.6% of the total issued and outstanding shares of Kingtone Wireless prior to our May 2010 public offering; Silver Avenue Overseas Inc. (“Silver Avenue”), which was incorporated in the British Virgin Islands on October 28, 2009, owned 972,322 shares of Kingtone Wireless representing, approximately 9.7% of the total issued and outstanding shares of Kingtone Wireless prior to our May 2010 public offering; Millennium Group Inc. (“Millennium”), a California corporation incorporated on June 29, 1994, owned 100,000 shares of Kingtone Wireless representing approximately 1% of the total issued and outstanding shares of Kingtone Wireless prior to our May 2010 public offering. Millennium received such shares in consideration for consulting services provided to Kingtone Information.
 
In exchange for causing Kingtone Information to enter into the Control Agreements, the shareholders of Kingtone Information received the right to acquire ordinary shares of Kingtone Wireless, through their nominee entities (Xtra, SCGC, Big Leap and Silver Avenue), in the same relative ownership percentage as they held in Kingtone Information prior to our May 2010 public offering and before giving effect to the 100,000 ordinary shares issued to Millennium. As part of the restructuring, certain of the shareholders of Kingtone Information entered into a Call Option Agreement dated as of December 15, 2009 with Xtra and Sha Li, Xtra’s sole shareholder, pursuant to which the shareholders of Kingtone Information are entitled to purchase up to an aggregate of 6,806,250 shares of Kingtone Wireless over time if certain conditions are satisfied. See “Item 4 – Information About the Company – C. Organizational Structure – Call Option Agreements” between Xtra Heights Management Ltd. and Shareholders of Kingtone Information” for further information on the Call Option Agreements. The remaining Kingtone Information shareholders have unwritten understandings with SCGC, Big Leap and Silver Avenue, as applicable, and their respective nominee shareholders, pursuant to which the Kingtone Information shareholders are entitled to purchase up to an aggregate of 3,093,750 of our ordinary shares upon the satisfaction of conditions similar to those set forth in the Call Option Agreements with Xtra.
 

Xtra is owned by Sha Li, a Singapore resident. However, pursuant to the call options agreements, the beneficial owners of our ordinary shares held by Xtra are as set forth in the table below, which share amounts are equal to each beneficial owner’s respective pro rata equity interest in Kingtone Information:
 
Name
 
Relationship to Kingtone Wireless
 
Shares
Tao Li
 
Chairman
 
6,099,107
Peng Zhang
 
Chief Executive Officer
 
35,357
Li Wu
 
Director
 
107,839
Pengguo Xi
 
Vice President of Research and Development
 
35,357
Xianying Chen
 
Vice President of Application Development
 
35,357
Wei Pu
 
Softech employee
 
102,536
Yu Fan Zhang
 
Softech employee
 
88,393
Wei Zhang
 
Softech employee
 
88,393
Xiao Bin Zhang
 
Softech employee
 
53,036
Wei Wang
 
Softech employee
 
37,125
June Ma
 
Former Chief Technology Officer
 
35,357
Jian Ping Li
 
Former Softech employee
 
88,393
 
SCGC Capital is owned by Shenzhen Capital (Hong Kong) Company Limited, a Hong Kong company. Big Leap is owned by Xuetao Chen, a PRC resident. Silver Avenue is owned by Hu Gao, a PRC resident. Millennium is owned by Jonathon Mork, a U.S. resident. None of our officers or directors is the beneficial owner of the ordinary shares held of record by SCGC Capital, Big Leap or Silver Avenue.
 
Corporate Information

Our principal executive offices are loated at 3/F, Area A, Block A, No. 181 South Taibai Road in Xi’an,   Shaanxi Province, People’s Republic of China 710065.  Our website is www.kingtoneinfo.com.  We routinely post important information on our website.  The information contained on our website is not a part of this annual report

Our agent for service of process in the United States is Vcorp Services LLC with an address at 20 Robert Pitt Drive, Suite 214, Monsey, NY 10952.
 
B .   BUSINESS OVERVIEW.

We are a China-based developer and provider of mobile enterprise solutions. Mobile enterprise solutions allow company personnel whose work function requires mobility (as opposed to operating from a single work station) to be connected with enterprise information technology, or IT systems, including Enterprise Asset Management (EAM), Enterprise Resource Planning (ERP), Supply Chain Management (SCM), and Customer Relationship Management (CRM). Our software enables such systems to get extended to personnel in the field using wireless devices such as smart phones, PDAs, cameras, barcode scanners, portable printers, GPS devices, and tablet computers. Mobile enterprise solutions also include custom software applications for specific industries and businesses.
 

Our mobile enterprise solutions are built on our proprietary core middleware platform consisting of standardized modules. This core middleware platform allows our solutions to seamlessly integrate with our customers’ existing information management systems. The core middleware platform can host an array of standardized and scalable applications developed by us or by others. This structured design allows us to timely and cost-effectively meet our customers’ specific requirements, and to respond to their changing needs.

Mobile enterprise solutions are generally aimed at reducing processing times and facilitating the flow of information among people and systems. Mobile computing allows field workers to communicate and interact more efficiently with their central operations, and vice versa. Enterprises are able to capture more accurate and timely information, and to achieve major reductions in paperwork and administration. Mobile enterprise solutions can be used to put important data in the hands of field workers, thus improving decision-making and productivity in the field. Mobile enterprise solutions improve efficiency in everyday functions including work dispatch, sales, inspections, repairs, deliveries, tracking and scheduling. Mobile enterprise solutions can also be used within factory settings, where wireless data connections are used to improve central control and monitoring of production and automations systems. For example, we designed and implemented a solution for a PRC-based petroleum company that allows plant managers to wirelessly monitor its production lines from off-site or remote locations.

The rollout of 3G wireless networks in China is increasing customer interest in mobile enterprise solutions. The increased bandwidth of 3G enables greater functionality and performance. In addition, touchscreen smart phones and other standard consumer devices that utilize 3G are able to be used for many applications that formerly required costly custom devices. These technology trends are positively affecting our business. We are also working with the three PRC telecom carriers, China Telecom, China Mobile, and China Unicom, on joint marketing and sales efforts to enterprises and government agencies. In addition, we are working with China Telecom to jointly develop and promote a custom, next-generation mobile solution for public safety agencies, including police and fire forces in certain provinces in China.

We typically act as a total solution provider, packaging our software with various third-party hardware and related equipment. We are headquartered in Xian, China and sell our products widely throughout China.

Our Industry — Mobile Enterprise Software Industry

We operate in the mobile enterprise software industry in China. We believe the mobile enterprise market in China benefits from compelling industry fundamentals such as increasing investment in IT, the country’s 3G rollout, and increasing demand for wireless applications within working environments.

Information Technology Development in China

Information technology has become an integral part of Chinese society and an important engine of growth for the economy. According to an IDC article dated October 22, 2009, IT spending by the PRC government in 2009 was expected to total RMB 53.65 billion, and is predicted to reach RMB 73.36 billion in 2013. Furthermore, according to an article published by the China Computer Newspaper dated March 3, 2010, government departments and sectors such as transportation, energy, healthcare, and environmental protection are among those with high growth rates in IT investment. IDC states that as the IT hardware market has become more fully developed, the focus of IT investment has gradually shifted from hardware infrastructure to software applications. From 2008 to 2013, the annual compound growth rate of IT hardware is projected to be 5.6%, compared to the annual compound growth rates of software and IT services of 13.2% and 14%, respectively, during the same period, according to IDC.
 
According to a report dated on November 24, 2010 by MIIT, China’s software industry revenue in the first ten months of 2010 surged to 1.09 trillion, or $160.3 billion, an increase of 29.9% compared to the same period in 2009.  This also represented an increase of over ten times the amount of software industry revenue compared to the same period in 2001, equivalent to an annual growth rate of 38% over the period.

This supports our belief that market acceptance of enterprise mobility applications, solutions and systems usually accelerates when potential customers’ back-end information technology systems are fairly developed and they start to invest in applications. By indentifying sectors with high growth rates of IT investment, we can exploit opportunities to expand our business by capturing the growth in targeted vertical industry markets.
 
 
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3G Rollout in China

On December 31, 2008, the State Council of the PRC, or the State Council, announced the approval of 3G license issuances to the three telecom operators, namely China Telecom, China Mobile and China Unicom, and the Ministry of Industry and Information Technology (MIIT) officially issued 3G licenses to those entities on January 7, 2009. Third generation wireless standard, or 3G, is a family of standards for mobile telecommunication. 3G communications allow simultaneous use of speech and data services at higher data rates than services developed under prior generation standards.

According to a January 2009 report by CITIC Jiantou Securities, it is estimated that investment in 3G between 2009 and 2011 by the three Chinese telecom carriers will total $44.0 billion. According to the MIIT, the 3G industry is expected to generate RMB 1 trillion, or $146.5 billion, in demand in the next three years. As mobile carriers further invest in applications and content, we believe the demand for enterprise mobile software/middleware will experience significant growth.

According to an article on November 26, 2010 published by China Daily, the MIIT reports that the number of 3G mobile telecommunication users in China reached 38.64 million by the end of October, 2010.  Of those users, approximately 25.38 million were new subscribers in the past year. The MIIT emphasized that China aimed to have 150 million 3G mobile users, while investment in 3G development would hit RMB 400 billion, or $59.7 billion, by 2011.

We believe the issuance of 3G licenses is expected to drive the growth of an enterprise wireless chain comprised of telecommunications service providers/carriers, converged mobile device providers, IT vendors, and software/middleware providers. Mobile software/middleware provides key platforms across which managed enterprise mobility services are deployed. We believe the 3G rollout and the upcoming commercial deployment will both inspire and facilitate new and diversified customer applications for mobile enterprise software.

Mobile Enterprise Solutions in China

We believe that China's enterprise mobility market is experiencing rapid development, driven primarily by the development of the mobile industry. In its January 2008 report, IDC forecasted the enterprise mobility market in China to reach $15.56 billion in 2011 with a forecasted compound annual growth rate of 6.0% from 2007 to 2011.

The growth of mobile enterprise solutions is driven by the demand for increased business efficiencies and new functionalities. In many modern businesses, operations are distributed over a large area, with individual operating elements. Mobile enterprise solutions allow organizations to enable mission-specific field and long-distance information management on a real-time basis. Mobile enterprise solutions consist of packaged, mission-specific and industry-specific applications and software designed especially for enterprise using wireless connectivity.

Enterprise wireless applications can be tailored to meet the specific needs of many industry sectors, such as manufacturing, energy, transportation, logistics, utilities, healthcare, and government agencies (such as police and emergency services). These custom software solutions include production control automation, sales force automation, field force automation, customer relationship management, enterprise resource planning, supply chain management, operations management, inventory management, time and expense, logistics, and other collaborative items.

Wireless enablement for an enterprise and its many activities is now a prominent trend according to the IDC report. With the rapid growth of the domestic economy, improvements in bandwidth, and increased mobility in working environments, enterprises and government agencies are increasing spending on the construction of mobile platforms and applications to extend their functionality outside of stationary locations. Mobile enterprise solutions including mobile middleware software, mobile security software, mobile device management software, and mobile enterprise applications have fueled the growth of both business data and video/voice usage, which are also major driving factors in communication spending.
 
Our Strengths

We believe the following strengths differentiate us from our competitors:

 
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Proprietary suite of mobile enterprise solutions offerings

We are among the first of Chinese companies to focus predominantly on developing mobile enterprise solutions. Since we began our operations in 2001, we have completed many successful client installations (approximately 140) and have accumulated special knowledge and expertise that has directly resulted in the creation and development of our proprietary adaptable middleware platform, and an array of software applications. A client installation is considered “successful” when we have developed the solutions/systems according to the customer’s contractual specifications and have otherwise fulfilled all other material terms set forth in the sales contract, including installing, configuring and making the solutions/systems operational within the specified time periods. Additionally, to be considered “successful”, a customer must have test run the solutions/systems and indicated its satisfaction by signing the acceptance letter.

We believe our mobile enterprise software is superior in breadth of application. Our middleware platform and software applications can be selectively packaged to create tailored solutions that can be installed on both new systems and existing frameworks.

Strong development capability

We have taken advantage of the significant talent pool within the universities and research institutes in Xi’an China, where our operations are located, to establish a dedicated research and development team. As of September 30, 2010, we had 97 engineers dedicated to technology development and customer implementations. Our development engineers have diverse technical backgrounds and are led by experienced development practitioners. We have been able to track and incorporate the latest technologies into our software to continuously improve our core middleware platform and applications, and to develop new functionalities.

Industry knowledge

We work closely with our customers to build upon our understanding of our customers’ operational processes and requirements. Our sales teams coordinate closely with our development teams to reflect those requirements in our solutions. As a result, our mobile enterprise solutions fit smoothly into our customers’ operations. In addition, our presence in the mobile enterprise solution market since its inception provides us with domain knowledge which we use to help position us for future growth. We are continually receiving feedback from this evolving market to anticipate emerging sectors and future product requirements.

Growing track record

In its January 2008 report, IDC forecasts the enterprise mobility market in China will reach $15.6 billion in 2011. Virtually all businesses and public service operations have the potential to experience efficiencies and new functionalities with mobile enterprise solutions. We have successfully completed projects for clients, such as the Central Government Security Bureau and Beijing Emergency Response Center, from many verticals. These serve as high-profile case studies and enhance our reputation in the marketplace and, thus, provide a key endorsement for the quality and stability of our product offerings. Moreover, by having our main corporate office in Xi’an, China, we have benefited from the continued surge in IT investment by the Western provinces.

Joint efforts with Chinese wireless telecom carriers

We benefit from joint business development efforts with China Telecom, China Mobile and China Unicom. These wireless telecom carriers have a strategic interest in the advancement of the mobile enterprise in China. Our sales professionals work closely with those companies to access their large pools of corporate customers. Together we make joint presentations to candidate customers, where the carrier will provide the wireless network and we will provide the mobile enterprise solution. We have unwritten cooperative relationships with all three telecom carriers to co-promote next-generation mobile solutions for various other applications in China. In addition we have a formal co-marketing agreement with China Telecom to co-promote next-generation mobile solutions for law enforcement applications in Shaanxi province. For the year ended September 30, 2010, we completed a total of 19 customer projects with the three telecom carriers. Typically under these arrangements, we jointly market our products and services for customer applications. Customers contract with the telecom carrier and we provide our solutions to the customer and receive our remuneration from the telecom carrier.

 
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Our Strategy

Seize the opportunity presented by 3G adoption in China

China’s legacy wireless networks (2G, 2.5G and 2.75G) have limited bandwidth and, consequently, limit the functional potential of mobile enterprise applications. Since the issuance of 3G licenses in January 2009, we have been working with wireless telecom carriers on joint marketing initiatives aimed at increasing the enterprise utilization of 3G. Our telecom partners are seeking new revenue streams to offset the diminishing opportunity for voice services, and we are offering solutions to enable wider forms of mobile computing that take advantage of the 3G bandwidth.

Recruit, train and retain engineering professionals

To sustain our high rate of growth, we must continue to add to our technical and business development teams through selective recruiting of university graduates and qualified lateral hires. Once employed, we provide our technical employees with a comprehensive training program to understand our technologies, market and product offerings.

Expand Operations

We purchased a six-story building in Xi’an to house anticipated expansion of our headcount and business activities. This building, which we named “Kingtone Center”, will house our headquarters and development teams, and provide dedicated facilities for customer demonstrations of our products and abilities. We believe Chinese customers have more confidence in the financial strength of businesses that have their own building. We expect the Kingtone Center to have a positive effect on our marketing and expansion activities.

Invest more in research and development to create more successful software products

To keep our competitive edge, we are launching a new research and development program to keep abreast of the latest developments in wireless standards and information management technologies, and to anticipate future customer needs. We also plan to invest in developing new applications for anticipated high-growth, vertical industry markets. Spending will be focused on testing equipment, including laboratories and 3G simulation systems, as well as expendable materials used during experiments. We plan to allocate a large portion of space in our new Kingtone Center facility to house our enlarged development team and increased research and development activities.

Pursue strategic acquisition opportunities

We will from time to time consider acquisitions or alliances that enable us to acquire talented and experienced software development personnel, enhance our technological capabilities and competitive advantages or provide licensing or recurring revenue opportunities, and propel our expansion.

Our Products and Solutions

We use various combinations of our existing middleware software modules, together with custom application software that we develop, to create a complete mobile enterprise software solution. For some customers, we provide the mobile enterprise software solution only. For other customers, we provide a complete wireless system solution, including mobile enterprise software and all hardware (our own plus third party hardware such as servers and wireless devices).

An example of our mobile enterprise software products is an insurance industry application that we developed with China Mobile. Our mobile enterprise software for this application enables an insurance company’s field personnel to receive their dispatch information and do accident reporting and claim processing while in the field. Form data is inputted electronically and high-resolution photos can be collected and filed over wireless, from the accident site. For this application, we provide the software only, while China Mobile provides hardware and the network services.
 
An example of our complete wireless systems (software and hardware) is a mobile video surveillance system that we developed for the Beijing Emergency Response Center. Using servers and cameras combined with our mobile enterprise software, we provided a complete wireless system that enables the Beijing Emergency Response Center to collect and monitor video from its patrol cars. This system can improve the speed and quality of the emergency response by enabling supervisors to more quickly and completely understand an emergency situation.

 
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Our mobile enterprise software consists of core middleware and a broad array of software applications. Our middleware serves as an intelligent platform that operates on top of our customers’ operating systems and management information systems. Our software applications can be integrated onto our middleware platform as well as attached mobile devices (mobile phones, PDAs, laptops, etc.) to perform essential tasks or extend our customers’ existing applications over wireless communications to fixed or mobile nodes. We have combined elements of both browser/server and client/server frameworks in our software design to allow for both reliable and flexible access by authorized personnel, virtually at anytime and from anywhere.

Core Middleware Platform

Our core middleware platform resides on the customers’ servers. It is comprised of two layers of modules. The General Purpose Layer consists of mandatory software modules required to support the application software plugged into the middleware platform. The Basic Layer modules are also mandatory components that perform basic functions, such as communicating with a variety of hardware and software platforms, computer operating systems, networking and database products, coordinating and synchronizing the tasks performed by our solutions, and adding information security to data transmission.

Software Applications

We have developed two types of software applications that can be selectively overlaid with the middleware to complete a packaged solution, namely, Information and Communication-Technology Converged, or ICT-converged, and Vertical Industry Applications.

ICT-converged applications perform generic functionalities that may be applied across multiple industries. Vertical Industry Applications, on the other hand, are non-generic and perform a specific task required by a particular industry. Both types of applications can reside on converged mobile devices (“Terminal-end Applications”), or on computer servers (“Server-end Applications”). Our Terminal-end Applications work on a variety of mobile devices and mobile operating systems.
 
In the terminal-end, we have information security, RFID, location-based service, steam media, information exchange, and management and configuration applications. The information security application encrypts or decrypts the information to ensure sensitive or classified information of our vertical industry customers can be transmitted over the public wireless telecommunication network safely. Installed with our RFID application and appropriate chips, a mobile phone can be turned into a RFID reader and writer for faster information input in certain vertical industry customers, such as the police and administration of industry and commerce. Our location-based service application enables a mobile phone to receive information relevant to its location. This application can greatly improve the operating efficiency of the mobile workforce of some of our vertical industry customers’ by pushing timely information to them. Our steam media application turns a mobile phone into a moveable video monitor and collector to facilitate decision-making by delivering live pictures anywhere anytime to the decision-maker. The information exchange application automatically synchronizes information in the mobile phone and in the back-end database.

Our Hardware Products

Portable Video Server .   Our portable video server for vehicles or individuals can be integrated into the overall solution or purchased separately to add live mobile video surveillance or transmission functions to our customers’ existing systems.

We design the server, including the breadboard, the layout of internal structures, the specifications of the electronic components, and the I/O specifications. We currently outsource the production of our hardware to third-party manufacturers. We program the embedded software and write the software into the portable video servers. We also program the software loaded on our customers’ central servers to work with our portable video servers. By using our portable video server solution, our customers enjoy higher quality video and experience better transmission compared to the generic webcam solutions available in the marketplace. Many industries and applications require this superior quality.

 
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Tailoring Our Solutions

Our engineers in our internal solution implementation department develop the tailored mobile enterprise solution according to our customer’s requirements. The tailored solution includes our core middleware platform and a selected combination of our software applications, and sometimes hardware we develop ourselves or outsource to third-party vendors. The tailored solution is delivered as a turn-key package.

Research and Development

At September 30, 2010, we had 97 engineers devoted to developing our software products. They are currently all located in our main corporate office in Xi’an, China.

Our success depends on continued enhancement of our current products and our ability to develop new technologically advanced products that meet the increasingly sophisticated requirements of our customers.  Our research and development center is responsible for conducting all of our basic research and development activities. The focus of our research and development personnel is on developing and improving our core middleware platform, our CIT-converged applications and our hardware products. Currently, there are 31 professionals in our research and development center, including two with doctorate degrees and two with other post-graduate degrees, with diverse backgrounds in computer science and technology, telecommunication engineering, software engineering and physical electronics.

We believe our professionals are adept at utilizing the latest technical developments in our industry to create new products and functionality. They also receive customer feedback from the sales and marketing team to develop applications demanded by our customers in certain sectors.

At September 30, 2010, we had 48 engineers in our Vertical Industry Application Development Department, which is responsible for developing vertical industry applications. At September 30, 2010, we had 18 engineers in our Automation Telematics Application Development Department that are responsible for developing automation telematics applications, which is a sub-group of vertical industry applications required by customers in manufacturing sectors with high degree of automation in their operations. Engineers in these two departments are also responsible for implementing the solutions for our customers.

Sales and Marketing

We sell our products and services mainly through our sales and marketing team, which is primarily based at our headquarters in Xi’an, China and our branch office in Beijing, China. We had 38 professionals in sales and marketing as of September 30, 2010.

To date, we have sold our mobile enterprise solutions to customers in 27 provinces, municipalities and autonomous regions in the PRC. In addition to those in Xi’an and Beijing, we have local sales teams that maintain close contact with our business partners and customers. We ensure that most of our sales and marketing professionals also have a technical background to make them competent for specialized IT sales, such as mobile enterprise solutions. Our sales and marketing professionals are organized into two teams: (i) Vertical Industry Application and (ii) Automation Telematics.

The Vertical Industry Application sales force targets general business and government customers. They work closely with sales professionals at China’s wireless telecommunication carriers (China Telecom, China Mobile and China Unicom), under general cooperation framework agreements to develop new customers. We believe the carriers are motivated to improve their average revenue per user, or APRU, by selling integrated services to enterprise customers. However, they generally lack the ability to develop applications to overlay on their basic data communication network. In most cases, the carriers directly contract with us to provide the wireless application solution. In other cases, we sell directly to our enterprise customers or are engaged as a sub-contract or by other IT companies with the customer relationship.

Our Automation Telematics Application sales team focuses on industrial automation projects. These are mainly factory-specific wireless solutions that enable automated or semi-automated factory production lines, using our proprietary middleware and wireless capability. Automation Telematics utilizes wireless over short distances in a wide variety of usages that enable great automation control and production line monitoring and management. For such projects, typically we are contracted directly by the project owners or sub-contracted by the general contractors to provide automation telematics solutions. In most cases, building our software into large and complex physical systems (such as automated production lines) enables us to make a greater profit than if we sold our software independently.

 
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Sales Process

Our sales process begins by explaining to our potential customers the benefit of our wireless application products to the customer’s particular business. Some companies seek mobile functionality for their sales force, others seek cross-company, real-time networking across all fixed and mobile nodes, while others seek a particular functionality specific to their own trade or business. Our team first seeks to understand each company’s particular needs and then develops a product design proposal. For each project or mandate, we will typically compete against several other companies in an open bid invitation process.

Major Customers

In the years ended September 30, 2010 and 2009, we derived a material portion of our revenues from a small number of customers. In particular, a single customer, Shaanxi Yanchang Petroleum Group, provided approximately $2.2 million and $5.0 million, respectively, of our revenue, representing 15.2% and 44.7%, respectively, of our total annual revenue. The material terms of our two largest contracts with such customers are summarized below.

On October 15, 2008, Kingtone Information entered into an Installation and Construction Subcontract, to act as a subcontractor with The Refine Chemical Company of Shaanxi Yanchang Petroleum Group, as construction party and Shaanxi Chemical Construction Co., Ltd., as general contract party. Pursuant to the agreement, Kingtone Information was subcontracted to contribute to the project named “HuiJiaHe Petroleum Product Adjusting Supply Renovation Instrument and Control System and Control System Full Installation and System Adjusting of Yangzhuanghe Refine Chemical Project System.” The term of the project, as set forth in the agreement, is from October 15, 2008 through January 31, 2009 for a fixed amount payable to Kingtone Information of RMB 21,600,000 (approximately $3.2 million) before the deduction of administrative fees, tax and utility fees (2.5% of the fixed amount). The project was completed and all sums were paid.

On April 30, 2009, Kingtone Information, as the supplier, entered into a Material Purchase Contract with Xi’an Product Petroleum Pipe Transportation Project Management Department of Shaanxi Huajian Yelian, as the purchaser. Pursuant to the agreement, Kingtone Information supplied a series of software and facilities to the purchaser for a total price of RMB12,200,000 (approximately $1.8 million). According to the agreement, Kingtone Information was required to deliver the subject items by June 25, 2009. The agreement has a one-year warranty period. The project was completed and all sums were paid.

In the year ended September 30, 2009, we derived revenue of $1.1 million, or 10.2% of our total revenue, from sales to Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd., which is a related party. We did not have any related party revenue in the year ended September 30, 2010.

Competition

The wireless applications software market is currently a highly-fragmented industry with many players offering industry-specific solutions. We compete with a variety of different companies, some of which do not have a proprietary wireless platform and must therefore outsource and/or do more development and testing. Other companies have developed a wireless system for a single application that is not widely adaptable to usages across many industries. We believe one of our competitive advantages is the versatility of our platform, which allows for its application across numerous industries without significant ground-up redevelopment for each customer.

Our main competitors in the wireless application market in China are:
 
 
·
International IT consulting and service providers that have a strong foothold in customized enterprise software and information system design and implementation, such as Syclo and Accenture;

 
·
International mobile enterprise software and solution providers that have a significant presence in China, such as Sybase and CDC Software; and

 
·
Domestic mobile enterprise solution developers, such as Beijing Silu Innovation Technology Co., Ltd., a mobile application provider that focuses solely on environmental protection areas, and Cyber Technologies (Suzhou) Co., Ltd., a wireless application software and IT service provider that focuses solely on the public securities areas.

 
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We believe we have a superior understanding of our vertical industry markets compared to our international competitors and that our software products have much wider application areas than those of our domestic competitors. We also bring mobile applications to industrial automation management and control, an area in which we believe we have a higher level of sophistication than our competitors.

Intellectual Property

We have registered the following software copyrights, patents and trademarks for our business operations. We believe this intellectual property forms an integral part of our competitive strength.

Patents:

Through Kingtone Information, we have been granted one invention patent by the State Intellectual Property Office (“SIPO”) of PRC on September 23, 2009. This patent is “wireless video transmission system based on BREW platform”. The patent code is ZL 200710018138.4. We enjoy a 20-year protection period starting from the issuance date of the patent.

We have also applied for a number of invention patents with SIPO. We have received letters of substantive examination of patent for invention application from SIPO, which is the last step before patents can be issued. The following table summarizes these pending patents as of September 30, 2010:
 
Name of Invention
 
Application
Number
 
Publication
Number
 
Publication
Date
BREW platform based audio-video collection and wireless transmission system
 
200710018505.0
  101159864  
April 9, 2008
             
WINCE platform based audio-video collection and wireless transmission system
 
200710018506.5
  101159865  
April 25,
2008
             
Wireless video transmission system based on Arena platform
 
200810150745.0
  101420597  
April 29,
2009
             
Multilink wireless mobile industrial management and control integrated data transmission system
 
200810150072.9
  101345764  
January 14,
2009
             
Video monitoring information interaction system based on Symbian platform
 
200810150746.5
  101420598  
April 29,
2009
 
We also have applied for a utility model patent with SIPO (application number: 200820228566.X) and have received the notice from SIPO to grant us this patent on September 4, 2009. The name of this utility model invention is “Multi-business Data Collection Equipment”.

Software Copyrights:

Through Kingtone Information, we have received the following software copyrights from the National Copyright Administration (“NCA”) of PRC:
 
Name of Software
  
Registration
Number
  
Date of Issuance
Wireless video monitoring system V1.0
 
2007SR12909
 
August 28, 2007
         
RFID based wireless transportation administration monitoring system V1.0
 
2007SR17240
 
November 1, 2007
         
Wireless emergency command and management system V1.0
 
2008SR04120
 
February 26, 2008
         
Mobile industry management and control integrated system V1.0
 
2008SR18892
 
September 10, 2008
         
Wireless mobile news dispatches system V1.0
 
2008SR18893
 
September 10, 2008
         
Wireless police affairs system V1.0
 
2009SR04756
 
November 10, 2009
         
Wireless OA system V1.0
 
2009SR07729
 
February 25, 2009
 
 
34

 

Trademarks:

We have registered the following trademarks with the Trademark Office, State Administration for Industry and Commerce in the PRC:
 
Registered Trademark
 
Registration
Number
 
Classification
Number
 
Valid Period
联合寻呼
 
1639871
 
38*
 
September 21, 2001 to September 20, 2011
KingTone
 
3559772
 
9*
 
November 28, 2004 to November 27, 2014
KingTone
 
4392291
 
42*
 
July 28, 2008 to July 27, 2018
联合信息
 
6484024
 
38*
 
April 7, 2010 to April 6, 2020
联合
 
6484025
 
38*
 
March 28, 2010 to March 27, 2020
 

*
See the footnotes to the table below for an explanation of each classification number used in the table above.
 
We have submitted applications for the following trademarks to the Trademark Office of State Administration for Industry and Commerce in the PRC:
 
Pending Trademark
  
Application Number
  
Classification
Number
  
Application Date
  
Date of Acceptance
for Application
 
7402901
 
9*
 
May 18, 2009
 
June 4, 2009
联合信息
 
7402911
 
35*
 
May 18, 2009
 
June 4, 2009
联合信息
 
7402912
 
37*
 
May 18, 2009
 
June 4, 2009
联合信息
 
7402913
 
42*
 
May 18, 2009
 
June 4, 2009
联合信息
 
7402914
 
9*
 
May 18, 2009
 
June 4, 2009
 
7402915
 
41*
 
May 18, 2009
 
June 4, 2009
 
7402916
 
45*
 
May 18, 2009
 
June 4, 2009
 
 
35

 

Pending Trademark
  
Application Number
  
Classification
Number
  
Application Date
  
Date of Acceptance
for Application
 
7402917
 
35*
 
May 18, 2009
 
June 4, 2009
 
7402918
 
37*
 
May 18, 2009
 
June 4, 2009
 
7402919
 
42*
 
May 18, 2009
 
June 4, 2009
 
7402920
 
38*
 
May 18, 2009
 
June 4, 2009
“KINGTONE
INFORMATION”
 
7402925
 
41*
 
May 18, 2009
 
June 4, 2009
“KINGTONE
INFORMATION”
 
7402926
 
45*
 
May 18, 2009
 
June 4, 2009
“KINGTONE
INFORMATION”
 
7402927
 
37*
 
May 18, 2009
 
June 4, 2009
“KINGTONE
INFORMATION”
 
7402928
 
9*
 
May 18, 2009
 
June 4, 2009
联合信息
 
7402929
 
41*
 
May 18, 2009
 
June 4, 2009
联合信息
 
7402930
 
45*
 
May 18, 2009
 
June 4, 2009


* See below for an explanation of each classification number used in the table above.
 
Classification No. 9:  data processing apparatus, couplers (data processing equipment), computer software (recorded), monitors (computer programs), smart cards (integrated circuit cards), electro-dynamic apparatus for the remote control of signals, alarms, and electric installations for the remote control of industrial operations.

Classification No. 35:  auctioneering, sales promotion for others, marketing analysis, marketing research, import-export agencies, advisory services for business management, business management for franchise, personnel management consultancy, relocation services for businesses, and systemization of information into computer databases.

Classification No. 37:  building construction supervision, electric appliance installation and repair, installation, maintenance and repair of computer hardware, interference suppression in electrical apparatus, machinery installation, maintenance and repair, burglar alarm installation and repair, and telephone installation and repair.

Classification No. 38:  message sending, telephone communication, cellular telephone communication, communications by computer terminals, computer aided transmission of messages and images, electronic mail, information about telecommunication, and providing telecommunications connections to a global computer network.

Classification No. 41:  instruction services, teaching, education information, tuition, arranging and conducting of colloquiums, publication of electronic books and journals on-line, amusements, and vocational guidance.
 
Classification No. 42:  technical research, studies (technical project), computer software design, updating of computer software, recovery of computer data, computer systems analysis, installation of computer software, computer anti-virus protection, and research and development for others.
 
Classification No. 45:  security consultancy, monitoring of burglar and security alarms, computer software permit (legal service), factory security inspection, household service security consultancy, copyright management, and baggage examination for safety.

 
36

 

Business Certificates and Qualifications

We have obtained all necessary regulatory certifications to conduct our business, including without limitation, the following: Software Enterprise Recognition Certificate, Computer Information System Integration Qualification Certificate, Construction Enterprise Qualification Certificate, and Security Technology & Protection Enterprise Certificate. We have also been properly certified as a high-tech enterprise and met the ISO 9001:2000 qualification management system.

Legal Proceedings

Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we do not believe that we are a party to any litigation that will have a material adverse impact on our financial condition or results of operations. We are not aware of any significant legal or governmental proceedings against us, or contemplated to be brought against us.
 
C.   ORGANIZATIONAL STRUCTURE

The following diagram illustrates our corporate structure and the place of formation and affiliation of each of our subsidiaries and affiliates.


Contractual Arrangements with Kingtone Information and Its Respective Shareholders

Our relationship with Kingtone Information and each of its respective shareholders is governed by a series of contractual arrangements. Some of the businesses in which Kingtone Information is engaged deal with classified government information in China. Current PRC laws and regulations do not allow companies with foreign equity holders to carry out such business activities. If we had a direct or indirect ownership in Kingtone Information, it could materially and adversely affect Kingtone Information’s ability to perform existing contracts and to win future contracts. Therefore, Softech and Kingtone Information entered into the following contractual arrangements to allow us to effectively control Kingtone Information but without violating relevant PRC laws and regulations. Under PRC laws, each of Softech and Kingtone Information is an independent legal person and neither of them is exposed to liabilities incurred by the other party. Pursuant to the contractual arrangements between Softech and Kingtone Information, as applicable, Kingtone Information transfers any and all net profits generated from its operations to Softech. Effective December 15, 2009, Softech entered into several control agreements with Kingtone Information, which agreements are summarized below.

 
37

 

Entrusted Management Agreement

Pursuant to the terms of a certain Entrusted Management Agreement dated December 15, 2009 among Kingtone Information, Softech and the shareholders of Kingtone Information (the `Entrusted Management Agreement`), Kingtone Information and its shareholders agreed to entrust the operations and management of  its business to Softech. According to the Entrusted Management Agreement, Softech possesses the full and exclusive right to manage Kingtone Information’s operations, assets and personnel, has the right to control all of Kingtone Information's cash flows through an entrusted bank account, is entitled to Kingtone Information's net profits as a management fee, is obligated to pay all of Kingtone Information’s payables and loan payments, and bears all losses of Kingtone Information. The Entrusted Management Agreement will remain in effect until (i) the parties mutually agree to terminate the agreement, (ii) the dissolution of Kingtone Information or (iii) Softech acquires all of the assets or equity of Kingtone Information (as more fully described below under “Exclusive Option Agreement”). Prior to that acquisition, Kingtone Information will continue to own all of its assets. We anticipate that Kingtone Information will continue to be the contracting party under its customer contracts, banks loans and certain other assets until such time as those may be transferred to Softech.
 
Exclusive Technology Service Agreement

Pursuant to the terms of a certain Exclusive Technology Service Agreement dated December 15, 2009 between Kingtone Information and Softech (“the Exclusive Technology Services Agreement”), Softech is the exclusive technology services provider to Kingtone Information. Kingtone Information agreed to pay Softech all fees payable for technologies services prior to making any payments under the Entrusted Management Agreement. Any payment from Kingtone Information to Softech must comply with applicable Chinese laws. Further, the parties agreed that Softech shall retain sole ownership of all intellectual property developed in connection with providing technology services to Kingtone Information. The Exclusive Technology Services Agreement shall remain in effect until (i) the parties mutually agree to terminate the agreement, (ii) the dissolution of Kingtone Information or (iii) Softech acquires Kingtone Information (as more fully described below under “Exclusive Option Agreement”).

Shareholders’ Voting Proxy Agreement

Pursuant to the terms of a certain Shareholders’ Voting Proxy Agreement dated December 15, 2009 among Softech and the shareholders of Kingtone Information (the “Shareholders’ Voting Proxy Agreement”), each of the shareholders of Kingtone Information irrevocably appointed Softech as their proxy to exercise on each of such shareholder’s behalf all of their voting rights as shareholders pursuant to PRC law and the Articles of Association of Kingtone Information, including the appointment and election of directors of Kingtone Information. Softech agreed that it shall maintain a board of directors the composition of which will be the members of the board of directors of Kingtone Wireless, except those directors that are employed solely for the purpose of satisfying listing or financing requirements of Kingtone Wireless. The Shareholders’ Voting Proxy Agreement will remain in effect until Softech acquires all of the assets or equity of Kingtone Information.

Exclusive Option Agreement

Pursuant to the terms of a certain Exclusive Option Agreement dated December 15, 2009 among Softech, Kingtone Information and the shareholders of Kingtone Information (the “Exclusive Option Agreement”), the shareholders of Kingtone Information granted Softech an irrevocable and exclusive purchase option (the “Option”) to acquire Kingtone Information’s equity interests and/or remaining assets, but only to the extent that the acquisition does not violate limitations imposed by PRC law on such transactions. As discussed above, current PRC law does not allow foreigners to hold equity interests in a PRC entity that engages in business dealings with classified government information. Accordingly, the Option is exercisable at any time at Softech’s discretion so long as such exercise and subsequent acquisition of Kingtone Information does not violate PRC law. The consideration for the exercise of the Option is to be determined by the parties and memorialized in the future by definitive agreements setting forth the kind and value of such consideration. To the extent Kingtone Information shareholders receive any of such consideration, the Option requires them to transfer (and not retain) the same to Kingtone Information or Softech. The Exclusive Option Agreement may be terminated by mutual agreement or by 30 days written notice by Softech.

 
38

 

Equity Pledge Agreement

Pursuant to the terms of a certain Equity Pledge Agreement dated December 15, 2009 among Softech and the shareholders of Kingtone Information (the “Pledge Agreement”), the shareholders of Kingtone Information pledged all of their equity interests in Kingtone Information, including the proceeds thereof, to guarantee all of Softech's rights and benefits under the Entrusted Management Agreement, the Exclusive Technology Service Agreement, the Shareholders’ Voting Proxy Agreement and the Exclusive Option Agreement. Prior to termination of the Pledge Agreement, the pledged equity interests cannot be transferred without Softech's prior written consent. The Pledge Agreement may be terminated only upon the written agreement of the parties.

Call Option Agreements between Xtra Heights Management Ltd. and Certain Shareholders of Kingtone Information

In connection with our December 2009 reorganization, twelve individual shareholders (listed below) of Kingtone Information (individually a “Purchaser” and collectively the “Purchasers”) each entered into a Call Option Agreement (collectively the “Call Option Agreements”) with Xtra and its sole shareholder Sha Li (collectively the “Seller”) dated as of December 15, 2009. Pursuant to the terms and conditions of the Call Option Agreements, the Purchasers are entitled to purchase up to an aggregate of 6,806,250 ordinary shares of our company from the Seller at a price of $0.001 per share. Specifically, (i) if the Purchasers enter into an employment agreement to serve for Softech for a term of not less than five years, the Purchasers are entitled to purchase up to 3,403,125 ordinary shares from the Seller; (ii) if Softech achieves not less than $500,000 in consolidated after-tax net income as determined under US GAAP for the fiscal year ending September 30, 2010, the Purchasers are entitled to purchase up to 1,361,250 ordinary shares from the Seller; (iii) if Softech achieves not less than $1,000,000 in consolidated after-tax net income as determined under US GAAP for the fiscal year ending September 30, 2011, the Purchasers are entitled to purchase up to 1,361,250 ordinary shares from the Seller; and (iv) if Softech achieves not less than $2,000,000 in consolidated after-tax net income as determined under US GAAP for the fiscal year ending September 30, 2012, the Purchasers are entitled to purchase up to 680,625 ordinary shares from the Seller. Under the Call Option Agreements, the Seller also irrevocably appoints each corresponding Purchaser with the exclusive right to exercise, on its behalf, all of the voting rights of the Seller’s shares. Additionally, the Call Option Agreements grant the Purchasers the right to all distributions made by us, including without limitation, dividends, in respect of the Seller’s shares.

The Purchasers entered into the Call Option Agreements upon terms substantially similar to the terms set forth in that certain Term Sheet, dated October 27, 2009, between the Purchasers and Ms. Sha Li.

The twelve Purchasers are (i) Tao Li, our chairman, (ii) Peng Zhang, our chief executive officer, (iii) Li Wu, a member of our board of directors and our former chief financial officer, (iv) Jun Ma, our former chief technology officer, (v) Pengguo Xi, our vice president of research and development, (vi) Xianying Chen, our vice president of application development, and (vii) Jian Ping Li, Wei Pu, Wei Wang, Wei Zhang, Xiao Bin Zhang, and Yu Fan Zhang, all of whom are employees of Softech.
 
D.  PROPERTY, PLANTS AND EQUIPMENT

We operate out of the office located at 3/F, Area A, Block A, No. 181 South Taibai Road in Xi’an. We own our office space, which covers a floor space of 3,022.94 square meters.

Our Beijing branch office is located at Room 2208 and 2209 at Building 16, An Hui Dong Li, Chaoyang District, Beijing. It covers a floor space of 184.81 square meters. Our chairman Mr. Tao Li owns this space. We pay no consideration for the use of this space.

In April 2008, we purchased an approximately 20,000 square meter six-story warehouse and industrial facility in Xi’an, which we named the “Kingtone Center”. We have paid the entire purchase price and obtained both the property ownership certificate and land ownership certificate from the provincial government. We are now in the interior design phase of refurbishing the Kingtone Center. The building will house over 500 employees in three years as business expands with an upgraded research & development center and a centralized customer support center. It will also assist sales and marketing with showrooms for demo applications.

 
39

 

ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
A . OPERATING RESULTS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such our anticipated growth strategy, our plans to recruit more employees, our plans to invest in research and development to enhance our product or service lines, our future business development, results of operations and financial condition, expected changes in our net revenues and certain cost or expense items, our ability to attract and retain customers, trends and competition in the enterprise mobile software application market, and the factors set forth elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements. In light of those risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur. You should not place undue reliance on the forward-looking statements contained in this report.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by U.S. federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.  Further, the information about our intentions contained in this report is a statement of our intention as of the date of this report and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices and our assumptions as of such date.  We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; and (iii) “RMB”, “Yuan” and Renminbi are to the currency of the PRC or China.

Overview

Kingtone Wireless was incorporated on October 27, 2009 under the laws of the British Virgin Islands and acts as a holding company. We conduct substantially all of our operations through our contractually-controlled PRC entity, Kingtone Information, which focuses on developing mobile enterprise solutions in China. We provide a suite of applications that enable mission-specific field and long-distance information management in wireless environments.

Kingtone Information commenced its current line of business in 2001 as an industrial automation management and control software system developer. We subsequently developed a core middleware platform consisting of standardized modules. This core middleware platform allows our solutions to seamlessly integrate with our customers’ existing information management systems. The core middleware platform can host an array of standardized and scalable applications developed by us. This structured design allows us to timely and cost-effectively meet our customers’ specific requirements and respond to their operational changes. Customized packages of our middleware platform and applications are marketed as tailored solutions to business and government customers of all kinds.

Due to the recent deployment of 3G telecommunication networks in China, demand for wireless enterprise application solutions has grown exponentially. We believe we are well positioned to capitalize on this market trend to further expand our market share and grow our revenue and profits.  Please see “Item 5 – Operating and Financial Review and Prospects – D. Trend Information” for more information in this regard.

 
40

 

Background

In December 2009, through one of our subsidiaries, we entered into a series of agreements with Kingtone Information, establishing Kingtone Information as our contractually-controlled variable interest entity, or VIE. Kingtone Information was formed on December 28, 2001 and its financial statements are presented on a fiscal year-end September 30 basis. In March 2010, we changed our fiscal year-end from November 30 to September 30, so we have the same fiscal year end with Kingtone Information. Although we are filing this transition report on Form 20-F for the transition period from December 1, 2009 to September 30, 2010 to reflect our change of fiscal year, Kingtone Wireless had no operations other than those of its VIE, Kingtone Information, from October 1, 2009 to November 30, 2009. In addition, the consolidated and combined statements of income and comprehensive income and cash flows for the years ended November 30, 2009 and 2008 included Kingtone Information for the years ended September 30, 2009 and 2008. Therefore we are presenting our consolidated and combined statements of income and comprehensive income and cash flows for the years ended September 30, 2010, 2009 and 2008 instead of for the ten months ended September 30, 2010 and the years ended November 30, 2009 and 2008.

Results of Operations for the fiscal year ended September 30, 2010 compared to fiscal year ended September 30, 2009.

The following table sets forth key components of our results of operations for the periods indicated, in thousands of dollars and percentage of revenue and changes.
 
   
For the Years Ended September 30
       
  
 
2010
   
2009
   
Changes
 
  
 
($ in Thousands, Except per Share Data)
       
Revenue
  $ 14,506       100.0 %   $ 11,240       100.0 %     29.1 %
Cost of sales
    2,352       16.2 %     3,894       34.6 %     -39.6 %
Gross profit
    12,154       83.8 %     7,346       65.4 %     65.5 %
Operating expenses
                                       
Selling and marketing expenses
    341       2.4 %     350       3.1 %     -2.6 %
General and administrative expenses
    1,635       11.3 %     537       4.8 %     204.5 %
Research and development expense
    179       1.2 %     139       1.2 %     28.8 %
Total operating expenses
    2,155       14.9 %     1,026       9.1 %     110.0 %
Income from operations
    9,999       68.9 %     6,320       56.2 %     58.2 %
Other income (expense)
                                       
Subsidy income
    44       0.3 %     307       2.7 %     -85.7 %
Interest expense
    (218 )     -1.5 %     (340 )     -3.0 %     -35.9 %
Other income (expense)
    20       0.1 %     (55 )     0.5 %     -136.4 %
Total other income (expense)
    (154 )     -1.1 %     (88 )     -0.8 %     74.6 %
Income before income tax expenses
    9,845       67.9 %     6,232       55.4 %     58.0 %
Income tax expenses
    1,608       11.1 %     935       8.3 %     72.0 %
Net income
  $ 8,237       56.8 %   $ 5,297       47.1 %     55.5 %
Other comprehensive income
                                       
Foreign currency translation gain
    598       4.1 %     22       0.2 %     2,618.2 %
Comprehensive income
  $ 8,835       60.9 %   $ 5,319       47.3 %     66.1 %
Net earnings per ordinary share:
                                       
Basic and Diluted
  $ 0.71             $ 0.53               34.9 %
Weighted average number of ordinary shares outstanding
    11,527,473               10,000,000               15.3 %

 
41

 

The following is a breakdown of our revenue, cost of sales and gross margin for the years indicated, in thousands of dollars, and our respective gross margin percentages and changes.
   
For the Years Ended September 30
       
  
 
2010
   
2009
   
Changes
 
  
 
($ in Thousands, Except per Share Data)
   
 
 
Revenue
                             
Software
  $ 11,272       77.7 %   $ 5,170       46.0 %     118.0 %
Wireless system solutions
    3,234       22.3 %     6,070       54.0 %     -46.7 %
Total Revenue
    14,506       100.0 %     11,240       100.0 %     29.1 %
Cost of Sales
                                       
Software
    903       38.4 %     476       12.2 %     89.7 %
Wireless system solutions
    1,449       61.6 %     3,418       87.8 %     -57. 6 %
Total Cost of Sales
    2,352       100.0 %     3,894       100.0 %     -39.6 %
Goss Profit
                                       
Software
    10,369       85.3 %     4,694       63.9 %     120.9 %
Wireless system solutions
    1,785       14.7 %     2,652       36.1 %     -32.7 %
Total Gross Profit
    12,154       100.0 %     7,346       100.0 %     65.5 %
Gross Margin
                                       
Software
            92.0 %             90.8 %        
Wireless system solutions
            55.2 %             43.7 %        
Blended Gross Margin
            83.8 %             65.4 %        

Revenue

We are a China-based developer and provider of mobile enterprise solutions. We generate revenue in two ways, from customized software middleware and applications for varies public and private service agencies, which we identify as software solution sales, and from packaged solutions that include both software and hardware in automation telematics for clients mainly in the manufacturing sector, which we identify as wireless system solution sales. In the past two years, we have experienced rapid growth and significantly expanded our business. Our revenue grew by 29.1% to approximately $14.5 million in the year ended September 30, 2010 from approximately $11.2 million in the year ended September 30, 2009.

Our revenue from software solution sales grew by 118.0% to approximately $11.3 million in the year ended September 30, 2010 from approximately $5.2 million in the year ended September 30, 2009. As a percentage of total revenue, software solution sales grew from 46.0% to 77.7%. The significant growth of our software solution revenue was mainly driven by increased sales of mobile enterprise applications to police and emergency agencies in new geographic areas.

 
42

 

Our revenue from wireless system solution sales decreased by 46.7% to approximately $3.2 million in the year ended September 30, 2010 from approximately $6.1 million in the year ended September 30, 2009. This decrease was driven primarily by two factors: (i) we had smaller contract value and less recognizable revenue with one existing customer in the oil refinery industry, Shaanxi Yanchang Petroleum (Group) CO., LTD (“Yanchang”), even though the number of contracts with its different subsidiaries have increased, and (ii) in the prior year, we completed two related party transactions with Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. (“Techteam”).  See “Item 7 – Major Shareholders and Related Party Transactions – B. Related Party Transactions.”. Without the $1.1 million revenue from these two related party transactions from the prior year, the third-party revenue from wireless system solution sales decreased 34.3% from a year ago even though there were more contracts with smaller amounts completed in the year ended September 30, 2010. As a percentage of total revenue, wireless system solution revenue decreased from 54.0% to 22.3% of our total revenue.

In the year ended September 30, 2010, approximately $2.2 million of our total revenue was derived from seven contracts with Yanchang, representing 15.2% of our total revenue, or 68.0% of our wireless system solution revenue. In the year ended September 30, 2009, approximately $5.0 million of our revenue was derived from four contracts with Yanchang, representing 44.7% of our total revenue, including approximately $0.8 million in revenue from one contract in software sales, representing 15.4% of our software revenue, and approximately $4.2 million in revenue from three contracts in wireless system solution sales, representing 69.6% of our wireless system solution revenue.

In the year ended September 30, 2009, we derived approximately $1.1 million of our total revenue from two contracts with Techteam, an indirect subsidiary of China Green Agriculture, Inc. (“CGA”), a company that is majority-owned by Mr. Tao Li, our chairman, and whose chairman, president and chief executive officer is Mr. Li. This revenue represented 10.2% of our total revenue and 18.9% of our revenue from wireless system solutions sales in the year ended September 30, 2009. In the year ended September 30, 2010, we did not have any sales to such related parties

Cost of Sales

Our cost of sales decreased by 39.6% to approximately $2.4 million in the year ended September 30, 2010 from approximately $3.9 million in the year ended September 30, 2009. The decrease in our cost of sales was largely due to the decrease in revenue from higher-cost wireless system solutions. As a percentage of our total revenues, our cost of sales decreased to 16.2% of revenues in the year ended September 30, 2010 from 34.6% of our total revenues in the year ended September 30, 2009.

Cost of sales for software increased by 89.7% to approximately $0.9 million in the year ended September 30, 2010 from approximately $0.5 million in the year ended September 30, 2009, representing 38.4% and 12.2% of our total cost of sales and 8.0% and 9.2% of our software revenue in the fiscal years ended September 30, 2010 and 2009, respectively. Cost of sales for wireless system solutions decreased by 57.6% to approximately $1.4 million in the year ended September 30, 2010 from approximately $3.4 million in the year ended September 30, 2009, representing 61.6% and 87.8% of total cost of sales and 44.8% and 56.3% of wireless system solution revenues in the fiscal years ended September 2010 and 2009, respectively.

Gross Margin

Our total gross profit increased by 65.5% to approximately $12.2 million in the year ended September 30, 2010 from approximately $7.3 million in the year ended September 30, 2009. Our total gross margin was 83.8% and 65.4% in the years ended September 30, 2010 and 2009, respectively. The improvement in our gross margin was mainly caused by a favorable shift in our product/service mix in fiscal 2010 as we increased the proportion of our total revenue derived from higher-margin software solution sales.

Our gross margin for software solution sales increased by 120.9% to approximately $10.4 million in the year ended September 30, 2010 from approximately $4.7 million in the year ended September 30, 2009. Our gross margin for software solutions sales increased to 92.0% in the year ended September 30, 2010 from 90.8% in the year ended September 30, 2009. This increase of gross margin was primarily due to the adaptability of our existing platform which we can configure and tailor without significant additional expenditure.

 
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Our gross profit for wireless system solution sales decreased by 32.7% to approximately $1.8 million in the year ended September 30, 2010 from approximately $2.7 million in the year ended September 30, 2009. Our gross margin for wireless system solution sales increased to 55.2% in the year ended September 30, 2010 from 43.7% in the year ended September 30, 2009. The increase in gross margin was mainly attributable to a shift in our business strategy to use less purchased hardware in our wireless system solution sales in fiscal 2010.

Operating Expenses

Selling and Marketing Expenses

Our selling and marketing expenses decreased by 2.6% to approximately $0.34 million in fiscal 2010 from approximately $0.35 million in fiscal 2009, and represented 2.4% and 3.1% of our revenue for the years ended September 30, 2010 and 2009, respectively. Selling and marketing expenses consisted primarily of compensation and benefit expenses relating to our sales and marketing personnel, travel and communication expenses, and selling and marketing-related office expenses.

Although our revenue increased significantly from fiscal year 2009 to fiscal year 2010, our selling and marketing expenses remained flat because our sales and marketing team improved their efficiency while remaining roughly the same size. We expect our selling and marketing expenses to increase in the near future as we increase our business development efforts, hire additional sales personnel, target additional customers and initiate additional marketing programs to further build our brand. However, we expect our selling and marketing expenses as a percentage of revenue to decrease because we believe our revenue will grow at a faster pace.

General and Administrative Expenses

Our general and administrative expenses increased by 204.5% to approximately $1.6 million in fiscal 2010 from approximately $0.54 million in fiscal 2009, and represented 11.3% and 4.8% of our revenue for the years ended September 30, 2010 and 2009, respectively. General and administrative expenses consist primarily of compensation and benefit expenses relating to personnel other than our engineers and our sales and marketing team, depreciation and amortization expenses and overhead expenses. General and administrative expenses also include legal and other professional fees, share-based compensation and other miscellaneous administrative costs. We expect our general and administrative expenses to increase significantly from the year ended September 30, 2010 level as we will incur our first full year of costs to comply with the requirements imposed on a public company in the U.S. and we expect to incur costs to conduct financing and investor relations activities. As a percentage of revenue, we expect our general and administrative expenses in fiscal 2011 to remain at about the same level as in the year ended September 30, 2010.

Research and Development Expenses

Our research and development expenses increased 28.8% to approximately $0.18 million in fiscal 2010 from approximately $0.14 million in fiscal 2009, and represented 1.2% of our revenue for both of the years ended September 30, 2010 and 2009. Research and development expenses consist primarily of compensation and benefit expenses relating to engineers in our research and development center, materials cost in research and development activities, and depreciation and amortization expenses relating to our research and development center. We plan to increase the size of our research and development team and have budgeted a significant portion of our projected cash flow during the near future and a portion of the proceeds from the May 2010 public offering of our American Depositary Shares, or ADSs, for developing new software solutions, as well as to better equip our research and development center to maintain our technological edge in our industry. Therefore, we expect our research and development expenses will increase in both dollar amount and as a percentage of our revenue.

Income from Operations

Income from operations grew 58.2% to approximately $10.0 million in the year ended September 30, 2010 from approximately $6.3 million in the year ended September 30, 2009. The growth of income from operations was mainly attributed to the growth in our revenue.

Net Income

Net income grew by 55.5% to approximately $8.2 million in the year ended September 30, 2010 from approximately $5.3 million in the year ended September 30, 2009. The growth of net income was mainly attributed to the growth in our revenue.

 
44

 

Results of Operations for the fiscal years ended September 30, 2009 compared to fiscal year ended September 30, 2008.

The following table sets forth key components of our results of operations for the periods indicated, in thousands of dollars and percentage of revenue and changes.

   
For the years ended September 30,
       
    
2009
   
2008
   
Varian ce (%)
 
    
( $ in thousands, except per share data)
             
                               
Revenues
  $ 11,240       100.0 %   $ 4,286       100.0 %     162.2 %
Cost of sales
    3,894       34.6 %     1,621       37.8 %     140.2 %
Gross profit
    7,346       65.4 %     2,665       62.2 %     175.6 %
                                         
Operating expenses
                                       
Selling and marketing expenses
    350       3.1 %     301       7.0 %     16.3 %
General and administrative expenses
    537       4.8 %     355       8.3 %     51.3 %
Research and development expenses
    139       1.24 %     79       1.84 %     75.9 %
Totoal operating expenses
    1,026       9.1 %     735       17.1 %     39.6 %
Income from operations
    6,320       56.2 %     1,930       45.0 %     227.5 %
                                         
Other income (expense)
                                       
Subsidy income
    307       2.7 %     163       3.8 %     88.3 %
Interest expense
    (340 )     -3.0 %     (531 )     -12.4 %     -36.0 %
Other income (expense)
    (55 )     -0.5 %     (356 )     -8.3 %     -84.6 %
Total other income (expense)
    (88 )     -0.8 %     (724 )     -16.9 %     -87.8 %
Income before income tax expenses
    6,232       55.4 %     1,206       28.1 %     416.7 %
Income tax expenses
    935       8.3 %     191       4.5 %     389.5 %
Net income
  $ 5,297       47.1 %   $ 1,015       23.7 %     421.9 %
Other comprehensive income
                                       
Foreign currency translation gain
    22       0.2 %     544       12.7 %     -96.0 %
Comprehensive income
  $ 5,319       47.3 %   $ 1,559       36.4 %     241.2 %
                                         
Earnings per common share:
                                       
Basic and Diluted
  $ 0.53             $ 0.10               430.0 %
                                         
Weighted average number of ordinary shares outstanding
                                       
Basic and Diluted
    10,000,000