ALBERT LUNG
650.843.7263
alung@morganlewis.com
MARCH 8, 2011
VIA EDGAR, ELECTRONIC MAIL AND FEDERAL EXPRESS
KATHLEEN COLLINS, ACCOUNTING BRANCH CHIEF
DIVISION OF CORPORATION FINANCE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
JUDICIARY PLAZA
450 FIFTH STREET, N.W.
WASHINGTON, DC 20549-0306
RE: PANSOFT COMPANY LIMITED
FORM 20-F FOR THE FISCAL YEAR ENDED JUNE 30, 2010
FILED ON NOVEMBER 8, 2010 FILE
NUMBER: 001-34168
Dear Ms. Collins:
On behalf of our client, Pansoft Company Limited (the "Company" or
"Pansoft"), we are responding to the comments from the staff (the "Staff") of
the Securities and Exchange Commission ("SEC") in a letter dated February 22,
2011 (the "Comment Letter") with respect to the Company's Annual Report on Form
20-F for the fiscal year ended June 30, 2010 (the "Form 20-F"). The numbered
paragraphs below restate the numbered paragraphs in the Comment Letter in bold
and italics, and the discussion set out below each such paragraph is the
Company's response to the Staff's comment.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS, PAGE 32
OPERATING RESULTS, PAGE 34
1. WE NOTE THAT YOU ATTRIBUTE THE INCREASE IN REVENUES AND GROSS PROFITS TO
LARGE-SCALE SOFTWARE SYSTEMS INTEGRATION PROJECTS. PLEASE PROVIDE MORE INSIGHT
AS TO HOW THESE PROJECTS IMPACTED YOUR REVENUES AND GROSS PROFITS. FOR INSTANCE,
TO THE EXTENT THAT SPECIFIC PROJECTS MATERIALLY IMPACTED YOUR RESULTS OF
OPERATIONS, TELL US YOUR CONSIDERATION TO INCLUDE A DISCUSSION OF SUCH IMPACT ON
YOUR OPERATIONS AND THE STATUS OF THESE PROJECT(S). FURTHER, TELL US YOUR
CONSIDERATION TO INCLUDE A DISCUSSION REGARDING THE NUMBER OF PROJECTS COMPLETED
AND IN-PROCESS DURING EACH PERIOD; THE AVERAGE DOLLAR AMOUNT OR RANGE OF
AMOUNTS, AND THE AVERAGE DURATION OR RANGE THEREOF FOR SUCH PROJECTS.
ALSO, TELL US WHAT CONSIDERATION WAS GIVEN TO DISCLOSING AND DISCUSSING
YOUR BACKLOG AND THE REASONS FOR CHANGES IN BACKLOG AT EACH BALANCE SHEET DATE.
WE REFER YOU TO ITEM 5.A OF FORM 20-F AND SECTION III.B OF SEC RELEASE NO.
34-48960.
DB2/22237613.5
Kathleen Collins, Accounting Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
March 8, 2011
Page 2
In response to the Staff's comments, the Company intends to expand the
discussion on large-scale software systems integration projects and backlog on
page 34 in an amended Form 20-F. The revised disclosure under the caption
"Operating Results--Revenues" will be substantially as follows:
"During the fiscal year ended June 30, 2010, our revenues were $
12,056,872, a 43% increase from $8,454,352 in the 12 month period ended
June 30, 2009. During the 6 month period ended June 30, 2010, our revenues
were $4,941,226, a 68% increase from $2,939,906 in the 6 month period
ended June 30, 2009.
The increases of our revenues during both periods were primarily
attributed to an increase in large-scale software systems integration
projects, which comprised a higher proportion of total revenue, as well as
natural growth of our development projects and services. The revenue
recognized from these large-scale software contracts, which typically have
a value between $1.5 million to $6 million per contract, was $5.87 million
and $1.1 million, accounting for approximately 49% and 13% of our total
revenue, for the fiscal years ended June 30, 2010 and 2009, respectively.
The total contract value of our large-scale software project contracts,
including our contracts with PetroChina to develop their Treasury
Management System and with Sinopec to develop their Centralized Accounting
System, was $11.15 million and $6.45 million for the fiscal years ended
June 30, 2010 and 2009, respectively, representing a 73% increase. The
total number of large-scale software projects under contract was 4 and 2
for the fiscal years ended June 30, 2010 and 2009, respectively. These
large-scale software project contracts usually require us to complete our
services over a two year period. We estimate that approximately 63% and
17% of the services required under these large-scale contracts were
completed as of June 30, 2010 and 2009, respectively. The substantial
increase in our large-scale contracts and related revenue was primarily
due to the fact that our large clients have gained more confidence and
recognition of the quality and technical capability of our products, and
therefore assigning more projects at their core IT system to be developed
by us.
Furthermore, as a result of our business expansion strategy, the sales of
our application systems have reached other markets, such as oil fields,
provincial petroleum sales corporations and coal mines. Although these new
revenue sources represent a relatively smaller portion of our total
revenue, they are increasing gradually and we expect such increase to
continue.
The Company considers its backlog to consist of remaining services to be
performed or completed under its software project contracts. The total
value of these contracts under execution was $20.2 million and $25.9
million as of June 30, 2010 and 2009, respectively. Approximately 28% and
49% of the services required under such contracts (including both
large-scale and small-scale projects) remain uncompleted as of June 30,
2010 and 2009, respectively. The reduction in our backlog between fiscal
2009 and 2010 was due to progress in job completion."
LIQUIDITY AND CAPITAL RESOURCES, PAGE 37
2. WE NOTE YOUR RISK FACTOR DISCLOSURES ON PAGE 18 REGARDING THE LIMITATIONS
PLACED ON YOUR PRC SUBSIDIARY, PCCL, AND ITS ABILITY TO PAY DIVIDENDS TO THE
PARENT COMPANY. FURTHER, WE NOTE FROM YOUR DISCLOSURES ON PAGE 15 THAT THE PRC
GOVERNMENT IMPOSES CONTROLS ON THE CONVERTIBILITY OF THE RENMINBI INTO FOREIGN
CURRENCIES, AND, IN CERTAIN CASES, THE REMITTANCE OF CURRENCY OUT OF CHINA. TELL
DB2/22237613.5
Kathleen Collins, Accounting Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
March 8, 2011
Page 3
US YOUR CONSIDERATION TO INCLUDE A DISCUSSION IN YOUR LIQUIDITY SECTION OF HOW
EARNINGS ARE TRANSFERRED FROM YOUR PRC SUBSIDIARY TO YOUR COMPANIES OUTSIDE OF
THE PRC. ALSO, TELL US HOW YOU CONSIDERED DISCUSSING THE RESTRICTIONS PLACED ON
PCCL'S ABILITY TO TRANSFER FUNDS AND THE POTENTIAL IMPACT ON THE COMPANY'S
ABILITY TO MEET ITS CASH OBLIGATIONS. WE REFER YOU TO ITEM 5.B.1.(B) OF FORM
20-F. ADDITIONALLY, TELL US AND DISCLOSE ANY SIGNIFICANT DIFFERENCES BETWEEN
ACCUMULATED PROFITS AS CALCULATED PURSUANT TO PRC ACCOUNTING STANDARDS AND
REGULATIONS AS COMPARED TO ACCUMULATED LOSSES AS PRESENTED IN YOUR FINANCIAL
STATEMENTS.
In response to the Staff's comments, the Company intends to revise the
disclosure on page 38 by inserting the following paragraphs:
"We are a holding company and conduct our operations primarily through our
wholly-owned subsidiary, PCCL, in China. Accordingly, our ability to pay
dividends to shareholders and to finance any debt we may incur depends on
the ability of PCCL to pay dividends to us. Under current PRC regulations,
PCCL is permitted to pay dividends to us only out of its accumulated
profits, if any, as determined in accordance with PRC accounting standards
and regulations. The most significant difference between PRC accounting
standards and U.S. GAAP in the calculation of profit and loss relates to
the timing of recognition of revenue. Under PRC accounting standards,
revenue is recognized only upon formal invoicing to the client, which
tends to occur at a later date than under our U.S. GAAP accounting policy.
The difference between "accumulated profit" of PCCL calculated under PRC
accounting standards and retained earnings calculated under U.S. GAAP was
$4,794,638 at June 30, 2010. Furthermore, PRC regulations require PCCL to
set aside least 10% of its after-tax profit each year to fund a statutory
reserve fund until the amount of the reserve fund reaches 50% of such
entity's registered capital. Although these statutory reserve funds can be
used to increase the registered capital and eliminate future losses in
excess of the retained earnings of PCCL, these reserve funds are not
distributable as cash dividends except in the event of a liquidation of
the company. In addition, under regulations of the SAFE, RMB cannot be
converted into foreign currencies, including U.S. dollars, for capital
account items, such as loans, repatriation of investments and investments
outside of China, unless we obtain prior approval of and registration with
the SAFE.
We do not expect that any of the restrictions discussed in the preceding
paragraph relating to transfer of funds by PCCL and conversion of RMB to
foreign currencies will have a significant impact on our ability to meet
our cash obligations, primarily because we have no present plans to pay
dividends to our shareholders and the parent holding company does not have
significant operating activities and cash requirements."
The Company also notes that the difference between "accumulated profit" of
PCCL calculated under PRC accounting standards and retained earnings calculated
under U.S. GAAP was $1,757,508 at December 31, 2010, representing a decline by
$3,037,130 from June 30, 2010 because of the significant invoicing and
collections from our clients.
3. TELL US HOW YOU CONSIDERED INCLUDING A DISCUSSION IN YOUR LIQUIDITY SECTION
REGARDING THE STATUTORY LIMITATIONS ON YOUR ABILITY TO LOAN MONEY TO YOUR PRC
SUBSIDIARY AS DESCRIBED IN THE RISK FACTOR ON PAGE 18 AND THE POTENTIAL FOR SUCH
RESTRICTIONS TO MATERIALLY AND ADVERSELY AFFECT YOUR LIQUIDITY AND ABILITY TO
FUND OPERATIONS. YOUR DISCUSSION SHOULD PROVIDE A QUANTITATIVE OR QUALITATIVE
DB2/22237613.5
Kathleen Collins, Accounting Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
March 8, 2011
Page 4
ANALYSIS TO PROVIDE INVESTORS WITH SUFFICIENT INFORMATION TO UNDERSTAND THE
AMOUNT OF STATUTORY LIMITS AND WHETHER IT IS REASONABLY LIKELY THAT THE COMPANY
WOULD EXCEED THESE LIMITS.
In response to the Staff's comments, the Company respectfully submits that
its PRC subsidiary, PCCL, is the main operating entity that generates revenue,
net income and liquidity for the Company. Historically PCCL has maintained
sufficient liquidity, and it has not relied on any loans from the parent holding
company (or any other non-PRC entities) to fund its operations. The Company
expects that this trend will continue for the foreseeable future. Accordingly,
the Company does not believe that a discussion is necessary in the MD&A with
respect to any statutory limitations or PRC regulatory restrictions on our
ability to loan money to PCCL, because no such loan has been or is expected to
be made in the foreseeable future. Additionally, the Company was registered in
China as a special purpose of vehicle, which should not have any operations and
can only invest in its subsidiary in China. It is not permitted by the SAFE to
loan to its subsidiary in China.
4. PLEASE EXPLAIN FURTHER THE REASONS FOR THE SIGNIFICANT INCREASE IN UNBILLED
RECEIVABLES. TELL US THE AMOUNT OF UNBILLED RECEIVABLES THAT HAS BEEN
SUBSEQUENTLY BILLED TO CUSTOMERS. IF A MATERIAL PORTION OF UNBILLED RECEIVABLES
WAS NOT SUBSEQUENTLY BILLED, PLEASE PROVIDE AN EXPLANATION AS TO WHY. ALSO,
EXPLAIN WHY THE COMPANY'S ABILITY TO INVOICE YOUR CUSTOMER IS CONTINGENT ON YOUR
CLIENT'S PAYMENT APPROVAL PROCESS.
In response to the Staff's comments, the Company intends to revise the
disclosure on page 37 under the caption "Liquidity and Capital Resources--Cash
Flow and Working Capital" in the amended Form 20-F by revising the fourth
paragraph under such caption substantially as follows:
"Unbilled revenue represents the accumulated unbilled amount of revenue
recognized, based on the Company's revenue recognition policy. The
increase in unbilled revenue was due to the rapid growth in our revenue
during the fiscal year ended June 30, 2010 and the timing difference
between revenue recognition and the final invoicing process, which must be
coordinated with our clients' payment approval policies. Specifically,
certain large clients have insisted that we not bill or invoice them until
they have informed us to do so because of their internal processes for the
approval and payment of invoices. Because the invoice triggers certain tax
obligations under PRC tax regulations, we prefer to invoice immediately
prior to customer payment. We typically collect substantially all of our
unbilled revenues by Chinese New Year, which usually falls in February. ."
In addition, the Company notes that as an example of our effort to collect
unbilled revenue, as of December 31, 2010, we have invoiced to our clients 76%
of our unbilled revenue recorded on June 30, 2010, and 97% of the related
invoices have been paid, with most payments occurring in December 2010.
CRITICAL ACCOUNTING POLICIES, PAGE 51
5. PLEASE TELL US HOW YOU CONSIDERED INCLUDING A DISCUSSION OF THE COMPANY'S
CRITICAL ACCOUNTING POLICIES, WHERE THE NATURE OF THE ESTIMATES AND ASSUMPTIONS
USED IN THE APPLICATION OF SUCH POLICIES IS MATERIAL DUE TO THE LEVELS OF
SUBJECTIVITY AND JUDGMENT NECESSARY TO ACCOUNT FOR HIGHLY UNCERTAIN MATTERS OR
THE SUSCEPTIBILITY OF SUCH MATTERS TO CHANGE. IN THIS REGARD, IT APPEARS AT A
MINIMUM, YOUR ACCOUNTING POLICIES FOR REVENUE RECOGNITION, IMPAIRMENT OF
DB2/22237613.5
Kathleen Collins, Accounting Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
March 8, 2011
Page 5
LONG-LIVED ASSETS AND IMPAIRMENT OF GOODWILL WOULD MEET THIS CRITERIA. WE REFER
YOU TO ITEM 5 OF FORM 20-F AND SECTION V OF SEC RELEASE NO. 34-48960.
In response to the Staff's comments, the Company intends to revise the
disclosure in Item 5 of the amended Form 20-F to add a section entitled
"Critical Accounting Policies and Estimates" substantially as set forth below:
"CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our financial statements in conformity with U.S. GAAP,
which requires us to make judgments, estimates and assumptions. We
continually evaluate these estimates and assumptions based on the most
recently available information, our own historical experience and various
other assumptions that we believe to be reasonable under the
circumstances. Since the use of estimates is an integral component of the
financial reporting process, actual results could differ from those
estimates. An accounting policy is considered critical if it requires an
accounting estimate to be made based on assumptions about matters that are
highly uncertain at the time such estimate is made, and if different
accounting estimates that reasonably could have been used, or changes in
the accounting estimates that are reasonably likely to occur periodically,
could materially impact the consolidated financial statements. We believe
that the following policies involve a higher degree of judgment and
complexity in their application and require us to make significant
accounting estimates. The following descriptions of critical accounting
policies, judgments and estimates should be read in conjunction with our
consolidated financial statements and other disclosures included in this
prospectus.
REVENUE RECOGNITION. We generate revenues from contracts for
software system integration and development services, under which we
design, redesign, build and implement new or enhanced systems applications
and related processes for our clients. Such revenues are recognized using
percentage-of-completion accounting by calculating the percentage of
services provided during the reporting period compared to the total
estimated services to be provided over the duration of the contract.
Estimated revenues for applying the percentage-of-completion method
include estimated incentives for which achievement of defined goals is
deemed probable. This method is followed where reasonably dependable
estimates of revenues and costs can be made, provided persuasive evidence
of an arrangement exists, certain milestones have been achieved or
delivery has occurred, the fee is fixed or determinable, and
collectability is reasonably assured. If the Company does not have a
sufficient basis to measure progress towards completion, revenue is
recognized when final acceptance is received by the Company from the
customer.
Estimates of total contract revenues and costs are continuously
monitored during the term of the contract, and recorded revenues and costs
are subject to revision as the contract progresses. Such revisions may
result in increases or decreases to revenues and income and are reflected
in the consolidated financial statements in the periods in which they are
first identified.
If our estimates indicate that a contract loss will occur, a loss
provision is recorded in the period in which the loss first becomes
probable and reasonably estimable. Contract losses are determined to be
DB2/22237613.5
Kathleen Collins, Accounting Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
March 8, 2011
Page 6
the amount by which the estimated direct and indirect costs of the
contract exceed the estimated total revenues that will be generated by the
contract and are included in Cost of services and classified in other
accrued liabilities. To date, we have not experienced material losses on
contracts in process or completed contracts.
For software system integration and development services, we
sometimes provide customers with a limited warranty for approximately one
year following the customer's initial acceptance of the completed project.
Retention by the customer of the last 5% - 10% of the contract price is
considered the milestone for the commencement of the warranty period on
such contracts. For those contracts with warranty clauses, 5% - 10% of the
contract amount is not recognized as revenue or invoiced until the
warranty period expires.
From time to time, per our clients' requirements, we enter into
ongoing maintenance supporting service arrangements with customers based
on time and cost-plus. These services typically include database operation
maintenance, space management, data migration and database tune-ups,
system servicing, system updating and version control, application
servicing, debugging, real-time servicing, and application of interfaces
with other business systems, training in ongoing system operation.
For ongoing maintenance supporting service arrangements based on a
fixed fee basis over a specified period of time, we considers amounts to
be earned once evidence of an arrangement has been obtained, services are
delivered, fees are fixed or determinable, and collectability is
reasonably assured. In such contracts, our efforts are usually measured by
time incurred, therefore, we recognize revenues as amounts become billable
on a straight-line basis, in accordance with contract terms, provided the
billable amounts are not contingent, are consistent with the services
delivered, and are earned, unless revenues are earned and obligations are
fulfilled in a different pattern. The revenue from maintenance related
contracts is not a significant proportion of our total revenue because
most of our clients have their permanent technical team for their long
term system maintaining needs.
Revenue from sale of hardware and synthesis software is recognized
when the i) significant risks and rewards of ownership have been
transferred to the customer at the time when the products are delivered to
and accepted by its customers, ii) the price is fixed or determinable as
stated on the sales contract, and iii) collectability is reasonably
assured. Our customers do not have a general right of return on hardware
delivered.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. Accounts
receivable are stated at original invoice amount less allowance made for
doubtful receivables based on a review of all outstanding amounts at the
period end. Our management must make estimates of the collectibility of
our accounts receivable. Management specifically analyzes accounts
receivable, historical bad debts, customer credit-worthiness, current
economic trends and changes in our customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts An allowance for
doubtful receivables is made when there is objective evidence that we will
not be able to collect all amounts due according to the original terms of
the receivables. Accounts receivables are written off when we have
DB2/22237613.5
Kathleen Collins, Accounting Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
March 8, 2011
Page 7
exhausted all reasonable means to collect the account and it has been
determined that further collection efforts would be ineffective. The
Company does not contain collateral on its accounts receivable.
PROPERTY AND EQUIPMENT. We record property and equipment at cost. We
depreciate property and equipment on a straight-line basis over their
estimated useful lives with 5% residual value using the following annual
rates:
Computer equipment - 5 years straight line
Vehicles - 5 years straight line
Office Furniture - 5 years straight line
Leasehold improvements - 3 years straight line
Computer software - 3 years straight line (without 5% residual
value)
We expense maintenance and repair expenditures as they do not improve or
extend an asset's productive life. These estimated lives have been
reasonably accurate in the past and have been based on historical
experience and the estimated useful lives of similar assets by other
software companies. These estimates are reasonably likely to change in the
future since they are based upon matters that are highly uncertain such as
general economic conditions, potential changes in technology and estimated
cash flows from the use of these assets.
IMPAIRMENT OF LONG-LIVED ASSETS. We review the carrying values of
our long-lived assets for impairment whenever events or changes in
circumstances indicate that they may not be recoverable. When such an
event occurs, we project undiscounted cash flows to be generated from the
use of the asset and its eventual disposition over the remaining life of
the asset. If projections indicate that the carrying value of the
long-lived asset will not be recovered, we reduce the carrying value of
the long-lived asset, by the estimated excess of the carrying value over
the projected discounted cash flows. Estimated cash flows from the use of
the long-lived assets are highly uncertain and therefore the estimation of
the need to impair these assets is reasonably likely to change in the
future. Should the economy or acceptance of our software change in the
future, it is likely that our estimate of the future cash flows from the
use of these assets will change by a material amount.
IMPAIRMENT OF GOODWILL. The carrying value of goodwill is evaluated
annually or more frequently if events or circumstances indicate that an
impairment loss may have occurred. Such circumstances could include, but
are not limited to, a significant adverse change in business climate,
increased competition or other economic conditions. Under FASB Accounting
Standard Codification (ASC) Topic 350 "Intangibles -- Goodwill and Other",
goodwill is tested at a reporting unit level. The impairment test involves
a two-step process. The first step involves comparing the fair value of
the reporting unit to which the goodwill is assigned to its carrying
amount. If this comparison indicates that a reporting unit's estimated
fair value is less than its carrying value, a second step is required. If
applicable, the second step requires us to allocate the estimated fair
value of the reporting unit to the estimated fair value of the reporting
unit's net assets, with any fair value in excess of amounts allocated to
such net assets representing the implied fair value of goodwill for that
reporting unit. If the carrying value of the goodwill exceeds its fair
value, the carrying value is written down by an amount equal to such
excess.
DB2/22237613.5
Kathleen Collins, Accounting Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
March 8, 2011
Page 8
The goodwill impairment testing process involves the use of
significant assumptions, estimates and judgments, and is subject to
inherent uncertainties and subjectivity. Estimating a reporting unit's
discounted cash flows involves the use of significant assumptions,
estimates and judgments with respect to a variety of factors, including
sales, gross margin and selling, general and administrative rates, capital
expenditures, cash flows and the selection of an appropriate discount
rate. Projected sales, gross margin and selling, general and
administrative expense rate assumptions and capital expenditures are based
on our annual business plans and other forecasted results. Discount rates
reflect market-based estimates of the risks associated with the projected
cash flows of the reporting unit directly resulting from the use of its
assets in its operations. These estimates are based on the best
information available to us as of the date of the impairment assessment."
ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
6. WE NOTE YOUR DISCUSSION REGARDING THE DISMISSAL OF YOUR FORMER INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM, AGCA, INC., ON JULY 26, 2010. PURSUANT TO
ITEM 16F OF FORM 20F, THE COMPANY SHALL PROVIDE AGCA WITH A COPY OF THE
DISCLOSURES INCLUDED IN THE FORM 20-F AND YOU SHALL REQUEST AGCA TO FURNISH THE
COMPANY WITH A LETTER ADDRESSED TO THE COMMISSION STATING WHETHER THEY AGREE
WITH THE STATEMENTS INCLUDED HEREIN, AND, IF NOT, STATING THE RESPECTS TO WHICH
THEY DO NOT AGREE. PLEASE AMEND YOUR FORM 20-F TO FILE THE FORMER ACCOUNTANTS
LETTER AS AN EXHIBIT TO THE ANNUAL REPORT PURSUANT TO ITEM 16F OF FORM 20-F.
In response to the Staff's comments, the Company is working with its
former auditor, AGCA Inc. ("AGCA"), to obtain the letter from AGCA as required
under Item 16F and file such letter as an exhibit to the amended Form 20-F.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION, PAGE 65
7. YOUR DISCLOSURES ON PAGE 21 INCLUDE A DISCUSSION REGARDING THE ON-GOING
MAINTENANCE SUPPORT THAT IS TYPICALLY REQUIRED AFTER THE INSTALLATION OF YOUR
SOFTWARE SOLUTIONS TO ENSURE THE EFFICIENT OPERATION OF YOUR SYSTEM. TELL US HOW
YOU ACCOUNT FOR REVENUES EARNED FROM THESE MAINTENANCE SERVICES AND TELL US
SPECIFICALLY WHERE YOU ADDRESS THE ACCOUNTING FOR SUCH SERVICES IN YOUR CURRENT
REVENUE RECOGNITION POLICY DISCLOSURES.
In response to the Staff's comment, the Company notes that the accounting
for revenues earned from maintenance services are described in detail in the 5th
and 6th paragraphs under "Revenue Recognition" on page 65 .. However, to clarify
the disclosure, the Company proposes to revise such disclosure, substantially as
follows
"For software system integration and development services, the Company
sometimes provides its customers with a limited warranty for approximately
one year following the customer's initial acceptance of the completed
project. Retention by the customer of the last 5% - 10% of the contract
price is considered the milestone for the commencement of the warranty
DB2/22237613.5
Kathleen Collins, Accounting Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
March 8, 2011
Page 9
period on such contracts. For those contracts with warranty clauses, 5% -
10% of the contract amount is not recognized as revenue or invoiced until
the warranty period expires.
From time to time, per our clients' requirement, the Company enters into
ongoing maintenance supporting service arrangements with customers based
on time and cost-plus. These services typically include database operation
maintenance, space management, data migration and database tune-ups,
system servicing, system updating and version control, application
servicing, debugging, real-time servicing, and application of interfaces
with other business systems, training in ongoing system operation.
For ongoing maintenance supporting service arrangements that are based on
a fixed fee basis over a specified period of time, the Company considers
amounts to be earned once evidence of an arrangement has been obtained,
services are delivered, fees are fixed or determinable, and collectability
is reasonably assured. In such contracts, the Company's efforts are
usually measured by time incurred, therefore, the Company recognizes
revenues as amounts become billable on a straight-line basis, in
accordance with contract terms, provided the billable amounts are not
contingent, are consistent with the services delivered, and are earned,
unless revenues are earned and obligations are fulfilled in a different
pattern. The revenue from maintenance related contracts is a not
significant proportion of our total revenue because most of our clients
have their permanent technical team for their long term system maintenance
needs."
In addition, because the revenue from our maintenance supporting services does
not constitute a significant portion of the total revenue, the Company proposes
to clarify this fact in the disclosures on page 21 of the amended Form 20-F.
EXHIBIT 12.1 AND 12.2
8. PLEASE REVISE THE INTRODUCTORY LANGUAGE TO PARAGRAPH 4 TO ALSO INDICATE THAT
THE CERTIFYING OFFICERS ARE RESPONSIBLE FOR ESTABLISHING AND MAINTAINING
INTERNAL CONTROL OVER FINANCIAL REPORTING (AS DEFINED IN EXCHANGE ACT RULE
13A-15(F) AND 15D-15(F). WE REFER YOU TO THE INSTRUCTIONS AS TO THE EXHIBITS OF
FORM 20-F.
In response to the Staff's comments, the Company will revise the
introductory language to paragraph 4 of Exhibits 12.1 and 12.2 in the amended
Form 20-F to indicate that the certifying officers are responsible for
establishing and maintaining internal control over financial reporting (as
defined in Exchange Act rule 13a-15(f) and 15d-15(f)).
EXHIBIT 15.1 & 15.2
9. IT APPEARS THAT YOU FILED A COPY OF CROWE HORWATH (HK) CPA LIMITED'S SIGNED
AUDIT REPORT IN EXHIBIT 15.1. REVISE TO INCLUDE A SIGNED AND DATED CONSENT FROM
CROWE HORWATH ACKNOWLEDGING THE USE OF ITS AUDIT REPORT IN THE COMPANY'S FORM
S-8 (333-162000) FILED SEPTEMBER 18, 2009.
In response to the Staff's comments, the Company intends to obtain a
revised Exhibit 15.1 to include a signed and dated consent from Crowe Horwath
acknowledging the use of its audit report in the company's Form S-8 (333-162000)
filed September 18, 2009 (the "Form S-8").
DB2/22237613.5
Kathleen Collins, Accounting Branch Chief
Division of Corporation Finance
United States Securities and Exchange Commission
March 8, 2011
Page 10
10. PLEASE ALSO REVISE TO INCLUDE A CORRECTED CONSENT FROM AGCA, INC.,
CONSENTING TO THE INCLUSION OF THEIR AUDIT REPORT IN THE COMPANY'S FORM S-8
(333-162000) FILED ON SEPTEMBER 18, 2009.
In response to the Staff's comments, the Company is working with AGCA to
obtain a corrected consent from AGCA, Inc. consenting to the inclusion of their
audit report in the Form S-8.
* * * * *
In connection with the Company's response to the Staff's comments, the
Company hereby acknowledges that:
o The Company is responsible for the adequacy and accuracy of the
disclosure in the filings;
o Staff comments or changes to disclosure in response to Staff
comments do not foreclose the Commission from taking any action with
respect to the filing; and
o The Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
The Company respectfully requests the Staff's assistance in completing the
review as soon as possible. Please advise us if we can provide any further
information or assistance to facilitate your review. Please direct any further
comments or questions regarding this letter to the undersigned at (650)
843-7263.
Sincerely,
// Albert Lung
Albert Lung
cc: Megan Akst
Staff Accountant
Division of Corporation Finance
Securities and Exchange Commission
Guoqiang Lin
Chief Executive Officer
Pansoft Company Limited
Allen Zhang
Chief Financial Officer
Pansoft Company Limited
DB2/22237613.5