UNITED STATES


SECURITIES AND EXCHANGE COMMISSION





WASHINGTON, D.C. 20549





FORM 10-K





x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December 31, 2010





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from _____________________ to ______________





FOR THE TRANSITION PERIOD FROM _______ TO ___________





COMMISSION FILE NO. 001-33709





China CGame, Inc.


(Exact name of small business issuer as specified in its charter)





Delaware

51-05021250(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)Research Building, No.801 Wuzhong Road,

Changzhou Science and Education Industrial Park

Wujin District, Changzhou, Jiangsu,

People’s Republic of China

213164(Address of principal executive offices)

(Zip Code)





REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:0086-756-8538908





SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:





Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, $0.001 par value

NASDAQ Global Select Market





SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:





None.





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Yes  ̈ No x


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.


Yes  ̈ No x





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes    x No     ̈





Indicate by check mark 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:





Large accelerated filer    ̈
Accelerated filer   ̈Non-accelerated filer      ̈

(Do not check if a smaller reporting company)
Smaller reporting companyx





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ̈ No x





The aggregate market value of the registrant's issued and outstanding shares of common stock held by non-affiliates of the registrant as of June 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $25.4 million.





There were 20,039,825 shares outstanding of the registrant’s common stock, par value $0.001 per share, as of April 14, 2011.   The registrant’s common stock is listed on the NASDAQ Global Select Market under the ticker symbol “CCGM”.





DOCUMENTS INCORPORATED BY REFERENCE:   The information required by Part III of Form 10-K is incorporated by reference from the registrant's definitive proxy statement on Schedule 14A that will be filed no later than the end of the 120-day period following the registrant's fiscal year end, or, if the registrant's definitive proxy statement is not filed within that time, the information will be filed as part of an amendment to this Annual Report on Form 10-K/A, not later than the end of the 120-day period.











CHINA CGAME, INC.





TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K


For the Fiscal Year Ended December 31, 2010





ITEM



PagePART I



1Item 1.

Business

1Item 1A.

Risk Factors

17Item 1B.

Unresolved Staff Comments

35Item 2.

Properties

35Item 3.

Legal Proceedings

36Item 4.

Reserved

37PART II



37Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

37Item 6.

Selected Financial Data

39Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

39Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

53Item 8.

Financial Statements and Supplementary Data

53Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

53Item 9A.

Controls and Procedures

53Item 9B.

Other Information

56PART III



57Item 10.

Directors, Executive Officers and Corporate Governance

57Item 11.

Executive Compensation

57Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

57Item 13.

Certain Relationships and Related Transactions, and Director Independence

57Item 14.

Principal Accounting Fees and Services

57PART IV



58Item 15.

Exhibits, Financial Statement Schedules

58Signatures

62









CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS





The information contained in this Annual Report on Form 10-K, including in the documents incorporated by reference into this Annual Report on Form 10-K, includes some statements that are not purely historical and that are “forward-looking statements.” Such forward-looking statements include, but are not limited to, statements regarding our and their management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition and results of operations. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and similar expressions, or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.





The forward-looking statements contained in this Annual Report on Form 10-K are based on current expectations and beliefs concerning future developments. There can be no assurance that future developments actually affecting the Company will be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements, including the following:





·
Our acquisition of a majority ownership interest in Shanghai ConnGame Network Co. Ltd. in August 2010;





·
Our ability to successfully complete and commercialize online games under development;





·
Our ability to compete in the highly competitive online interactive entertainment industry;





·
Our ability to incur the substantial up-front expenditures needed for development of MMORPG products requires.





·
Our ability to integrate and maintain internal controls after our acquisition of ConnGame;





·
Our dependence on government contracts and government sponsored contracts;





·
Fluctuation and unpredictability of costs related to our products and services;





·
Changes in the laws of the PRC that affect our operations;





·
Our failure to meet or timely meet contractual performance standards and schedules;





·
Adverse capital and credit market conditions;





·
Any occurrence of epidemic diseases and other cross-region infectious diseases;





·
Reduction or reversal of our recorded revenue or profits due to “percentage of completion” method of accounting;





·
Increasing provisions for bad debt related to our accounts receivable;





·
Our dependence on the steel and aluminum markets;





·
Exposure to product liability and defect claims;





·
Our ability to obtain all necessary government certifications and/or licenses to conduct our business;





·
Expenses and costs related to our issuance of our bonds and bond warrants;





·
The cost of complying with current and future governmental regulations and the impact of any changes in the regulations on our operations; and





·
The other factors referenced in this Annual Report on Form 10-K, including, without limitation, under the sections entitled “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and “Business”.





These risks and uncertainties, along with others, are also described below under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of the parties’ assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.











PART I





ITEM 1.  BUSINESS





Our company, China CGame, Inc., operates through its direct and indirect wholly- and partially-owned subsidiaries, including but not limited to Zhuhai King Glass Engineering Co., Ltd. (“Zhuhai KGE”) in Zhuhai, PRC, Full Art International, Ltd. (“Full Art”) in Hong Kong, Techwell Engineering Limited (“Techwell”) with operations in Dubai, CAE Building Systems Inc. (“CAE BS”) in United States and Shanghai ConnGame Network Ltd. (“ConnGame”) in Shanghai, PRC. We acquired ConnGame on August 18, 2010.





The terms “CCGM,” “Company,” “we,” “our” or “us” in this Annual Report refer to China CGame, Inc. and its subsidiaries, unless the context suggests otherwise.  Additionally, unless we indicate otherwise, references in this Annual Report to:





·
“China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this Annual Report only, Taiwan and the special administrative regions of Hong Kong and Macau;


·
“RMB” and “Renminbi” are to the legal currency of China; and


·
“$,” “US$” and “U.S. dollars” are to the legal currency of the United States.





In addition, except as otherwise specified, all information in this Annual Report and all share and per share information has been adjusted to reflect a reverse stock split that was effected on December 21, 2010 pursuant to which every 4 shares of our common stock was converted into 1 share of our common stock.





Overview





CCGM (formerly CAEI), founded in 1992, has traditionally specialized in the design, engineering, fabrication and installation of high-end curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems and eco-energy saving building conservation systems and related products, for public works and commercial real estate projects throughout China, Australia, Southeast Asia, the Middle East, and the United States. We provide timely, high quality, reliable, fully integrated and cost-effective service solutions to our clients using specialized technical expertise in the design, engineering, fabrication, installation and construction of structural exterior cladding systems. We compete on the strength of our reputation, relationships with government and commercial clients, and our ability to give expression to the vision of leading architects. By focusing on innovation while outsourcing commoditized manufacturing work, we believe we are able to add artistic and technological value to projects at cost-effective price points.





Acquisition of 60% Equity Interest in ConnGame





On August 18, 2010, pursuant to a stock purchase agreement that was entered into on August 11, 2010 by and among the Company, First Jet Investments Limited (“First Jet”), New Crown Technology Limited, First Jet’s wholly-owned subsidiary (“New Crown”) and Mr. Jun Tang, the principal of First Jet and New Crown, the Company completed an acquisition of 60% of the issued and outstanding shares of New Crown, which is the holder of 100% of the equity interests of Shanghai ConnGame Network Ltd. (“ConnGame”). In exchange for the 60% equity interest of New Crown, the Company issued 6,250,000 shares of the Company’s common stock. ConnGame is a company organized under the laws of the People’s Republic of China with a registered capital of RMB 10,000,000. ConnGame is a developer and publisher of MMORPG (Massively Multiplayer Online Role Playing Game). In connection with the foregoing transaction, the Company transferred to New Crown 100% of the equity interests of China Architectural Engineering (Shenzhen) Co., Ltd., which had immaterial operations and assets at the time of transfer.





While utilizing its game engines, scalable development platforms, and production teams, ConnGame focuses on self-developed MMORPGs game titles that are based on China's iconic characters and nostalgic epochs. We believe that our acquisition of ConnGame will permit us to refocus our core capabilities and facilitate our planned transformation into a high-end architectural design consultant and service provider, as we intend to leverage ConnGame’s design engines and virtual applications to broaden our service capabilities and scope of architectural collaborations.





We intend to utilize ConnGame's technology and online platform to provide technical consulting and advisory services to architects, real estate developers and governments. We believe our acquisition of ConnGame will enable us to strengthen our core architectural engineering and design abilities. We believe that our planned focus on design and construction will permit us to reduce our exposure to unpredictable operational risks that relate to construction projects, in addition to providing us with the tools to strengthen our ability to complete projects within budget limitations. We also believe that our acquisition of ConnGame and its technologies will enable us to better evaluate estimated profitable of construction projects before we enter into contracts. We believe that our technology profile will be strengthened, particularly with ConnGame’s virtual and online and graphic technologies, and that the technology and capabilities will permit us to render more animated, detailed, and interactive designs that could assist us in attaining highly desirable projects from our bidding competitors.





1


We believe that our acquisition will also enable us to enter China's large online game market, with ConnGame’s two to-be-released MMORPG games.  We believe that the online game industry and its related business model will be a growing market in China.  We will seek to divide our business services into the following:





·
Construction consulting—We intend to continue to conduct our construction consultancy services within China.





·
Construction design services—We believe that we will be able to utilize the technical skills and expertise of ConnGame to provide unique consulting services for the design and fabrication projects globally, with such services to include real-time and interactive capabilities.





·
Online Games—ConnGame expects to launch its first game in the second fiscal quarter of 2011 and another game in third fiscal quarter of 2011, subject to successful testing that is ongoing.





·
Network Gaming and Home Decoration—We intend to develop a platform to provide services on home decoration through an interactive style, develop online games to provide to architects, other professionals, and individual consumers the ability to design and interact with other users.





Online Game Market in China





Despite the negative effects of the global financial crisis on the Chinese economy in 2010, the online game industry in China still experienced growth. In January 2011, the General Administration of Press and Publication (GAPP) of the PRC and International Data Group (IDG) jointly issued a report on the Chinese online game industry in 2010. According to the joint report, the Chinese online game industry in 2010 generated approximately $5 billion, with a growth rate of 26%, as compared to comaparative rates 30% in 2009. According to the report, China-made online games accounted for approximately $2.4 billion in 2009 and $3 billion and 2010, representing a market share of approximately 65% for 2010. China-made games have generally held a leading position in the game market.





International and Domestic (China) Construction Market





Domestic Projects





Historically, the relative growth of the Chinese economy had assisted in the growth of China’s construction industry, especially in the commercial and public works sectors. As architectural designs for these buildings have become more complex, challenging and modern in scope, there has been an increased need for technology driven companies providing high-end specialty curtain wall systems. In addition, governmental agencies and international regulators are becoming more environmentally conscious in the enactment of regulations governing new construction. Awareness of fuel costs and environmental concerns have resulted in regulation designed to ensure that new commercial and public works buildings have a low environmental impact. Technologies such as solar lighting, advanced shading systems and circulating sea water systems are constantly improving the ability of structures to interact with the environment by taking advantage of natural conditions, thus meeting the dual goals of reducing energy costs and lessening environmental impact.





During 2010, we believe that the Chinese market has fared better than most of the international markets, even though it was still impacted by the global economic crisis in 2009, with investments in the construction sector having been significantly reduced.   With the strength of our reputation and history of notable projects in China, we have been focusing our resources and efforts in our domestic market.   While China’s construction industry has become a challenging environment in which to operate, we believe that we, having completed high profile projects in China, have long-standing relationships with leading Chinese and international architects.  We were awarded a new contract by the Overseas Chinese Town ("OCT") Group during the third quarter 2010 for their Joy Coast project, with a total value of approximately $3.2 million. The Joy Coast project is the first large-scale, high-end integrated urban ecotourism project in China.




International Projects





The recent trends in the global economy have had a significant adverse impact on the commercial construction industry as a whole. As a result, the competitive environment in which we operate has become more competitive, increasing the number of re-bid construction projects and amount of time between bidding and award of a project, reducing selling prices, and causing competitors to modify the scope and type of projects on which they bid.





2


We do not believe that the international economy will experience a swift recovery in the near future and therefore its negative impact on construction industry still exists and will exist in the near future.  As a result, we ended the orders of the construction of international projects in 2009, and shifted the focus of our business to design and professional consulting services.  To develop projects and generate revenue, we have sought to join new projects in the position of design and project consultant and the role of material supplier.





Although we believe that a global market opportunity still exists for our services and products despite the difficult environment, we believe that it would be more advantageous to our business to take advantage of our low design and production cost in China. We believe that the Chinese market has faired much better than most of the international markets. With the strength of our reputation and history of notable projects in China, we are focusing our resources and efforts in our domestic market. We believe that we have long-standing relationships with leading Chinese and international architects, having completed high profile projects in China, including the National Grand Theater in Beijing, the Shanghai South Railway Station, the Shenzhen International Airport, the National Palace Museum in Beijing, the Wuhan Qintai Grand Theatre and Wuhan International Horse Racing Course. During the year 2010, we completed certain landmark projects in China, which consisted of the Changsha Train Station, Changsha Museum, Guangzhou Science Town, and projects in Jinan and Inner Mongolia. We plan to continue to meet the needs of government and private sector customers in the larger cities.





ConnGame Planned Products and Services




Game Development





We believe that timely and high-quality game development will be critical to our ability to succeed. Our game development team mainly consists of our programming personnel, design personnel and graphics personnel. We have in-house capabilities that we believe will allow us to develop games in a timely manner and in response to changing market demands and trends.Our systematic game development process includes the following key steps:




•
Concept generation. Our design team takes the lead in generating game development ideas based on the latest trends in player preferences. We recruit game players into our design team to closely track the hot topics among our players and on the Internet. We also encourage all of our employees to provide creative ideas and concepts for game development.




•
Detailed proposal. Upon management’s approval of the new game concept, the design team will prepare a detailed proposal that sets preliminary storylines and game characters, estimates of costs and target markets.




•
Development plan. After the completion of the technical review of the proposal, a project team consisting of our programming staff, design staff and graphics artists work together to set the technical criteria for the game development, and then formulate a game development plan with development milestones.




•
Design, style and story concepts. Based on the game development plan, our graphics artists will determine the style of the new game and design game characters, our game designers will develop the game story and define game environments, and our program developers will develop both the server-end software and the user-end software modules.




•
Internal reviews. Mid-term management reviews will take place upon the completion of each milestone of the development plan. Concurrently, our testing department tests the accuracy and completeness of the development, and our marketing department initiates marketing campaigns according to the development milestones.




•
Closed beta testing and open beta testing. We conduct closed beta testing to work out technical issues and eliminate technical problems. Thereafter, we conduct open beta testing to test the operation of new games under open market conditions and introduce new games to players.





Our games are realized through coordination among teams of program developers, game designers and graphic artists. Our in-house development team also supports our frequent game upgrades and updates to accommodate the latest user preferences and evolving market trends. We also try to design each of our games to cater to distinct market segments to grow our overall player base rather than merely shifting players from one game to another. Furthermore, our games are developed with built-in multiple-language capability to support our timely expansion into international markets through a convenient localization process.





3


Online Games




We have finished the development stage of our first two 2.5D MMORPGs, Revolution and The Warring States. Both games are developed by using our proprietary of two self-developed game engines, "Turbo" and "Apocalypse."   Our games offer “anytime play,” meaning users can play the games 24 hours a day, seven days a week. Both offer significant opportunities for social interaction in cyberspace. Life-like features in some of our games include marriages among online characters and martial arts apprenticeships, which are historical associations formed by martial arts masters according to Chinese legends. In addition, characters in our games may visually express feelings by their actions or by using emotive icons that appear within a character’s dialogue box. We believe that these features significantly expand the interface for player interaction, allow players to express their own personalities or virtual personalities through their virtual characters and create a certain level of social reality in the game. Although each game character may be unique, groups of players may, and often must, form teams or alliances to achieve certain collective game objectives, such as battles and missions. Our games also incorporate instant messaging systems and chat rooms, which allow players to communicate and interact with each other in real-time groups or in one-on-one discussions. The bulletin boards in our games allow players to post notes or inquiries and respond to other players’ notes or inquires.





Revolution. Revolution is our first mysterious adventure 2.5D MMORPG developed based on our proprietary Apocalypse engine. Revolution enables game players to travel between Eastern and Western cultures, featuring themes ranging from Western mythology to the history of China’s Zhou Dynasty, catering to game players with different interests. This game also includes adventures in historic sites and turf wars.





The Warring States. The Warring States is a war story developed based on the well-known period in ancient Chinese history. This game is designed to include various in-game weapons and large-scale map of the game environment in a historical cultural setting. Game players can freely choose to join any of the seven states, i.e., Qin, Chu, Wei, Zhao,Yan, Han, or Qi and are provided with full experience of the historical battles of the period. In addition, the game also features motion fighting system, allowing players to attack their opponents as they move, which we believe enhances appeal to game players.





The revenue model of ConnGame’s MMORPG business is based on the item-based revenue model, meaning game players can play our games for free, but may choose to pay for virtual items, which are non-physical items that game players can purchase and use within an MMORPG.  Such items include gems, pets, fashion items, magic medicine, riding animals, hierograms, skill books and fireworks, all designed to enhance the game-playing experience. ConnGame intends to sell prepaid game cards to a range of regional distributors throughout China, who in turn sub-distribute them to numerous retail outlets, including Internet cafés and various Websites, newsstands, software stores, book stores and retail stores. ConnGame also intends to directly sell game points to players through our online sales platform. ConnGame’s ability to generate revenue and attain profitability depends upon its ability to develop quality products and the acceptance and popularity of its products by the end consumer.




ConnGame plans to continue to improve its product quality through a various testing series to attain player feedback. If feedback of players indicates consumer desire for further improvement to game content and quality, it will take additional development efforts and the cost of research and development will increase, in addition to lengthening the time for ConnGame to generate revenue.





Our Proprietary Technologies





ConnGame owns two self-developed game engines, "Turbo" and "Apocalypse."  ConnGame's online game-engines were created and developed independently by its research and development team.  Apocalypse provides a solution for development of MMORPG games and can be applied to game content development and enhancement of the standardization process.  The Turbo engine tool set is designed to facilitate the development of three dimensional MMORPG games, in conjunction with development of online role-playing games.  Turbo encompasses all parts of the client programming, including management of server and client-side resources.




Our game development platforms have been designed with modularized functions to allow our game designers and graphic artists to quickly enhance and expand on the game play, design and settings without getting bogged down by technical computer programming language. Designers and graphic artists can program by going through a series of user-friendly menus. This significantly shortens our game development process and allows us to quickly add content and features to our games even after their launch. Furthermore, as the same program development team supports the programming of multiple games via the same development platform, any programming improvement originated from one game can be readily introduced to other games. We believe that our various game development platforms provide us with a solid foundation to rapidly and frequently develop and introduce new games and to update our existing games.





Pricing and Distribution





Pricing. We intend to adopt item-based pricing model. Under this model, players can play the basic functions of the game free of charge for as long as they want. We generate revenues when players purchase in-game items such as performance-enhancing items, clothing, accessories and pets that enhance the game play experience. We determine the price of each in-game item before its introduction, generally based on an analysis of a series of benchmarks, such as the price of similar items offered in other online games, the market price of the real-life item represented by the in-game item, and pricing of other popular forms of entertainment.Distribution. We intend to establish our distribution network by leveraging our management team’s extensive connections accumulated from their previous software distribution experience. We intend to distribute our physical and virtual prepaid game cards and online points through various channels.




4


Marketing and Promotion




We aim to rapidly attract game players and increase revenues from players by introducing innovative marketing and promotion strategies that are specifically designed for each of our games in development. Marketing programs and promotional activities to be employed by us include:




Advertising and Online Promotions. We intend to advertise in many online game sites and game magazines that are updated regularly. To enhance our market penetration, especially among working professionals, we also intend to advertise through flat-panel television displays placed in high-traffic areas of commercial office buildings, such as in lobbies and near elevators.




Live Promotions. We also intend to organize off-line promotion activities to develop and support the community of game players, such as Internet café gatherings, player clubs, product press conferences, college marketing, distribution of free game-related posters, distribution of promotional online points and cross-marketing with telecommunication operators.




In-Game Marketing. We intend to post announcements in the game environment to promote new items and features, usually linking with in-game events. Leveraging our in-house development capability, we intend to offer new in-game items periodically, especially around the holidays and certain special events, such as the offering of Christmas stockings during the Christmas season.




Network Infrastructure




We aim to build a reliable and secure network infrastructure to fully support our operations. We maintain an efficient hardware and software infrastructure with a large network capacity consisting of self-owned and leased servers.We have a network operation team responsible for establishing the stability and security of our network. The primary responsibilities of the team members consist of monitoring system performance, troubleshooting, detecting system error, random sample testing on servers, maintaining equipment, and testing, evaluating and installing hardware and software.




Construction-Related Products and Services





We specialize in high-end curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems, eco-energy saving building conservation systems and related products, for public works and commercial real estate projects. We provide timely, high quality, reliable, fully integrated and cost-effective service solutions to our clients using specialized technical expertise in the design, engineering, fabrication, installation and construction of structural exterior cladding systems. We design and develop systems to offer custom-designed solutions for developers of commercial and public works projects with special architectural features. In terms of project management, we conduct overall project planning and control over key areas of activities such as design and engineering, procurement, production scheduling, quality control and site installation.




Concept and Project Management





Initially, we work with the architect to develop, clarify and enhance the overall creative vision for the project. In the design of a curtain wall system, architects are freely able to choose different structure systems to meet the requirements of various architectural models. All contracts awarded are assigned a project number, which was designed to track each component and man-hour associated , with the project through the entire construction process. All project drawings, specifications and completion schedules on a project are reviewed by our senior management team, and all projects are assigned to one or more project managers, who assume primary responsibility for all aspects of the project. Reporting to the project manager are construction supervisors, safety and administration staff, quality control staff and project engineering staff. Each of these project team members coordinates with internal functional departments and outside suppliers as appropriate. Often a project manager assigned to a given project will have significant experience in similar projects. A project manager generally will be responsible for a number of projects in various stages of completion at any given time, depending on the scope, complexity, and geographic location of such projects. Each project is divided into critical sequences that follow the anticipated curtain wall construction path. Each sequence follows a timeline, the status of which is continually monitored. Project managers coordinate and manage design changes or other changes in scheduled completion deadlines in an effort to minimize overall project delays.





Ouracquisition of ConnGame will enable us to leverage ConnGame’s design engines and virtual applications to broaden our service capabilities and scope of architectural collaborations. We intend to utilize ConnGame's technology and online platform to provide technical consulting and advisory services to architects, real estate developers and governments.





5


Design





Specific technical parameters of the concept are established as new design elements are created and combined with existing technologies. During the design phase, our engineers and technicians review preliminary and completed designs and make recommendations regarding types of connections, possible savings on fabrication techniques, and methods of installation. Operating state-of-the art computer-aided design (CAD) stations, these individuals provide customized design solutions in the form of structural calculations, drawings, fabrication and installation details, together with technical advice and consultancy on specifications, feasibility studies and material procurement. At the implementation stage of the project, detailed fabrications/shop-drawings are produced, discussed and agreed with the project architect/manager. These form the blueprint for project execution and scheduling. Every order is scheduled for production through CAD and computer-aided manufacturing (CAM) systems with progress tracked at each stage of the project process. Quality control and assurance programs are a combination of our specifications with quality inspectors working at all production stages.





Engineering





We maintain significant in-house structural engineering and detailing capabilities that enable us to implement and coordinate with our shop and field personnel original project specifications and changes to building and structural designs sought by our clients. These resources help influence critical determinations as to the most cost-effective systems, designs, connections, and installation procedures for a particular project. Our engineers work on-site with suppliers to machine our patented curtain wall elements and to procure the appropriate raw materials. Our detailers prepare detail shop drawings of the dimensions, positions, locations, and connections, and the fabrication and installation sequences, of each component utilized in a project, and continually update these drawings to accommodate design and other changes. Our automated detailing systems produce updated detail drawings electronically, which can be delivered to our domestic and foreign field locations. Detailers coordinate directly with customers and our suppliers and installation teams to determine and plan the order of fabrication and installation of a project and associated personnel and equipment requirements.





Fabrication





Although we are responsible for hiring suppliers and manufacturers, we subcontract the manufacture of parts made from glass, metal and other materials used in our exterior cladding systems. Once parts have been manufactured by subcontracted factories, we will occasionally process them further. This processing usually entails procedures such as adding metal frames to or drilling holes in glass panes, or cutting and bending steel rods into customized shapes. All of our products are fabricated in accordance with applicable industry and specific customer standards and specifications.





Installation





We have full-time project managers/supervisors and part-time on-site workers who are engaged on our projects. Our installation teams consist of highly trained, skilled and experienced field operatives with established lines of communication between the work site, the technical design department and the factory, ensuring that clients are provided with optimum and cost-effective practical solutions. Site installation is managed through our trained project management staff, and each project has a dedicated project team. On site there are a number of our supervisors who are each responsible for a different section of the curtain wall project. The installation process typically consists of pre-assembly of metal and glass component parts at the project site, the lifting of components by crane to the appropriate location at the site and the final assembly of major components. The installation team coordinates its site delivery program with the main contract schedule to meet completion deadlines.





Customer Service





Our quality control and assurance department is comprised of trained technicians who are responsible for the quality assurance, including quality control of in-process fabrication and site installation by a detailed inspection as well as continued maintenance after project completion. We have adopted important safety policies that are administered and enforced by our senior management and provide training on safety procedures and techniques to our shop and field personnel.





Construction Products Attributes





Our exterior cladding systems products are highly engineered specialty wall systems consisting primarily of a series of glass panels set in metal frames, stone panels, or metal panels, as well as roofing systems and related products. A curtain wall is fixed to the commercial building by mechanical connection, either in a primarily inoperable mode or adjustable with special settings with spring or press systems. Glass panels are connected to the metal support system by metal clamps and fixing bolts. The support system of fixing bolts could be a steel, aluminum and or glass structure, with glass flank or spidery tension rod or cable.





We offer a variety of support systems:





·
Glass Fin Support System. The facial glass mixing with the glass fin provides facade with maximum transparence, which eliminates the differential expansion among glass metal structures.




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·
Metal Structure Support System. This system utilizes both steel post and steel truss of aluminum post in a metal structure. One of our most popular support systems, its flexibility can fully meet the criteria of demanding modern architecture. At the same time, the combination of transparent glass and steady metal structure completely realizes a harmony between beauty and force, elegance and strength.





·
Spidery Tension Rod/Cable Support System. This system utilizes a stainless steel tension rod connector for connecting the tension rod or the tension cable to the steel structure in order to form a stable spidery structure for glass curtain wall supporting. A response to the challenge of modern architecture, architects are able to create a smooth and transparent facade.





We use a variety of clamping devices to integrate the glass frame to the support system. Metal “spider” clamps are cast from stainless or high-strength carbonic steel in and provide the features of high strength, simple installment and easy maintenance. Our metal clamps integrate the facial glass with the structure, enhancing the hardness of an entity. Transferable cabling structure makes the curtain wall stretch higher, meeting designers’ requirements for the larger size of vertical space. The combination of steel and glass embodies the feature of stability, lightness and transparency, expressing the majesty and originality of a building.





Our fixing bolts are made of stainless steel and are used for holding the glass glazing. These specifically designed bolts transfer the wind loads, deflection stress and the weight of glass itself to the metal support system, which helps reduce the strain on the glass and ensure structural integrity. These bolts are offered in both countersink and flat head. Countersink head fixing bolts they provide a smooth surface when fit flush in the outward surfaces of the glass. They are typically utilized in single and double glazed glass structures. The cylindrical head of our flat head fixing bolts protrude from the surface of glass, which provides more strength against wind force and shear force and can use to fix laminated and insolated glass.





We offer a variety of glass panels allowing a diverse selection of styles to meet the architectural demands of our clients:





·
Insulating Glass. Increases a window’s thermal performance and sound insulation; constructed with two or more pieces of glass separated by a desiccant-filled spacer and sealed with an organic sealant. The desiccant absorbs the insulating glass unit’s internal moisture.





·
Laminated Glass. Consists of two or more pieces of glass fused with a vinyl or urethane interlayer and is used primarily for skylight, security and hurricane-resistant application.





·
Energy- Efficient Coated Glass. Provides solar control, both minimizing heat gain and controlling thermal transfer, by adding coatings to glass. In addition, coatings add color and varying levels of reflectively.





·
Spandrel Glass. The use of full coverage paint on insulated glass or polyester opacifier film backing on high performance coated glass for the non-vision areas of the building.





Construction Projects





General





Our work is performed under cost-plus-fee contracts and fixed-price contracts. The length of our contracts varies but typically has duration of one to two years.





Approximately 95% of our sales are from fixed price contracts. Our remaining sales are from cost-plus-fee contracts. Under fixed-price contracts, we receive a fixed price. Approximately 70% of contracts are modified after they begin, usually to accommodate requests from clients to increase project size and scope. In cases where fixed-price contracts are modified, the fixed price is renegotiated and adjusted upwards accordingly. A disadvantage of fixed-price contracts is that we realize a profit only if we control our costs and prevent cost over-runs on the contracts, which can oftentimes be out of our control, such as cost of materials. An advantage of these contracts is that we can adjust the material and technology that we use in the project, as long as we satisfy the requirements of our customer, and there is a potential to benefit from lower costs of materials.





Under cost-plus-fee contracts, which may be subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be reimbursed for all our costs. An advantage of cost-plus-fee contracts is that the cost of materials generally has no effect on our profit, since we are reimbursed for costs. A disadvantage is that the profit resulting from any cost savings on the materials goes to the contractor and not us.





During 2010, we completed eight projects. Our three largest projects accounted for approximately 7.7%, 5.7% and 4.3% of our sales, respectively, for the year ended December 31, 2010. For the year ended December 31, 2010, approximately 23.7% of our sales came from new construction projects starting in 2010 and for the year ended December 31, 2009, approximately 24% of our sales came from new construction projects starting in 2009.





7


Sales and Marketing





Sales





Sales managers lead our sales and marketing efforts through our domestic headquarters in Zhuhai, China, and our main regional sales offices in Beijing, Shanghai, Guangzhou, Shenzhen, and Wuhan. We deal with overseas operational issues through our subsidiaries in Hong Kong and USA, and establish local project departments only when the project possesses substantial feasibility. We employ full-time project estimators and chief estimators. Our sales representatives attempt to maintain relationships with governments, developers, general contractors, architects, engineers, and other potential sources of business to determine potential new projects under consideration. Our sales efforts are further supported by our executive officers and engineering personnel, who have substantial experience in the design, engineering, fabrication, and installation of high-end specialty curtain walls.





We primarily compete for new project opportunities through our relationships and interaction with our active and prospective customer base, which we believe provides us with valuable current market information and sales opportunities. In addition, we are often contacted by governmental agencies in connection with public construction projects, and by large private-sector project owners and general contractors and engineering firms in connection with new building projects both in China and other countries, often at the recommendation of architects and engineers we have worked with in the past.





Upon selection of projects to bid or price, our estimating division reviews and prepares projected costs of shop, field, detail drawing preparation, raw materials, and other costs. On bid projects, a formal bid is prepared detailing the specific services and materials we plans to provide, payment terms and project completion timelines. Upon acceptance, our bid proposal is finalized in a definitive contract. We experience an average accounts settlement period ranging from three months to as high as one year from the time we provide services to the time we receive payment from our customers. In contrast, we typically need to place certain deposit with our suppliers on a portion of the purchase price in advance and for some suppliers we must maintain a deposit for future orders. We are typically paid by the contractor the entire amount due to us for our services and products once the entire project is completed, which could be significantly after we complete the curtain wall portion of the project. China’s policy requires the contractor to pay 85% of our total contract value to us before the project is completed, and the remainder may be paid when the contractor completes the entire project. In addition, current national policy in China dictates that for government projects sub-contractors will be paid directly from the government budget offices, not through general contractors and/or developers. Because our payment cycle is considerably shorter than our receivable cycle, we may experience working capital shortages. We have used bank loans, cash provided by operations and other financings to fund our operations.





Marketing





Management believes that we have developed a reputation for innovative technology and quality in the specialty high-end curtain wall industry. Marketing efforts are geared towards advancing us as a brand of choice for building the worlds most modern and challenging projects. Our marketing plan has historically focused on print advertising, participation in tradeshows, exhibitions, lecture and technology briefings to architects and property owners. To better showcase our diverse products to potential customers, we regularly exhibit at leading trade shows and exhibitions. Our dynamic, state-of-the-art trade show exhibits are developed internally to showcase our latest product offerings.





Production of Construction Products





Supplier Selection





We procure high quality glass panes, metal support beams, and other curtain wall components from a number of regional and international suppliers, depending on the requirements of the contract. Once the suppliers are chosen, our engineers work with them to configure their production processes to manufacture anything from a standard glass pane to a patented fixing bolt or connector. All manufacturing is monitored and approved by our quality control and engineering departments.





Component Processing and Delivery





Once the curtain wall components are produced, they are either shipped directly to the site or sent to one of our facilities for further processing. Such processing typically involves drilling holes in glass panes, affixing metal frame pieces to glass panes, and cutting steel rods and bending them into customized shapes. The project manager and project engineer jointly approve all factory purchases.





Quality Control





Our facilities are designed and maintained with a view towards conforming to good practice standards. To comply with the strict requirements of our customer base, we have implemented a quality assurance plan setting forth our quality assurance procedures. Our quality control department is responsible for maintaining quality standards. Quality control executes the following functions:




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·
implementing sampling systems and sample files;





·
maintaining quality of equipment and instruments;





·
auditing production records to ensure delivery of quality products;





·
articulating the responsibilities of quality control staff; and





·
on-site evaluation of supplier quality control systems.





We have received the following certifications in recognition of our production and quality assurance program:





·
ISO 9001 - International Quality System Certification, valid from April 9, 2008 to April 8, 2011;





·
ISO 14001 - International Environmental System Certification, valid from April 9, 2008 to April 8, 2011; and





·
ISO 18001 - International Safety System Certification, valid from April 16, 2008 to April 15, 2011.





Research and Development





Companies such as us are under pressure from customers to respond more quickly with new designs and product innovations to support rapidly changing consumer tastes and regulatory requirements. We believe that the engineering and technical expertise of our management and key personnel, together with our emphasis on continuing research and development in support of our high-end curtain wall technologies, allows us to efficiently and timely identify and bring new, innovative products to market for our customers using the latest technologies, materials and processes. We believe that continued research and development activities are critical to maintaining our offering of technologically-advanced products to serve a broader array of our customers.





For example, in an effort to add value and create new markets, we are working to develop high performance systems that reduce the need for air conditioning in the summer and heat in the winter. Our products under development are designed to both reduce the direct light and heat coming into the building and, through the use of photovoltaic cells, to harness the energy collected from the sun and further reduce external energy costs by generating power for use in other areas of the building. Other features are designed to add a level of programmed intelligence, automatically adjusting louvers/blinds and other façade controls to achieve predetermined levels for user comfort. These efforts are made to meet the demand for self-sustaining buildings and clean, renewable power in response to climbing energy prices and declining energy reserves.





Our research and development strategy relies primarily on internal innovation and development, supplemented with collaboration with academic and research institutions. For example, in 2001, we were appointed by the Chinese Ministry of Construction to lead the committee tasked with establishing national standards for the fixing bolt glass curtain wall technology industry. Luo Ken Yi, our Director and President, was the Editor-in-Chief for the new standard code. Also, in recognition of our contributions to the curtain wall industry, Luo Ken Yi and two other of our engineers were appointed to senior posts at the Architectural Glass and Metal Structure Institute of Qinghua University in Beijing, one of the most prestigious research institutions in China, which we helped to create in 1999. We were able to incorporate many of the academic research results by the Institute into our projects, including the National Grand Theater in Beijing and the Hangzhou Grand Theater, both completed in 2007.





As of December 31, 2010, we employed 238 designers and engineers. We currently own 79 patents, of which 51 are approved, and 28 pending approval. Of the 51 approved, 48 are in China and 3 are in other countries.





We expended $3,102,729, $2,926 and $711,318 on research and development activities for each of the years ended December 31, 2010, 2009 and 2008, respectively. All of the expenses for 2010 were incurred by ConnGame on research and development of techniques on online game operations.





Backlog





As of December 31, 2010, our total backlog of construction projects orders considered to be firm was approximately $27 million, compared with $39 and $176 million at December 31, 2009 and 2008, respectively. Of our 2010 amounts, 78% of the backlog, or $21 million, is expected to generate revenues in 2011, compare to 92% of our 2009 backlog, or $36 million, is expected to generate revenues in fiscal 2010. The decrease in backlog is primarily due to the absence of new international projects taken by the company. Our backlog as of December 31, 2010 consisted entirely of projects within our home market of China.





We define backlog as the total anticipated revenue from projects already begun and upcoming projects for which contracts have been signed or awarded and pending signing.  We view backlog as an important statistic in evaluating the level of sales activity and short-term sales trends in our business. However, as backlog is only one indicator, and is not an effective indicator of the ultimate profitability of our sales, we do not believe that backlog should be used as the sole indicator of our future earnings.  There can be no assurance that the backlog at any point in time will translate into net revenue in any subsequent period.




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Competition





Construction Competitors





The markets that we serve are highly competitive, price and lead-time sensitive and are impacted by changes in the commercial construction industry, including unforeseen delays in project timing and workflow. In addition, competition in the markets of the building industry is intense. It is based primarily on:





·
quality;





·
service;





·
delivery;





·
ability to provide added value in the design and engineering of buildings;





·
price;





·
speed of construction in buildings and components; and





·
personal relationships with customers.





We compete with several large integrated glass manufacturers, numerous specialty, architectural glass and window fabricators, and major contractors and subcontractors. We also compete with a number of other manufacturers of engineered building systems ranging from small local firms to large national firms. Many of our competitors have greater financial or other resources than we do. In addition, we and other manufacturers of engineered high-end curtain walls compete with alternative methods of building construction. If these alternative building methods compete successfully against us, such competition could adversely affect us.





Online Gaming Competitors





Competition in the online game market in China and the overseas markets where we offer our games is intense. We believe that the key competitive factors include the design, quality, popularity and price of online games and in-game items, the ability to rapidly update and upgrade games, marketing activities, sales and distribution network and customer service. We expect to compete principally with the following groups of competitors:




•
online game developers and operators in China, including Shanda Games, NetEase, Changyou, Giant Interactive, Nineyou, The9, Tencent, Kingsoft, Perfect and NetDragon;




•
other competitors, including major Internet portal operators in China, and game developers and operators in the overseas markets where we offer our games.




Some of our existing and potential competitors have significantly greater financial and marketing resources and a larger portfolio of game offerings than we do. However, in the 2.5D MMORPG market, our engines and games are in the most competitive situation.





Government Regulations





Our provision of online game services and related content on our websites is subject to various PRC laws and regulations relating to the telecommunications industry, Internet and online games, and regulated by various government authorities, including:




•
the Ministry of Industry and Information Technology and, before its formal establishment in 2008, its predecessor, the Ministry of Information Industry;




•
the General Administration of Press and Publications (the National Copyright Administration);




•
the State Administration for Industry and Commerce;




•
the Ministry of Culture;




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•
the Ministry of Public Security; and




•
the State Administration on Radio, Film and Television.





The principal PRC regulations governing the Internet content provision industry as well as the online game services in China include:




•
Telecommunications Regulations (2000);





•
the Administrative Rules for Foreign Investments in Telecommunications Enterprises (2001, and as amended in 2008);





•
the Administrative Measures for Telecommunications Business Operating Licenses (2009);





•
the Internet Information Services Administrative Measures (2000);





•
the Tentative Measures for Administration of Internet Culture (2003, and as amended in 2004);





•
the Notice on Several Issues Relating to the Implementation of The Tentative Measures for Administration of Internet Culture (2003);





•
the Tentative Measures for Administration of Internet Publication (2002);





•
the Notice of Implementing the State Council’s “Regulation ‘Sanding’” and Relevant Interpretation Issued by State Commission Office for Public Sector Reform (“SCOPSR”) and Further Strengthen the Administration and Approval of the Pre-approval and Import of Online Games (2009);





•
the Foreign Investment Industrial Guidance Catalogue (2007);





•
the Administrative Measures on Electronic Publications (2008);





•
the Administrative Measures on Software Products (2009);





•
the Administrative Measures on Internet Electronic Bulletin Board Services (2000);





•
the Measures on Computer Software Copyright Registration (2002);





•
the Notice of the Ministry of Culture on Enhancing the Content Review Work of Online Game Products (2004);





•
Some Opinions of the Ministry of Culture and the MIIT on the Development and Administration of Online Games (2005);





•
the Notice on the Work of Purification of Online Games (2005);





•
the Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business (2006);





•
the Circular on Implementing Online Game Anti-fatigue System to Protect the Health of the Minors (2007);





•
the Administrative Measures on Internet Video/Audio Program Services (2007);




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•
the Tentative Catalogue of Internet Video/Audio Program Services (2009); and





•
the Notice on the Reinforcement of the Administration of Internet Cafés and Online Games (2007).




As both the online game industry are at an early stage of development in China, new laws and regulations may be adopted from time to time to require additional licenses and permits other than those we currently have, and address new issues that arise from time to time. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future Chinese laws and regulations applicable to the online game.




Restrictions on Foreign Investment




Under the above regulations, a foreign investor is currently prohibited from owning more than 50% of the equity interest in a Chinese entity that provides value-added telecommunications services, including online game, and other Internet content provision. In addition, foreign and foreign invested enterprises are currently not able to apply for certain required licenses for operating online games in China.





The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business issued by the MIIT in July 2006, reiterated the regulations on foreign investment in telecommunications business, which require foreign investors to set up foreign-invested enterprises and obtain an ICP license in order to conduct any value-added telecommunications business in China. Under this circular, a domestic company that holds an ICP license is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance in forms of resources, sites or facilities to foreign investors that conduct value-added telecommunications business illegally in China. Furthermore, the relevant trademarks and domain names that are used in the value-added telecommunications business shall be owned by the local ICP license holder or its shareholders. This circular further requires each ICP license holder to have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications service providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Due to the lack of further necessary interpretation from the regulator, it remains unclear what impact this circular will have on us or the other Chinese Internet companies that have adopted the same or similar corporate and contractual structures as ours.In addition, pursuant to certain PRC regulations promulgated in September 2009, foreign investors are prohibited from directly providing online game services in China or indirectly doing so through establishing joint ventures, contracting with other entities, providing technical supports, or providing account management or payment service.




Regulation of LicensesOnline game operators are required to hold a variety of permits and licenses, which, among others, include:




ICPLicense. Under current Chinese laws and regulations, a commercial operator of Internet content provision services must obtain a value-added telecommunications business operating license for Internet content provision from the appropriate telecommunications authorities in order to carry on any commercial Internet content provision operations in China. ConnGame has obtained the ICP license.




Internet Culture Operation License. Each ICP license holder that engages in the supply of Internet culture products and related services, including provision of online games services, must obtain an additional Internet culture operation license from the appropriate culture administrative authorities pursuant to the Tentative Measures for Administration of Internet Culture (2003, and as amended in 2004). ConnGame obtained an Internet culture operation license for the operation of online games in April 2010.




Internet Publishing License. The GAPP and the MIIT jointly impose a license requirement for any company that intends to engage in Internet publishing, defined as any act by an Internet information service provider to select, edit and process content or programs and to make such content or programs publicly available on the Internet. According to the Tentative Measures for Administration of Internet Publication (2002), the provision of online games services is deemed an Internet publication activity. Therefore, online game operators need to obtain an Internet publishing license in order to directly make their online games services publicly available in China.




In addition to the aforementioned permits and licenses that are required for online game operators, for each online game that an operator operates, additional permits or licenses are required, which include, among others, those set forth below in “—Regulation of Internet Content” and “—Regulation of Information Security.”




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Regulation of Internet Content




The Chinese government has promulgated measures relating to Internet content through a number of ministries and agencies, including the MIIT, the Ministry of Culture and the GAPP. These measures specifically prohibit Internet activities, which includes the operation of online games, that result in thepublication of any content which is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security or secrets. When an Internet content provider or an Internet publisher finds that information falling within the above scope is transmitted on its website or is stored in its electronic bulletin service system, it shall terminate the transmission of such information or delete such information immediately and keep records and report to relevant authorities. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites. In addition, according to the Notice on the Work of Purification of Online Games jointly issued by the Ministry of Culture, the MIIT and some other governmental authorities in June 2005, online games shall be registered and filed as software products in accordance with the Administrative Measures on Software Products (2000) for the purpose of being operated in China. Furthermore, in accordance with the Notice on Enhancing the Content Review Work of Online Game Products (2004) promulgated by the Ministry of Culture, imported and domestic online games should be filed with the Ministry of Culture before the operation of each game.




Regulation of Information Security




Internet content in China is also regulated and restricted from a State security standpoint. The National People’s Congress, China’s national legislative body, has enacted a law that may subject to criminal punishment in China any effort to: (1) gain improper entry into a computer or system of strategic importance; (2) disseminate politically disruptive information; (3) leak State secrets; (4) spread false commercial information; or (5) infringe intellectual property rights.




The Ministry of Public Security has promulgated measures that prohibit use of the Internet in ways which, among other things, result in a leak of State secrets or a spread of socially destabilizing content. The Ministry of Public Security has supervision and inspection rights in this regard, and we may be subject to the jurisdiction of the local public security bureaus. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.




Intellectual Property Rights




The State Council and the National Copyright Administration have promulgated various regulations and rules relating to protection of software in China. Under these regulations and rules, software owners, licensees and transferees may register their rights in software with the National Copyright Administration or its local branches and obtain software copyright registration certificates.




The PRC Trademark Law, adopted in 1982 and revised in 2001, with its implementation rules adopted in 2002, protects registered trademarks. The Trademark Office of the SAIC handles trademark registrations and grants a protection term of ten years to registered trademarks.




Internet Café Regulation




Internet cafés are required to obtain a license from the Ministry of Culture and the SAIC, and are subject to requirements and regulations with respect to location, size, number of computers, age limit of customers and business hours. In 2004, the Ministry of Culture, the SAIC and some other governmental authorities jointly issued a notice to suspend issuance of new Internet café licenses. Though this nationwide suspension has been generally lifted in 2005, the local authorities have the authority of controlling the volume and recipients of new licenses at their discretion. In addition, local and higher-level governmental authorities may from time to time strictly enforce customer age limits and other requirements relating to Internet cafés, as a result of the occurrence of, and media attention on, gang fights, arsons or other incidents in or related to Internet cafés. As many of our customers access our games website from Internet cafés, any reduction in the number, or any slowdown in the growth, of Internet cafés in China as a result of any intensified Internet café regulation will limit our ability to maintain or increase our revenues and expand our customer base, which will in turn materially and adversely affect our business and results of operations. A notice jointly issued by several central governmental agencies in February 2007 suspended nationwide the approval for the establishment of new Internet cafés for the year of 2007 and enhanced the punishment for Internet cafés admitting minors.




Privacy Protection




Chinese law does not prohibit Internet content providers from collecting and analyzing personal information from their users. We require our users to accept a user agreement whereby they agree to provide certain personal information to us. Chinese law prohibits Internet content providers from disclosing to any third parties any information transmitted by users through their networks unless otherwise permitted by law. If an Internet content provider violates these regulations, the MIIT or its local bureaus may impose penalties and the Internet content provider may be liable for damages caused to its users.




Anti-fatigue System and Real Identification Registration System




In April 2007, the GAPP and several other governmental authorities issued a circular requiring the implementation of an “anti-fatigue system” and a real-name registration system by all PRC online game operators, in an effort to curb addictive online game play behaviors of minors. Under the anti-fatigue system, three hours or less of continuous play by minors is considered to be “healthy,” three to five hours to be “fatiguing,” and five hours or more to be “unhealthy.” Game operators are required to reduce the value of in-game benefits to a player by half if the player has reached “fatiguing” level, and to zero in the case of “unhealthy” level.




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To identify whether a player is a minor and thus subject to the anti-fatigue system, a real-name registration system is also adopted, which requires online game players to register their real identity information before they play online games. We have developed our own anti-fatigue system and real identification number registration system, and have implemented them since March 2010.




Virtual Currency




On February 15, 2007, the Ministry of Commerce, the People’s Bank of China and other relevant government authorities jointly issued the Notice on the Reinforcement of the Administration of Internet Cafes and Online Games, or the Internet Cafés Notice. Under this notice, the People’s Bank of China is directed to strengthen the administration of virtual currency in online games to avoid any adverse impact on the economy and financial system. This notice provides that the total amount of virtual currency issued by online game operators and the amount purchased by individual game players should be strictly limited, with a strict and clear division between virtual transactions and real transactions carried out by way of electronic commerce. This notice also provides that virtual currency should only be used to purchase in-game items.




On June 4, 2009, Ministry of Commerce jointly issued Notice on the Reinforcement of the Administration of Virtual Currency in Online Games, which defines what is virtual currency and requires that entities shall obtain the approval from the Ministry of Commerce before issuing virtual currency and engaging in transactions using virtual currency in connection with online games. Entities are prohibited from using virtual currency to carry out gambling business.




Regulation of Internet Video/Audio Program Services





On December 12, 2007, SARFT and MIIT promulgated the Administrative Measures on Internet Video/Audio Program Services, which requires that, among others, a service provider of Internet video/audio program shall obtain a license from SARFT, failure of which may result in the suspension or close of the website providing the Internet video/audio program services.




Construction industry





China’s construction industry is heavily regulated by the national government. On November 1, 1997, the National Government of the PRC published the Construction Law of the PRC, Presidential Order No. 91, which is the basic construction law of China. This law outlines the basic requirements and rules for all construction activity in China. Underneath the National Government, the Ministry of Construction also writes laws. On March 14, 2001, the Ministry of Construction published Rule No. 87, which puts forth licensing requirements for all construction companies operating in China. The Ministry of Construction also writes specific standards for all different types of construction. The three standards from the Ministry of Construction which are most relevant to our business are: (i) the Curtain Wall Engineering and Design Licensing Standard, and (ii) the Light-Duty Steel Building Structure Engineering and Design Licensing Standard, and (iii) the Automated Building Control System Standard. These standards stipulate the basic requirements for construction companies in China in such areas as registered capital, tangible assets, liability insurance, employee regulations and engineering certifications. The standards also have graded levels of qualification. We have first class certification for the Curtain Wall Standard and Second Class Certification for the Light Steel Structure Standard. In addition, provincial and municipal governments may also enact regulations through their own construction bureaus.





Business license





Any company that conducts business in the PRC must have a business license that covers a particular type of work. Our business license covers our present business, which is to design, fabricate and install curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems, eco-energy saving building conservation systems and provision of related products, for public works and commercial real estate projects.  Prior to expanding our business beyond that of our business license, we are required to apply and receive approval from the PRC government.





Employment laws





We are required to contribute a portion of our employees’ total salaries to the Chinese government’s social insurance funds, including medical insurance, unemployment insurance and job injuries insurance, and a housing assistance fund, in accordance with relevant regulations. We are required to contribute to government social security, medical insurance, unemployment insurance, disability insurance and so on for our employees based in Hong Kong, Australia and the United States.  Changes in Chinese labor laws that became effective January 1, 2008 that results in an increase of labor costs and impose restrictions on our relationship with our employees. There can be no assurance that the labor laws will not change further or that their interpretation and implementation will vary, which may have a negative effect upon our business and results of operations.





Patent protection in China





The PRC’s intellectual property protection regime is consistent with those of other modern industrialized countries. The PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets.




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The PRC is also a signatory to most of the world’s major intellectual property conventions, including:





·
Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);





·
Paris Convention for the Protection of Industrial Property (March 19, 1985);





·
Patent Cooperation Treaty (January 1, 1994); and





·
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).





Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of the China Patent Law and its Implementing Regulations came into effect in 2001 and 2003, respectively.





The PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries, a right of priority during the period fixed in the convention.





The Patent Law covers three kinds of patents—patents for inventions, utility models and designs. The Chinese patent system adopts the principle of first to file; therefore, where more than one person files a patent application for the same invention, a patent can only be granted to the person who first filed the application. Consistent with international practice, the PRC only allows the patenting of inventions or utility models that possess the characteristics of novelty, inventiveness and practical applicability. For a design to be patentable, it cannot be identical with or similar to any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been publicly used in the country, and should not be in conflict with any prior right of another.





PRC law provides that anyone wishing to exploit the patent of another must conclude a written licensing contract with the patent holder and pay the patent holder a fee. One broad exception to this rule, however, is that, where a party possesses the means to exploit a patent but cannot obtain a license from the patent holder on reasonable terms and in reasonable period of time, the PRC State Intellectual Property Office, or SIPO, is authorized to grant a compulsory license. A compulsory license can also be granted where a national emergency or any extraordinary state of affairs occurs or where the public interest so requires. SIPO, however, has not granted any compulsory license to date. The patent holder may appeal such decision within three months from receiving notification by filing a suit in a people’s court.





PRC law defines patent infringement as the exploitation of a patent without the authorization of the patent holder. Patent holders who believe their patent is being infringed may file a civil suit or file a complaint with a PRC local Intellectual Property Administrative Authority, which may order the infringer to stop the infringing acts. Preliminary injunction may be issued by the People’s Court upon the patentee’s or the interested parties’ request before instituting any legal proceedings or during the proceedings. Damages in the case of patent infringement is calculated as either the loss suffered by the patent holder arising from the infringement or the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be reasonably determined in an amount ranging from one to more times of the license fee under a contractual license. The infringing party may be also fined by Administration of Patent Management in an amount of up to three times the unlawful income earned by such infringing party.





Foreign currency exchange





Under the PRC foreign currency exchange regulations applicable to us, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the PRC State Administration of Foreign Exchange, or SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, the SAFE and the State Reform and Development Commission.  We currently do not hedge our exposure to fluctuations in currency exchange rates.





Dividend distributions





Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China are required to set aside at least 10.0% of their after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation





15


Employees





As of December 31, 2010, we had 416 full-time employees. Approximately 57% of our employees are designers and engineers, 3% are project managers/supervisors and the remaining employees are supply chain and administrative staff. We believe that our relationship with our employees is good.





Available Information





The Company maintains a website at www.caebuilding.com.  This corporate website provides free access to the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after electronic filing such material with, or furnishing it to, the Securities and Exchange Commission.





16


ITEM 1A. RISK FACTORS





Any investment in our securities involves a high degree of risk. Investors should carefully consider the risks described below and all of the information contained in this Annual Report before deciding whether to purchase our securities. Our business, financial condition or results of operations could be materially adversely affected by these risks if any of them actually occur. The trading price of our common stock could decline due to any of these risks, and an investor may lose all or part of his investment. Some of these factors have affected our financial condition and operating results in the past or are currently affecting our company. This report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this report. With respect to this discussion, the terms, “we,” “us,” or “our” refer to CHINA CGAME, INC., and all of our subsidiaries.





RISKS RELATED TO OUR OPERATIONS





More than half of our contracts receivables are attributable to a Dubai project, which is under dispute and we may never be paid.





One of the primarily reasons that the aging of Company’s contract receivables have increased is the delay in payment by client of the Dubai projects since April 2009.  The underlying receivable as of December 31, 2010 from the Dubai projects was approximately $42 million, which represented 52% of the total contract receivables as of such date. The Company has employed a claim consultant, Hill International, to facilitate the Company’s claim for the back payment.  In April 2011, the master contractor reiterated that it does not believe that it is obligated to pay to the Company any of the amounts that the Company believes it is due. The Company intends to file an arbitration claim in April 2011. The Company currently expects that there will be progress and payments will be received.  However, due to the ongoing dispute, there is no guarantee that the Company will collect all or a portion of the contract receivable.  If we are not able to collect the receivable, our results of operations and financial condition will be materially adversely impacted.  See“ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION—Dubai Metro Rail Project” in this report for more information.





We have recently suffered substantial losses and our auditors have expressed doubt about our ability to continue as a going concern.





The independent auditor's report on our financial statements contains explanatory language that substantial doubt exists about our ability to continue as a going concern. The report states that we have suffered operation net loss of more than $23 million during the year ended December 31, 2010 and as of December 31, 2010, we have an accumulated deficit of approximately $11.2 million due to the fact that we continued to incur losses over the past few years. As noted in the report, we have difficulty to maintain sufficient working capital for operation activities. All of these matters raise substantial doubt of our ability to continue as a going concern. If we are unable to obtain sufficient additional financing in the near term or regain profitability, then we would, in all likelihood, experience severe liquidity problems and may have to curtail our operations. If we curtail our operations, we may be placed into bankruptcy or undergo liquidation, the result of which will adversely affect the value of our common shares.





A majority of the bonds have matured and we are unable to make payment. Exercise of the bondholders' right to require redemption of the Bonds would suffer a significant material adverse effect on our liquidity and cash resources.





If we are required to redeem all or any portion of the $8 million and $20 million outstanding Bonds, this may have a material adverse effect on our liquidity and cash resources, and may impair our ability to continue to operate. Pursuant to the terms of the Bonds, at any time after April 12, 2010, each holder of the 2007 Bonds can require us to redeem the 2007 Bonds at 126.51% of the principal amount of the 2007 Bonds and we are required to redeem any outstanding 2007 Bonds at 150.87% of its principal amount on April 4, 2012.  Also, on April 15 and October 15 of each year on or after April 15, 2010, the holders of the 2008 Bonds may require us to redeem the 2008 Bonds at 116.61% of their principal amount.  We are required to redeem any outstanding 2008 Bonds at 116.61% of its principal amount on April 15, 2011.  If a triggering event occurs and we are requested by the holders to repurchase all or a portion of the 2007 or 2008 Bonds, we will be required to pay cash to redeem all or a portion of the Bonds.





Pursuant to the Waiver, upon our timely payment of all of the required payments under the Waiver, the bondholders have agreed to commence negotiations in good faith with us to waive their rights under the trust deed governing the 2007 Bonds to require us to redeem the 2007 Bonds at 126.51% of the principal amount, plus all accrued but unpaid interest, at any time after April 12, 2010, and their rights under the trust deed governing the 2008 Bonds to require us to redeem the 2008 Bonds at 116.61% of the principal amount of the Bonds redeemed, plus all accrued but unpaid interest, on any Interest Payment Date on or after April 15, 2010.  However, we cannot assure you that we will be able to reach an agreement with the bondholders for their waiver of such rights.  If we are required to repurchase all or a portion of the Bonds and do not have sufficient cash to make the repurchase, we may be required to obtain third party financing to do so, and there can be no assurances that we will be able to secure financing in a timely manner and on favorable terms, which could have a material adverse effect on our financial performance, results of operations and stock price.




17




We have failed to make the required interest payment under our $28 million convertible bonds.  The bondholders may, at any time, declare a default under the Bonds and require us to pay the Bonds.  We have entered into a waiver with the bondholders, but had been unable to meet the terms and condition of the waiver agreement, which could result in bankruptcy or otherwise impair our ability to maintain sufficient liquidity to continue our operations.





On February 24, 2010, we and the holders of our Bonds and the 2008 Bond Warrants entered into an Amendment and Waiver Agreement (the “Waiver”).  Pursuant to Waiver, which has a three month term, the bondholders and warrantholder agreed to waive their right to a reduction in the conversion price of the Bonds and exercise price of the 2008 Bond Warrants due to our issuance of 6,250,000 shares of common stock to First Jet Investment Limited to acquire an equity interest in ConnGame at a price per share less than the current conversion prices of the Bonds and exercise price of the 2008 Bond Warrants.  Pursuant to the Waiver, we agreed to pay the bondholders the interest in arrears owed on the Bonds as of March 31, 2010 in two equal payments on March 31, 2010 and May 31, 2010 of approximately $1.26 million each and to pay 100% of the interest payments on the Bonds that becomes due in April 2010 to be paid on April 15, 2010 of approximately $1.32 million, for aggregate payments of approximately $3.84 million.  We also agreed to repay the principal and all accrued interest that we owe to ABN AMRO Bank (China) Co., Ltd., Shenzhen Branch (the “Overdraft Lender”) under an Overdraft Facility letter in three equal separate installments. The total amount owed to the Overdraft Lender is equal to approximately $4.91 million. The first installment is due no later than March 31, 2010, the second installment is due on April 30, 2010 and the third installment is due on May 31, 2010.





We further agreed that we will not repay or prepay any debt prior to its currently scheduled due date until we make all of the payments specified in the Waiver and the Bonds have been redeemed in full and that any new indebtedness incurred by us for the purpose of repaying the overdraft facility shall (i) not exceed the outstanding amount due and payable under the overdraft facility and (ii) be subordinated to all amount owed under the Bonds.





If we fail to make any of the payments specified in the Waiver or fail to uphold any obligation in the Waiver, then the waiver will be null and void and the bondholders are declare a default and call the bonds for payment.  If we are required to redeem all or a portion of the Bonds, we may be required to seek third party financing to do so, and there can be no assurances that we will be able to secure financing in a timely manner and on favorable terms, which would have a material adverse effect on our results of operation, financial position, and cash flows and liquidity, and could result in bankruptcy.





We have not been able to comply with the terms of the Waiver, including payments required to be made by us, the waiver of the adjustment rights may become voided and the conversion and exercise prices of the bonds and warrants may adjust down, resulting in substantial dilution to our securities and immediate repayment of the Bonds.





One of the conditions to the acquisition of ConnGame was that we obtain a waiver from our bondholders related to their rights to have the conversion and exercise price of the Bonds and 2008 Warrants, respectively, adjusted downward as a result of ours issuance of the 6.5 million shares. We obtained the Waiver on February 24, 2010. The Waiver had a three month term from the execution date, and therefore expired on May 24, 2010. The parties entered into a new waiver on July 13, 2010, which has a three month term subject to the terms and conditions contained therein. We close the transaction within the three-month period. We have failed to make certain payments specified in the Waiver and are currently negotiating with the bondholders to amend the Waiver. If we are not able to reach an agreement with the bondholders, all rights of the holders of the Bonds and 2008 Warrants waived under the Waiver to or to be waived under the Waiver, shall not be waived and will be reinstated, and any previous waivers will be null and void.





Our failure to adequately recover on claims brought by us against project contractors, such as the contractor of the Dubai Metro Rail Project, for additional contract costs could have a negative impact on our liquidity and profitability.





We have brought claims against project contractors for additional costs exceeding the contract price or for amounts not included in the original contract price.  These types of claims occur due to matters such as contractor- or owner-caused delays or changes from the initial project scope, both of which may result in additional cost.  Often, these claims can be the subject of lengthy arbitration or litigation proceedings, and it is difficult to accurately predict when these claims will be fully resolved.  For example, we are currently in a dispute with the contractor of the Dubai Metro Rail Project for amounts that we believe are owed to us but with which the project owner disagrees, including additional contract costs.  At dispute is approximately $42.1 million.  When these types of events occur and unresolved claims are pending, we have used working capital in projects to cover cost overruns pending the resolution of the relevant claims.  A failure to promptly recover on these types of claims, if at all, could have a negative impact on our liquidity and profitability.





18


The growth of aging receivables and a deterioration in the collectability of these accounts could adversely affect our results of operations.





We provide for bad debts principally based upon the aging of accounts receivable, in addition to collectability of specific customer accounts, our history of bad debts, and the general condition of the industry.  Among the contract receivables as of December 31, 2010, $59.4 million was outstanding over 365 days and $18.5 million over 730 days, in total of $87.0 million which including $15.4 million of retention money which would only be settled after the retention periods of two or three years. The Company periodically prepares the aging of the receivables information and reviews the balances with consideration of the background of each client for assessing the realizable value of the balances and would make provision when appropriate. We recorded a general provision for doubtful accounts amounting to approximately $1.4 million in 2009 and $6.0 million in 2010, which management believes is commensurate to cover the associated credit risk in the portfolio of our construction contract related receivables.  As of December 31, 2010, our provision for doubtful accounts was $5.5 million, which was 6.4% of our construction contract related receivables of $87.0 million. We believed it was appropriate to increase the reserve for doubtful accounts primarily due to an increase in the aging of our accounts receivable, the growth of the outstanding balance of receivables as of December 31, 2010, and the general decline in the domestic and global economy.  Due to the difficulty in assessing future trends, we could be required to further increase our provisions for doubtful accounts.  As our accounts receivable age and become uncollectible our cash flow and results of operations are negatively impacted.





We identified material weaknesses in our internal control over financial reporting and concluded that such controls were not effective.  If we fail to maintain effective internal control over financial reporting, we may not be able to accurately report our financial results.  We can provide no assurance that we will at all time in the future be able to report that our internal control is effective.





Because we have reporting obligations under the Exchange Act, we are required to report, among other things, control deficiencies that constitute material weaknesses or changes in internal control that, or that are reasonably likely to, materially affect internal control over financial reporting.  A “material weakness” is a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  Based on the restatements to our financial statements referenced above, our management concluded that our system of internal control over financial reporting was not effective as of December 31, 2010, in addition to prior period end dates, which were the cause of our restatements as described above.  Although management does not anticipate making any further restatements to the financial statements for subsequent periods, management believes that our weakness in internal controls continued during such periods.  Management has identified internal control deficiencies which, in management’s judgment, represent material weaknesses in internal control over financial reporting.  The control deficiencies related to controls over the accounting and disclosure for transactions to ensure such transactions were recorded as necessary to permit preparation of financial statements and disclosure in accordance with GAAP. If we fail to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 or report a material weakness, we might be subject to regulatory sanction and investors may lose confidence in our financial statements, which may be inaccurate if we fail to remedy such material weakness.





If we are unable to accurately estimate and control our contract costs and timelines, then we may incur losses on our contracts, which may result in decreases in our operating margins and in a significant reduction or elimination of our profits.





If we do not control our contract costs, we may be unable to maintain positive operating margins or experience operating losses. Approximately 95% of our sales are from fixed-price contracts. The remaining 5% of our sales are from cost-plus-fee contracts. Under fixed-price contracts, we receive a fixed price. Consequently, we realize a profit on fixed-price contracts only if we control our costs and prevent cost over-runs on the contracts. Approximately 70% of contracts are modified after they begin, usually to accommodate requests from clients to increase project size and scope. In cases where fixed-price contracts are modified, the fixed price is renegotiated and adjusted upwards accordingly. Under cost-plus-fee contracts, which may be subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be reimbursed for all our costs. Under each type of contract, if we are unable to estimate and control costs and/or project timelines, we may incur losses on our contracts, which may result in decreases in our operating margins and in a significant reduction or elimination of our profits.





Due to global recession, its negative effect on the construction industry, and other reasons, we do not intend to engage in any international projects in 2010, which accounted for a majority of our revenues in 2009.  We have shifted our focus to projects located in mainland China and our contract revenues and net income will be materially reduced if we are not able to secure sufficient projects in China.





For fiscal 2010, 2009 and 2008, revenue from sales of our products and services internationally (for our purposes, outside of China) represented approximately 2%, 57% and 44.6% respectively, of our total revenue.  As a result of our recent restructure and reorganization to turn back to local instead of oversea market due to the recent change in international economic environments, our Shenzhen office was down sized and moved out from the leasehold multi-floor office building to a smaller leased place at minimal operations in September 2009. The set up of the Shenzhen office was originally for the support of the overseas operations which we have decided to discontinue. As a result, the current improvement works to the leasehold multi-floor office building were stopped and was written off in the third quarter of 2009, a loss of $1.9 million.  In addition, a substantial percentage of our revenue has been derived from international projects in the past few years, and with the loss of such sources of revenue going forward, our results of operations will suffer if we are unable to secure a sufficient amount of projects in mainland China to offset the void in revenue that we have received from international projects in the past, which could negatively affect our stock price.





19


A substantial portion of our assets has been comprised of construction contract receivables representing amounts owed by a small number of customers. If any of these customers fails to timely pay us amounts owed, we could suffer a significant decline in cash flow and liquidity which, in turn, could cause us to be unable to pay our liabilities and purchase an adequate amount of inventory to sustain or expand our sales volume.





Our construction contract receivables represented approximately 69.0% and 65.7% of our total current assets as of December 31, 2010 and 2009, respectively. As of December 31, 2010, our largest customer represented over 51.6% of the total amount of our construction contract receivables. As a result of the substantial amount and concentration of our construction contract receivables, if any of our major customers fails to timely pay us amounts owed, we could suffer a significant decline in cash flow and liquidity which could adversely affect our ability to borrow funds to pay our liabilities and to purchase inventory to sustain or expand our current sales volume.





Our use of the “percentage-of-completion” method of accounting could result in reduction or reversal of previously recorded revenues and profits.





A substantial portion of our revenues and profits are measured and recognized using the “percentage-of-completion” method of accounting, which is discussed further in Note 2, “Summary of Significant Accounting Policies” to our “Financial Statements.” Our use of this method results in recognition of revenues and profits ratably over the life of a contract, based generally on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effect of revisions to revenues and estimated costs is recorded when the amounts are known or can be reasonably estimated.  There are uncertainties inherent in the estimating process, and estimate revisions may occur.  Such revisions could occur in any period and their effects could be material.  As is customary in the construction industry, we intend to conduct interim reviews on a rolling basis, and it may be determined during these reviews that actual costs on a project or projects vary materially from estimates, including reductions or reversals of previously recorded revenues and profits.  Our results of operations for current and past periods may be negatively affected by revisions to estimates and reductions or reversals of previously recorded revenues and profits, which could harm the value of our securities.





The restatement of certain of our historical consolidated financial statements may have an adverse effect on us.





In May 2010, our management concluded that our consolidated audited financial statements for the years ended December 31, 2009, 2008 and 2007 and our consolidated unaudited interim financial statements for the periods ended September 30, 2007, September 30, 2007, March 31, 2008 and September 30, 2008 needed to be restated and should not be relied upon.  For a more detailed discussion of the restatements, amendments and their underlying circumstances, please refer to the Explanatory Note at the beginning of our Annual Report on Form 10-K/A for the year ended December 31, 2009 (the “Amended 2008 Form 10-K”) and Note 1 of the Notes to the consolidated financial statements included in the Amended 2009 Form 10-K.  As a result of the restatements, the Company may become subject to a number of significant risks, which could have an adverse effect on its business, financial condition and results of operations, including potential civil litigation (including stockholder class action lawsuits and derivative claims made on behalf of the Company), and regulatory proceedings or actions, the defense of which may require significant management attention and significant legal expense and which litigation, proceedings or actions, if decided against us, could require us to pay substantial judgments, settlements or other penalties.





In 2009, the contractor of the Dubai Metro Rail Project called bonds that were established on our behalf, and our ability to maintain adequate bonding capacity is necessary for us to successfully bid on and win contracts.





In line with industry practice, we are often required to provide performance or payment bonds to clients under contracts. These bonds indemnify the customer should we fail to perform our obligations under the contract. If a bond is required for a particular project and we are unable to obtain an appropriate bond, we cannot pursue that project. In 2009, the contractor of Dubai Metro Rail Project called for and received payment of $2.1 million in performance bonds and $7.3 million in advance payment bonds that were issued on our behalf for the project. Such action had a negative effect on our bonding capacity. We have experienced a decrease in the trading price of our common stock, and as a result, the value of the stock price has lead to insufficient collateral value of bonds and credits. We believe that we still have bonding capacity but, as is typically the case, the issuance of a bond is at the surety’s sole discretion. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be more difficult to obtain in the future or may only be available at significantly higher costs. There can be no assurance that our bonding capacity will continue to be available to us on reasonable terms. Our inability to obtain adequate bonding and, as a result, to bid on new contracts could have a material adverse effect on our business, financial condition, results of operations and cash flows.





If we fail to timely complete, miss a required performance standard or otherwise fail to adequately perform on a project, then we may incur a loss on that project, which may affect our overall profitability.





We may commit to a client that we will complete a project by a scheduled date. We may also commit that a project, when completed, will achieve specified performance standards. If the project is not completed by the scheduled date or subsequently fails to meet required performance standards, we may either incur significant additional costs or be held responsible for the costs incurred by the client to rectify damages due to late completion or failure to achieve the required performance standards. The uncertainty of the timing of a project can present difficulties in planning the amount of personnel needed for the project. If the project is delayed or canceled, we may bear the cost of an underutilized workforce that was dedicated to fulfilling the project. In addition, performance of projects can be affected by a number of factors beyond our control, including unavoidable delays from weather conditions, unavailability of vendor materials, changes in the project scope of services requested by clients or labor disruptions. In some cases, should we fail to meet required performance standards, we may also be subject to agreed-upon financial damages, which are determined by the contract. To the extent that these events occur, the total costs of the project could exceed our estimates and we could experience reduced profits or, in some cases, incur a loss on that project, which may affect our overall profitability.




20




There are restrictive covenants in the Waiver relating to our ability to incur future indebtedness.





Pursuant to the Waiver, we agreed that we will not repay or prepay any debt prior to its currently scheduled due date until we make all of the payments required by the Waiver and the Bonds have been redeemed in full. Additionally, we agreed that any new indebtedness incurred by us for the purpose of repaying the amounts owed to the Overdraft Lender under the overdraft facility letter (i) will not exceed the amounts due under the facility and (ii) will be subordinated to all amounts owed under the Bonds. Therefore, only after we make all of the required payments pursuant to the Waiver, will we be able to incur additional debt, including secured indebtedness or indebtedness by, or other obligations of, our subsidiaries to which the Bonds would be structurally subordinate. A higher level of indebtedness increases the risk that we may default on our indebtedness. We cannot assure you that we will be able to generate sufficient cash flow to pay the interest on our indebtedness or that future working capital, borrowings or equity financing will be available to pay or refinance such indebtedness.





There are restrictive covenants in the trust deeds governing our outstanding Bonds and the Waiver relating to our ability to incur future indebtedness.





As long as any of such Bonds remains outstanding, we agreed not to create any encumbrance upon our present or future assets or revenues to secure any indebtedness or to secure any guarantee of or indemnity in respect of any such indebtedness unless our obligations under the Bonds are secured by the same encumbrance or have the benefit from a guarantee or indemnity in substantially identical terms. The trust deeds do not contain any financial or operating covenants or restrictions on the payment of dividends, incurrence of indebtedness (other than as stated above), transactions with affiliates, incurrence of liens, or the issuance or repurchase of securities by us or any of our subsidiaries.





Pursuant to the Waiver, we agreed that we will not repay or prepay any debt prior to its currently scheduled due date until we make all of the payments required by the Waiver and the Bonds have been redeemed in full.  Additionally, we agreed that any new indebtedness incurred by us for the purpose of repaying the amounts owed to the Overdraft Lender under the overdraft facility letter (i) will not exceed the amounts due under the facility and (ii) will be subordinated to all amounts owed under the Bonds.  Therefore, after we make all of the required payments pursuant to the Waiver, we may incur additional debt, including secured indebtedness or indebtedness by, or other obligations of, our subsidiaries to which the Bonds would be structurally subordinate. A higher level of indebtedness increases the risk that we may default on our indebtedness. We cannot assure you that we will be able to generate sufficient cash flow to pay the interest on our indebtedness or that future working capital, borrowings or equity financing will be available to pay or refinance such indebtedness.





We issued convertible bonds that include features that will have the effect of reducing our reported operating results during the term of the bonds.





We issued $10,000,000 Variable Rate Convertible Bonds due in 2012 in April 2007 (the “2007 Bonds”) and $20,000,000 12% Convertible Bonds due in 2011 in April 2008 (the “2008 Bonds,” and collectively with the 2007 Bonds, the “Bonds”). At of December 31, 2009, $2 million of the 2007 Bonds have been converted.  The terms of 2007 Bonds and 2008 Bonds include conversion features allowing the holders to convert the Bonds into shares of our common stock. Certain of those conversion features that allow for the reduction in conversion price upon the occurrence of stated events constitute a “beneficial conversion feature” for accounting purposes.  The accounting treatment related to the beneficial conversion and mandatory redemption features of the 2007 and 2008 Bonds and the value of the warrants to purchase 300,000 shares of our common stock expiring 2013 issued in connection with the 2008 Bonds (the “2008 Bond Warrants”) will have an adverse impact on our results of operations for the term of the Bonds. The application of Generally Accepted Accounting Principles required us to allocate $2,171,429 to the beneficial conversion feature of the 2007 Bonds, and $2,183,085 and $1,413,503 to the 2007 Bonds Warrants and 2008 Bond Warrants, respectively, which have been reflected in our financial statements as an interest discount. Also, we have determined that the total redemption premium associated with the mandatory redemption feature of the 2007 and 2008 Bonds is $4,138,418 and ($702,579), respectively. All of the aforementioned amounts associated with the beneficial conversion and mandatory redemption feature of the bonds and the value of the bond warrants are being amortized as additional interest expense over the term of the bonds. This accounting will result in an increase in interest expense in all reporting periods during the term of the bonds, and, as a result, reduce our net income accordingly.





Because we depend on governmental agencies for a significant portion of our revenue, our inability to win or renew government contracts could harm our operations and significantly reduce or eliminate our profits.





Revenues from Chinese government contracts represented approximately 49.0% and 35.2% of our revenues for the years ended December 31, 2010 and 2009, respectively. Our inability to win or renew Chinese government contracts could harm our operations and significantly reduce or eliminate our profits. Chinese government contracts are typically awarded through a regulated procurement process. Some Chinese government contracts are awarded to multiple competitors, causing increases in overall competition and pricing pressure. The competition and pricing pressure, in turn may require us to make sustained post-award efforts to reduce costs in order to realize revenues under these contracts. If we are not successful in reducing the amount of costs we anticipate, our profitability on these contracts will be negatively impacted.





21


Adverse capital and credit market conditions, in addition to the negative effects of our rapid growth, may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.





The capital and credit markets have been experiencing extreme volatility and disruption in recent months, including, among other things, extreme volatility in securities prices, severely diminished liquidity and credit availability, ratings downgrades of certain investments and declining valuations of others. Governments have taken unprecedented actions intended to address extreme market conditions that have included severely restricted credit and declines in real estate values. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers. While currently these conditions have not impaired our ability to utilize our current credit facilities and finance our operations, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies such that our ability to access credit markets and finance our operations might be impaired. Without sufficient liquidity, we may be forced to curtail our operations. Adverse market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to operate and grow our business. As such, we may be forced to delay raising capital or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. Demand for our services is cyclical and vulnerable to economic downturns.   The current tightening of credit in financial markets could adversely affect the ability of our customers to obtain financing for purchases of our services and could result in a decrease in or cancellation of orders for our services. We are unable to predict the duration and severity of the current disruption in financial markets and the global adverse economic conditions and the effect such events might have on our business. Our results of operations, financial condition, cash flows and capital position could be materially adversely affected by disruptions in the financial markets.





In addition, our ability to meet liquidity needs and access capital has been detrimentally affected by our failure to timely control the speed and magnitude of the company’s expansion after the listing of our common stock on a US national exchange in 2007.  In addition, the delayed payment by customers caused insufficient cash flows, the difficulty of payments caused the delayed payment of bond interests and bank loans, and breaching the contracts.  Rapid growth has caused the internal management and control unable to maintain proper development during and after the expansion such that operation costs dramatically increased.  In response, we have increased our cost-cutting efforts in the first half of 2009.  Nevertheless, the large amount of preliminary spending and substantial costs due to the downsizing have caused the depletion of our capital to the point that it may no longer be able to continue or support regular operations.





The global economic conditions caused by the decline in the worldwide economy and constraints in the credit market has caused, and may continue to cause, clients to delay, curtail or cancel proposed and existing projects, thus decreasing the overall demand for our services and weakening our financial results.





Our clients and potential clients have been impacted by the global economic conditions caused by the decline in the overall economy and constraints in the credit market.  As a result, some clients have delayed, curtailed or cancelled proposed and existing projects and may continue to do so, thus decreasing the overall demand for our services and adversely impacting our results of operations.  Since 2008, we have conducted a substantial work for the development and undertaking of the international projects, and contributed a large amount of labor, materials and financial resources. As a result, we rapidly obtained numerous high value and high profit projects, and the team and management system were built up at the same time.  However, after the global financial crisis worsened, these projects failed to progress smoothly.  Some national projects were stopped and some unconstructed projects were shut down or the progress of them were slowed down, such as Hong Kong Polytechnic University Project, Nine Dragon Marine Park and Studios Projects, Abu Dhabi Project and the U.S 371 Project.  In addition, progress of other projects were delayed and the receipt of payments for those projects were slowed down, such as Guangzhou Opera House Project, Kuwait Project, Singapore Conservatory Complex, and the At Gardens By the Bay Project.  We have taken a number of measures to prevent the deterioration of the situation, but the results were minimal, and a significant portion of our preliminary spending did not result in revenues for our company.





The current economic volatility has also made it very difficult for us to predict the short-term and long-term impacts on our business and made it more difficult to forecast our business and financial trends.  In addition, our clients may find it more difficult to raise capital in the future due to substantial limitations on the availability of credit and other uncertainties in the federal, municipal and corporate credit markets.  Also, our clients may find it increasingly difficult to timely pay invoices for our services, which would impact our future cash flows and liquidity.  Any inability to timely collect our invoices may lead to an increase in our accounts receivable and potentially to increased write-offs of uncollectible invoices.  The economic downturn, tightened credit markets and the decline in commodity prices have resulted in reductions in spending capital for the development of new production facilities, adversely affecting our revenues.  Also, ongoing credit constraints in the market could limit our ability to access credit markets in the future and, therefore, impact our liquidity.





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Demand for our services is cyclical and vulnerable to economic downturns and reductions in government and private industry spending.  If the global economy remains weak or client spending declines further, then our revenues, profits and our financial condition may continue to deteriorate.





In fiscal 2010, we experienced a further decline in our revenues compared to fiscal 2009 and a decrease in project awards.  If the economy remains weak or client spending declines further, then our revenues, backlog, net income and overall financial condition may continue to deteriorate.  In light of current macroeconomic conditions, we are projecting declines in revenues in our power and industrial and commercial market sectors for 2010.  Demand for our services is cyclical and vulnerable to economic downturns and reductions in government and private industry spending, which may result in delaying, curtailing or canceling proposed and existing projects by clients.





If our goodwill resulting from our 2007 acquisition of Techwell becomes impaired, then our financial condition and profits may be reduced.





A decline in our stock price and market capitalization, such as our stock price decline in 2009, could result in an impairment of a material amount of our goodwill, which is fully attributable to our subsidiary Techwell, which could reduce our earnings.  Goodwill may be impaired if the estimated fair value of one or more of our reporting units’ goodwill is less than the carrying value of the unit’s goodwill.  In 2007, we acquired Techwell Engineering, and its accordingly recorded goodwill assets in the amount of approximately $8.0 million, which represents a significant portion of our assets.  We perform an analysis on our goodwill balances to test for impairment on an annual basis and whenever events occur that indicate an impairment could exist.  There are several instances that may cause us to further test our goodwill for impairment between the annual testing periods including:  (i) continued deterioration of market and economic conditions that may adversely impact our ability to meet our projected results; (ii) declines in our stock price caused by continued volatility in the financial markets that may result in increases in our weighted-average cost of capital or other inputs to our goodwill assessment; (iii) the occurrence of events that may reduce the fair value of a reporting unit below its carrying amount, such as the sale of a significant portion of one or more of our reporting units.





Our impairment review did not indicate an impairment of the goodwill, however while this review indicated that the estimated fair value exceeded the carrying value of goodwill, it is reasonably possible that changes in the numerous variables associated with the judgments, assumptions and estimates we made in assessing the fair value of our goodwill, could cause the respective value of this or other reporting units to become impaired.  If our goodwill is impaired, we would be required to record a non-cash charge that could have a material adverse effect on our condensed consolidated financial statements.





Our future revenues depend on our ability to consistently bid and win new contracts and renew existing contracts and, therefore, our failure to effectively obtain future contracts could adversely affect our profitability.





Our future revenues and overall results of operations require us to successfully bid on new contracts and renew existing contracts. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which is affected by a number of factors, such as market conditions, financing arrangements and required governmental approvals. If negative market conditions arise, or if we fail to secure adequate financial arrangements or the required governmental approval, we may not be able to pursue particular projects, which could adversely affect our profitability.





Our results could be adversely impacted by product quality and performance.





We manufacture or install products based on specific requirements of each of our customers. We believe that future orders of our products or services will depend on our ability to maintain the performance, reliability and quality standards required by our customers. If our products or services have performance, reliability or quality problems, we may experience delays in the collection of accounts receivables, higher manufacturing or installation costs, additional warranty and service expense, and reduced, cancelled or discontinued orders. Additionally, performance, reliability or quality claims from our customers, with or without merit, could result in costly and time-consuming litigation that could require significant time and attention of management and involve significant monetary damages.





Continued price volatility and supply constraints in the steel and aluminum markets could prevent us from meeting delivery schedules to our customers or reduce our profit margins .




We buy semi-finished products made of aluminum, steel and glass, and, to a degree, our business is dependent on the prices and supply of steel and aluminum, which, along with glass, are the principal raw materials used in our products. The steel and aluminum industries are highly cyclical in nature, and steel and aluminum prices have been volatile in recent years and may remain volatile in the future.


Steel and aluminum prices are influenced by numerous factors beyond our control, including general economic conditions, competition, labor costs, production costs, import duties and other trade restrictions. In the past, there have been unusually rapid and significant increases in steel and aluminum prices and severe shortages in the steel and aluminum industries due in part to increased demand from China’s expanding economy and high energy prices. We do not have any long-term contracts for the purchase of steel and aluminum and normally do not maintain inventories of steel and aluminum in excess of our current production requirements. We can give you no assurance that steel and aluminum will remain available or that prices will not continue to be volatile. If the available supply of steel and aluminum declines, we could experience price increases that we are not able to pass on to our customers, a deterioration of service from our suppliers or interruptions or delays that may cause us not to meet delivery schedules to our customers. Any of these problems could adversely affect our results of operations and financial condition.





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Our business is characterized by long periods for collection from our customers and short periods for payment to our suppliers, the combination of which may cause us to have liquidity problems.





We experience an average accounts settlement period ranging from two months to as high as one year from the time we provide services to the time we receive payment from our customers for domestic contracts.  For our overseas projects, we typically experience an account settlement period according to the contracts.  In most international contracts, the account settlement period is approximately two months.   In contrast, we typically need to place certain deposits with our suppliers on a portion of the purchase price in advance and for some suppliers we must maintain a deposit for future orders. We are typically paid by the contractor the entire amount due to us for our services and products once the entire project is completed, which could be significantly after we complete the curtain wall portion of the project. China’s policy requires the contractor to pay 85% of our total contract value to us before the project is completed, and the remainder may be paid when the contractor completes the entire project. Because our payment cycle is considerably shorter than our receivable cycle, we may experience working capital shortages. Working capital management, including prompt and diligent billing and collection, is an important factor in our results of operations and liquidity. We cannot assure you that system problems, industry trends or other issues will not extend our collection period, adversely impact our working capital.





The industries in which we operate are highly competitive.





The markets we serve are very competitive, price and lead-time sensitive and are impacted by changes in the commercial construction industry, including unforeseen delays in project timing and work flow. In addition, competition in the markets of the building industry and in the metal coil coating industry is intense. It is based primarily on:





·
quality;





·
service;





·
delivery;





·
ability to provide added value in the design and engineering of buildings;





·
price;





·
speed of construction in buildings and components; and





·
personal relationships with customers.





We compete with several large integrated glass manufacturers, numerous specialty, architectural glass and window fabricators, and major contractors and subcontractors. We also compete with a number of other manufacturers of engineered building systems ranging from small local firms to large national firms. In addition, we and other manufacturers of engineered high-end curtain walls compete with alternative methods of building construction. If these alternative building methods compete successfully against us, such competition could adversely affect us. Demand for our services is cyclical and vulnerable to economic downturns. If the economy weakens, then our revenues, profits and our financial condition may deteriorate. Many of our competitors have greater financial or other resources than we do.





We are currently a defendant in a lawsuit in Hong Kong regarding our acquisition of Techwell Engineering Limited (“Techwell”) in November 2007, pursuant to which the sellers have alleged that, inter alia , (i) we misrepresented to them the financial status of our company and operations during the course the negotiations of the acquisition; and (ii) we failed to perform our obligations under a settlement agreement alleged to have been agreed to by us in January 2009.  We believe this lawsuit to have limited merit and we shall vigorously defend such lawsuit. If however we are unsuccessful in defending the lawsuit, we may be required to pay damages and we may potentially lose our ownership of Techwell.





Pursuant to a Stock Purchase Agreement dated November 7, 2007, the previous shareholders of Techwell, Mr. Ng, Chi Sum and Miss Yam, Mei Ling Maria agreed to sell 100% of the shares in Techwell to us for approximately $11.7 million in cash and shares of common stock of our company. Subsequent to the acquisition, Mr. Ng and Miss Yam were employed by Techwell.  Techwell generated revenue that accounted for approximately 47% and 1.3% of our total revenue for the years ended December 31, 2009 and 2010.





On January 14, 2009, the board of directors of Techwell passed a board resolution, to dismiss both Mr. Ng and Miss Yam with immediate effect and remove Mr. Ng from the board of Techwell (the “Resolution”).   On January 16, 2009, Mr. Ng and Miss Yam filed a lawsuit in the High Court of Hong Kong against us and our subsidiary, Full Art International Limited.  The lawsuit alleges that,inter alia , (i) we misrepresented to them the financial status of our company and operations during the course the negotiations of the acquisition of Techwell; (ii) we failed to perform our obligations under a settlement agreement alleged to have been agreed to by us in January 2009; and (iii) the dismissal of Mr. Ng was unlawful and invalid.





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On January 23, 2009 an ex-parte injunction order was granted to Mr. Ng, restraining us from implementing the Resolution, which was eventually dismissed with immediate effect on February 25, 2009 after a court session in the High Court of Hong Kong. Mr. Ng was also ordered to bear the costs of the various court proceedings in connection with the injunction order. On March 27, 2009, Mr. Ng and Miss Yam filed a summons in the High Court of Hong Kong seeking a court order for leave to join the Company’s principal shareholder, KGE Group Limited, as a defendant in the lawsuit, which was granted on April 9, 2009.  As a result, KGE Group Limited became one of the defendants of the lawsuit. On May 12, 2009, the Company filed a Defense and Counterclaim at the High Court of Hong Kong in response to a Statement of Claim served by Mr. Ng and Miss Yam on the Company on April 7, 2009.





We intend to vigorously defend this pending lawsuit; however, no assurance can be given that the lawsuit will be resolved in our favor.  Even if we successfully defend the lawsuit, we may incur substantial costs defending or settling the lawsuit, in addition to a possible diversion of the time and attention of our management from our business.  If we are unsuccessful in defending the lawsuit, we may be required to pay a significant amount of damages and/or we may potentially lose ownership of Techwell, which will have a material adverse effect on our business, financial condition or results of operations.   In the event we lose ownership of Techwell, we will lose the approximately $17.1 million of profit contribution since the acquisition of Techwell.





If we acquire or invest in other businesses or other assets, we may be unable to integrate them with our business, our financial performance may be impaired or we may not realize the anticipated financial and strategic goals for such transactions.





If appropriate opportunities present themselves, we may acquire or make investments in businesses and other assets that we believe are strategic. We may not be able to identify, negotiate or finance any future acquisition or investment successfully. Even if we do succeed in acquiring or investing in a business or other asset, such acquisitions and investments involve a number of risks, including:





·
retaining key employees and maintaining the key business and customer relationships of the businesses we acquire;





·
cultural challenges associated with integrating employees from an acquired company or business into our organization;





·
the possibility that the combined company would not achieve the expected benefits, including any anticipated operating and product synergies, of the acquisition as quickly as anticipated or that the costs of, or operational difficulties arising from, an acquisition would be greater than anticipated;





·
significant acquisition-related accounting adjustments or charges, particularly relating to an acquired company's deferred revenue, that may cause reported revenue and profits of the combined company to be lower than the sum of their stand-alone revenue and profits;





·
the need to integrate an acquired company's accounting, management information, human resource and other administrative systems to permit effective management and timely reporting, and the need to implement or remediate controls, procedures and policies appropriate for a public company in an acquired company that, prior to the acquisition, lacked these controls, procedures and policies; and





·
litigation or other claims in connection with, or inheritance of claims or litigation risks as a result of, an acquisition, including claims from terminated employees, customers or other third parties.





Future acquisitions and investments could also involve the issuance of our equity and equity-linked securities (potentially diluting our existing stockholders), the incurrence of debt, contingent liabilities or amortization expenses, write-offs of goodwill, intangibles, or acquired in-process technology, or other increased cash and non-cash expenses such as stock-based compensation. Any of the foregoing factors could harm our financial condition or prevent us from achieving improvements in our financial condition and operating performance that could have otherwise been achieved by us on a stand-alone basis. Our stockholders may not have the opportunity to review, vote on or evaluate future acquisitions or investments.





Force majeure events, including natural disasters and terrorists’ actions have negatively impacted and could further negatively impact the economies in which we operate, which may affect our financial condition, results of operations or cash flows.





Force majeure events, including natural disasters, such as Typhoon Pai Bi An that affected the Southeastern China Coast in August 2006 and terrorist attacks, such as those that occurred in New York and Washington, D.C. on September 11, 2001, could negatively impact the economies in which we operate.





We typically remain obligated to perform our services after a terrorist action or natural disaster unless the contract contains aforce majeure clause that relieves us of our contractual obligations in such an extraordinary event. If we are not able to react quickly toforce majeure , our operations may be affected significantly, which would have a negative impact on our financial condition, results of operations or cash flows.




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We may suffer as a result of product liability or defective products.





We may produce products which injure or kill individuals despite proper testing. Existing PRC, Qatar and UAE laws and regulations do not require us to maintain third party liability insurance to cover product liability claims. In the United States and Australia, we are required to maintain third party liability insurance. However, if a product liability claim is brought against us, it may, regardless of merit or eventual outcome, result in damage to our reputation, breach of contract with our customers, decreased demand for our products, costly litigation, product recalls, loss of revenue, and the inability to commercialize some products.





We incur costs to comply with environmental laws and have liabilities for environmental cleanups.





Because we have air emissions, discharge wastewater, and handle hazardous substances and solid waste at our fabrication facilities, we incur costs and liabilities to comply with environmental laws and regulations and may incur significant additional costs as those laws and regulations change in the future or if there is an accidental release of hazardous substances into the environment. The operations of our fabrication facilities are subject to stringent and complex environmental laws and regulations that regulate the cleanup of hazardous substances that may have been released at properties currently or previously owned or operated by us or locations to which we have sent waste for disposal. Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial requirements, and the issuance of orders enjoining future operations.





If our partners fail to perform their contractual obligations on a project, we could be exposed to legal liability, loss of reputation or reduced profits.





We sometimes enter into subcontracts, joint ventures and other contractual arrangements with outside partners to jointly bid on and execute a particular project. The success of these joint projects depends upon, among other things, the satisfactory performance of the contractual obligations of our partners. If any of our partners fails to satisfactorily perform its contractual obligations, we may be required to make additional investments and provide additional services to complete the project. If we are unable to adequately address our partner’s performance issues, then our client could terminate the joint project, exposing us to legal liability, loss of reputation or reduced profits.





Our failure to attract and retain key employees could impair our ability to provide services to our clients and otherwise conduct our business effectively.





As we shift the focus of our business to that of a professional and technical services company, we will become increasingly labor intensive, and, therefore, our ability to attract, retain and expand our senior management and our professional and technical staff is an important factor in determining our future success.  Key personnel include, but is not limited to, Zhixin (Steven) Xing, our Chief Executive Officer and Luo Ken Yi, our Director and President, each of whom perform vital functions in the operation of our business.  From time to time, it may be difficult to attract and retain qualified individuals with the expertise and in the timeframe demanded by our clients.   In addition, we rely heavily upon the expertise and leadership of our senior management.  If we are unable to retain executives and other key personnel, the roles and responsibilities of those employees will need to be filled, which may require that we devote time and resources in identifying, hiring and integrating new employees.  In addition, the failure to attract and retain key individuals could impair our ability to provide services to our clients and conduct our business effectively.





We cannot guarantee the protection of our intellectual property rights and if infringement or counterfeiting of our intellectual property rights occurs, our reputation and business may be adversely affected.





Our success depends in part on our ability to preserve our patents and trade secrets and operate without infringing the proprietary rights of third parties. If we fail to maintain our patents and trade secret protections, we may not be able to prevent third parties from using our proprietary rights. In addition, our issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products or provide us with any competitive advantage. If a third party initiates litigation regarding our patents, and is successful, a court could revoke our patents or limit the scope of coverage for those patents. We also rely upon trade secrets, proprietary know-how and continuing technological innovation to remain competitive. We attempt to protect this information with security measures such as the use of confidentiality agreements with our employees, consultants and corporate collaborators. It is possible that these individuals will breach these agreements and that any remedies for a breach will be insufficient to allow us to recover our costs. Furthermore, our trade secrets, know-how and other technology may otherwise become known or be independently discovered by our competitors.





Furthermore, we have registered and applied for registration of our trademarks in the PRC, where we have a substantial business presence, to protect the reputation of our products. Our products are sold under these trademarks. There is no assurance that there will not be any infringement of our brand name or other registered trademarks or counterfeiting of our products in the future. Should any such infringement or counterfeiting occur, our reputation and business may be adversely affected. We may also incur significant expenses and substantial amounts of time and effort to enforce our intellectual property rights in the future. Such diversion of our resources may adversely affect our existing business and future expansion plans.





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RISKS RELATED TO OUR ACQUISITION OF CONNGAME





The development of MMORPG products requires substantial up-front expenditures. We may not be able to recover development costs for our future MMORPG products.





Consumer preferences for games are usually cyclical and difficult to predict, and even the most successful titles remain popular for only limited periods of time, unless refreshed with new content. We will be required to continuously develop new products and enhancements to existing products. Because of the significant complexity of MMORPG games, these products require a longer development time and are more expensive to create than traditional console game products. In addition, the long lead time involved in developing a MMORPG product and the significant allocation of financial resources that each product requires means it is critical that we accurately predict consumer demand for new MMORPG products. If future MMORPG products do not achieve expected market acceptance or generate sufficient sales upon introduction, we may not be able to recover the development and marketing costs associated with new products, and our financial results could suffer.





If we fail to establish a system and network infrastructure that operates effectively, our ability to successfully launch and maintain our online games may be harmed.





Our business may be harmed if we are unable to upgrade our systems fast enough to accommodate traffic levels, avoid obsolescence or successfully integrate any newly developed or acquired technology with our existing systems. Furthermore, our network capacity depends on our network servers and the communication bandwidth to which we have access. Constraints in network capacity could cause unanticipated system disruptions and slower response time, affecting data transmission and game play. These factors could, among other things, cause us to lose potential customers, which could, in turn, materially and adversely affect our business and planned operations.




We may not be able to ever generate any significant revenues and profitability as we operate in a highly competitive industry and compete against many companies.





There are many online game operators in China, and given the relatively low entry barriers to operating online games, we expect more companies to enter the online game industry in China and a wider range of online games to be introduced to the China market. In addition, we also face potential competition from major Internet portal operators, other domestic and foreign game developers and publishers, and alliances between our existing and new competitors. Some of our competitors have significantly greater financial and marketing resources and name recognition than we have. Some of our competitors or potential competitors, especially major foreign online game developers, have greater game development resources than we have. In addition, many of our competitors have developed and operated games that have proven commercially successful. As a result, they may be able to take greater risks and endure lower than expected performances from some of their games than we are able to do.




We believe that competition in the online game market in China may become more intense as increasing numbers of online games are introduced in the market. We cannot assure you that we will be able to successfully enter the market and compete against any new or existing competitors, or against any new business models implemented by them. All of these competitive factors could have a material adverse effect on our revenues and profitability.




Although we expect that the acquisition of ConnGame will result in benefits to us, we may not realize those benefits because of integration difficulties and other challenges.





Because we issued 6,250,000 shares of our common stock as consideration in the Acquisition, our shareholders suffered immediate dilution.  Following the issuance of the Shares, holders of our outstanding common stock prior to such issuance owned approximately 68.8% of our outstanding common stock after the Stock Issuance. The success of the acquisition of ConnGame will be dependent in large part on the success of our management in integrating the operations, technologies and personnel of the two companies. Our failure to meet the challenges involved in successfully completing the integration of the operations of ConnGame or to otherwise realize any of the anticipated benefits of the acquisition, including additional revenue opportunities, could impair our results of operations.  The challenges may be particularly difficult for our company because we have never been engaged in the MMORPG industry prior to the acquisition.





Challenges involved in this integration include, without limitation:





·
integrating successfully each company's operations, technologies, products and services;


·
reducing the costs associated with operations;


·
coordinating the publishing, distribution and marketing efforts to effectively promote the services and products of our combined company; and


·
combining the corporate cultures, maintaining employee morale and retaining key employees.





We may not successfully complete the integration of our operations and ConnGame in a timely manner and we may not realize the anticipated benefits of the acquisition of ConnGame to the extent, or in the timeframe, anticipated. Anticipated benefits assume a successful integration and are based on projections, which are inherently uncertain, and other assumptions. Even if integration is successful, anticipated benefits may not be achieved.





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We may be subject to intellectual property claims.





As the number of interactive entertainment products increases and the features and content of these products continue to overlap, software developers increasingly may become subject to infringement claims.  Our products often utilize complex technology that may become subject to emerging intellectual property rights of others. It is possible that third parties still may claim infringement.  From time to time, we receive communications from third parties regarding such claims. Existing or future infringement claims against us, whether valid or not, may be time consuming, distracting to management and expensive to defend.





Intellectual property litigation or claims could force us to do one or more of the following:





·
cease selling, incorporating, supporting or using products or services that incorporate the challenged intellectual property;





·
obtain a license from the holder of the infringed intellectual property, which if available at all, may not be available on commercially favorable terms; or





·
redesign the affected interactive entertainment software products or hardware peripherals, which could result in additional costs, delay introduction and possibly reduce commercial appeal of the affected products.





Any of these actions may harm our business and financial results.





We face risks and uncertainties regarding the growth of the online game industry and market acceptance of our online games and in-game items.





The online game industry is a relatively new and evolving industry and concept. The growth of the online game industry and the level of demand and market acceptance of our online games are subject to a high degree of uncertainty. Our ability to successfully launch our first game and generate any significant revenue will depend on numerous factors, many of which are beyond our control. These factors include:




·
the growth of personal computer, Internet and broadband users and penetration in China and other markets in which we offer our games, and the rate of any such growth;


·
whether the online game industry, particularly in China, continues to grow and the rate of any such growth;


·
general economic conditions, particularly economic conditions adversely affecting discretionary consumer spending;


·
the availability and popularity of other forms of entertainment, particularly games of console systems, which are already popular in developed countries and may gain popularity in China and other countries in which we market our games;


·
changes in consumer demographics and consumer tastes and preferences;


·
the popularity and price of new online games and in-game items that we and our competitors launch and distribute; and


·
our ability to timely conduct a commercial launch of our two games in development and to establish their competitive positions in the online game market.





Our ability to plan for product development and distribution and promotional activities will be significantly affected by our ability to anticipate and adapt to relatively rapid changes in consumer tastes and preferences. Currently, MMORPGs are popular in China. However, there is no assurance that MMORPGs will continue to be popular in China or elsewhere. A decline in the popularity of online games in general, or the MMORPGs that we operate, will likely adversely affect our business and prospects. We must be able to track and respond to changes in consumer preferences in a timely and effective manner, especially changes in game preferences and consumer spending trends relating to in-game item purchases.




Our acquisition of ConnGame may be subject to adverse tax consequences, including but not limited to the uncertainty under Circular on Strengthening the Administration of Enterprise Income Tax on Non-resident Enterprises' Share Transfer (“Circular 698”) released in December 2009 by China's State Administration of Taxation (SAT), effective as of January 1, 2008.





The recent introduction of Circular 698 increases the risk of a general anti avoidance tax challenge by the Chinese tax authority on indirect disposals of the shares in the underlying Chinese companies with a potential consequence of paying Chinese tax on the gain derived from such disposals.  Pursuant to Circular 698, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country (jurisdiction) where the effective tax burden is less than 12.5% or where the offshore income of her residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers.  Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through the abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the tax authority may re-assess the nature of the equity transfer in accordance with the “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes.




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While the term "indirectly transfer" is not defined, we understand that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. The relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country (jurisdiction) and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. Meanwhile, there are not any formal declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose,” which can be utilized by us to balance if our acquisition complied with the Circular 698.  As a result, there is uncertainty as to whether the payment of our common stock may be subject to tax liability or foreign exchange control in the PRC and there is a risk of unforeseen tax liability, each of which may have a material adverse effect to our financial condition and results of operations.
 
 Our inability to comply with the terms of the Waiver, including payments required to be made by us, the waiver of the adjustment rights may become voided and the conversion and exercise prices of the bonds and warrants may adjust down, resulting in substantial dilution to our securities and immediate repayment of the Bonds.
 
 One of the conditions to the Acquisition was that we obtain a waiver from our bondholders related to their rights to have the conversion and exercise price of the Bonds and 2008 Warrants, respectively, adjusted downward as a result of ours issuance of the 6,250,000 Shares.  We obtained the Waiver on February 24, 2010.  The Waiver had a three month term from the execution date, and therefore expired on May 24, 2010.  The parties entered into a new waiver on July 13, 2010, which has a three month term subject to the terms and conditions contained therein.   We close the transaction within the three-month period.  We have failed to make certain payments specified in the Waiver and are currently negotiating with the bondholders to amend the Waiver.  If we are not able to reach an agreement with the bondholders, all rights of the holders of the Bonds and 2008 Warrants waived under the Waiver to or to be waived under the Waiver, shall not be waived and will be reinstated, and any previous waivers will be null and void.
 
 There are restrictive covenants in the Waiver relating to our ability to incur future indebtedness.
 
 Pursuant to the Waiver, we agreed that we will not repay or prepay any debt prior to its currently scheduled due date until we make all of the payments required by the Waiver and the Bonds have been redeemed in full.  Additionally, we agreed that any new indebtedness incurred by us for the purpose of repaying the amounts owed to the Overdraft Lender under the overdraft facility letter (i) will not exceed the amounts due under the facility and (ii) will be subordinated to all amounts owed under the Bonds.  Therefore, only after we make all of the required payments pursuant to the Waiver, will we be able to incur additional debt, including secured indebtedness or indebtedness by, or other obligations of, our subsidiaries to which the Bonds would be structurally subordinate. A higher level of indebtedness increases the risk that we may default on our indebtedness. We cannot assure you that we will be able to generate sufficient cash flow to pay the interest on our indebtedness or that future working capital, borrowings or equity financing will be available to pay or refinance such indebtedness.
 
 Integrating and maintaining internal controls for the combined business may strain our resources and divert management's attention. If we fail to establish and maintain proper internal controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.
 
 Prior to the consummation of the acquisition, ConnGame was not subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act of 2002 and the rules and regulations of any stock exchange. As a subsidiary of ours, ConnGame is subject to such rules and regulations. As described in Item 9A of this Form 10-K, it was determined that our controls and procedures were not effective as of December 30, 2010. In addition, we have historically had difficulties in establishing effective internal controls on past acquisitions, namely Techwell. Integrating and maintaining appropriate internal controls and procedures for the combined business will require specific compliance training of certain officers and employees, will entail substantial costs in order to modify existing accounting systems, and will take a significant period of time to complete. We may not be able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, or that our internal controls are perceived as inadequate, or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.
 
 29
 
 RISKS RELATED TO US DOING BUSINESS IN CHINA
 
 Substantially all of our assets are located in China and substantially all of our revenues are derived from our operations in China, and changes in the political and economic policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the results of operations and financial condition.
 
 Our business operations may be adversely affected by the current and future political environment in the PRC.  The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities.  Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters.  Under the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization.  There is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
 
 Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
 
 We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC, particularly in our industry since it involves obtaining project contracts from the government of China and other countries. Our executive officers and employees have not been subject to the United States Foreign Corrupt Practices Act prior to 2007. We can make no assurance that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
 
 The PRC laws and regulations governing ourcurrent business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may have a material and adverse effect on our business.
 
 The PRC’s legal system is a civil law system based on written statutes, in which system decided legal cases have little value as precedents unlike the common law system prevalent in the United States. 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 our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We are considered a foreign persons or foreign funded enterprise under PRC laws, and as a result, we are required to comply with PRC laws and regulations. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:
 
 ·
levying fines;
 
 ·
revoking our business and other licenses;
 
 ·
requiring that we restructure our ownership or operations; and
 
 ·
requiring that we discontinue any portion or all of our business.
 
 Inflation in the PRC could negatively affect our profitability and growth.
 
 While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country.  Rapid economic growth can lead to growth in the money supply and rising inflation.  According to the National Bureau of Statistics of China, China’s Consumer Price Index increased 2.7% in February 2010 over February 2009.  If prices for our products and services rise at a rate that is insufficient to compensate for the rise in the costs of supplies such as raw materials, it may have an adverse effect on our profitability.
 
 Furthermore, in order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending.  In January 2010, the Chinese government took steps to tighten the availability of credit including ordering banks to increase the amount of reserves they hold and to reduce or limit their lending. The implementation of such policies may impede economic growth.  In 2004, the People’s Bank of China, the PRC’s central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese economy.  In 2007, and most recently in October 2010, the People’s Bank of China raised the interest rate again.  Repeated rises in interest rates by the central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products and services.
 
 30
 
 PRC regulations relating to acquisitions of PRC companies by foreign entities has created regulatory uncertainties that could restrict or limit our ability to operate. Our failure to obtain the prior approval of the China Securities Regulatory Commission, or the CSRC, for the listing and trading of our common stock on a national securities exchange in the United States could have a material adverse effect on our business, operating results, reputation and trading price of our common stock.
 
 Within the last five years, the PRC government has, on several occasions, amended its regulations relating to overseas listings of PRC businesses. Most recently, on August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Administration for Industry and Commerce, CSRC and SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors. This regulation became effective on September 8, 2006 and includes provisions that purport to require offshore special purpose vehicles:
 
 (i)
controlled directly or indirectly by PRC companies or citizens; and
 
 (ii)
formed for the purpose of effecting an overseas listing of a PRC company
 
 to obtain the approval of CSRC prior to the completion of the overseas listing. On September 8, 2006, CSRC published procedures regarding the approval process associated with overseas listings of special purpose vehicles. There is little precedent as to how CSRC will interpret the new regulation and apply the related procedures.
 
 Our PRC counsel, Guangdong Seagull Law Firm, has advised us that because we completed our restructuring before September 8, 2006, the effective date of the new regulation, it is not necessary for us to submit the application to the CSRC for its approval, and the listing and trading of our Common Stock on a national securities exchange does not require CSRC approval.
 
 If the CSRC or another PRC regulatory agency subsequently determines that CSRC approval was required for our initial public offering that was completed on October 3, 2007, 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 or subsequent offerings 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 Common Stock.
 
 These new rules may significantly affect the means by which offshore-onshore restructurings are undertaken in China in connection with offshore private equity and venture capital financings, mergers and acquisitions. It is expected that such transactional activity in China in the near future will require significant case-by-case guidance from Ministry of Commerce and other government authorities as appropriate. Given the uncertainties regarding interpretation and application of the new rules, we may need to expend significant time and resources to maintain compliance. It is uncertain how our business operations or future strategy will be affected by the interpretations and implementation of these new rules. Our business operations or future strategy could be adversely affected by these new rules. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities.
 
 Under the New EIT Law, we and Full Art may be classified as “resident enterprises” of China for tax purpose, which may subject us and Full Art to PRC income tax on taxable global income.
 
 Under the new PRC Enterprise Income Tax Law (the “New EIT Law”) and its implementing rules, both of which became effective on January 1, 2008, enterprises are classified as resident enterprises and non-resident enterprises. An enterprise established outside of China with its “de facto management bodies” located within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese domestic enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management body as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. Due to the short history of the New EIT law and lack of applicable legal precedents, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a foreign company such as us and Full Art. Both our and Full Art’s members of management are located in China. If the PRC tax authorities determine that we or Full Art is a “resident enterprise” for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income, including interest income on the proceeds from this offering, as well as PRC enterprise income tax reporting obligations. Second, the New EIT Law provides that dividend paid between “qualified resident enterprises” is exempted from enterprise income tax. A circular issued by the State Administration of Taxation regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group enterprises and established outside of China as “resident enterprises” clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC shareholders. It is unclear whether the dividends that we or Full Art receives from Zhuhai King Glass Engineering Co., Limited or any of our other PRC subsidiaries will constitute dividends between “qualified resident enterprises” and would therefore qualify for tax exemption, because the definition of qualified resident enterprises is unclear and the relevant PRC government authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. We are actively monitoring the possibility of “resident enterprise” treatment for the applicable tax years and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible. As a result of the New EIT Law, our historical operating results will not be indicative of our operating results for future periods and the value of our common stock may be adversely affected.
 
 31
 
 Dividends payable by us to our foreign investors and any gain on the sale of our shares may be subject to taxes under PRC tax laws.
 
 If dividends payable to our shareholders are treated as income derived from sources within China, then the dividends that shareholders receive from us, and any gain on the sale or transfer of our shares, may be subject to taxes under PRC tax laws.
 
 Under the New EIT Law and its implementing rules, PRC enterprise income tax at the rate of 10% is applicable to dividends payable by us to our investors that are non-resident enterprises so long as such non-resident enterprise investors do not have an establishment or place of business in China or, despite the existence of such establishment of place of business in China, the relevant income is not effectively connected with such establishment or place of business in China, to the extent that such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of our shares by such investors is also subject to a 10% PRC income tax if such gain is regarded as income derived from sources within China and we are considered as a resident enterprise which is domiciled in China for tax purpose. Additionally, there is a possibility that the relevant PRC tax authorities may take the view that the purpose of us and Full Art is holding Zhuhai King Glass Engineering Co., Limited or any of our other PRC subsidiaries, and the capital gain derived by our overseas shareholders or investors from the share transfer is deemed China-sourced income, in which case such capital gain may be subject to a PRC withholding tax at the rate of up to 10%. If we are required under the New EIT Law to withhold PRC income tax on our dividends payable to our foreign shareholders or investors who are non-resident enterprises, or if you are required to pay PRC income tax on the transfer or our shares under the circumstances mentioned above, the value of your investment in our shares may be materially and adversely affected.
 
 In January, 2009, the State Administration of Taxation promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises (“Measures”), pursuant to which, the entities which have the direct obligation to make the following payment to a non-resident enterprise shall be the relevant tax withholders for such non-resident enterprise, and such payment includes: incomes from equity investment (including dividends and other return on investment), interests, rents, royalties, and incomes from assignment of property as well as other incomes subject to enterprise income tax received by non-resident enterprises in China. Further, the Measures provides that in case of equity transfer between two non-resident enterprises which occurs outside China, the non-resident enterprise which receives the equity transfer payment shall, by itself or engage an agent to, file tax declaration with the PRC tax authority located at place of the PRC company whose equity has been transferred, and the PRC company whose equity has been transferred shall assist the tax authorities to collect taxes from the relevant non-resident enterprise. However, it is unclear whether the Measures refer to the equity transfer by a non-resident enterprise which is a direct or an indirect shareholder of the said PRC company. Given these Measures, there is a possibility that we may have an obligation to withhold income tax in respect of the dividends paid to non-resident enterprise investors.
 
 The foreign currency exchange rate between U.S. Dollars and Renminbi could adversely affect our financial condition.
 
 To the extent that we need to convert U.S. Dollars into Renminbi for our operational needs, our financial position and the price of our common stock may be adversely affected should the Renminbi appreciate against the U.S. Dollar at that time.  Conversely, if we decide to convert our Renminbi into U.S. Dollars for our operational needs or paying dividends on our common stock, the dollar equivalent of our earnings from our subsidiaries in China would be reduced should the dollar appreciate against the Renminbi.  We currently do not hedge our exposure to fluctuations in currency exchange rates.
 
 Until 1994, the Renminbi experienced a gradual but significant devaluation against most major currencies, including dollars, and there was a significant devaluation of the Renminbi on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system.  Since 1994, the value of the Renminbi relative to the U.S. Dollar has remained stable and has appreciated slightly against the U.S. Dollar. Countries, including the United States, have argued that the Renminbi is artificially undervalued due to China’s current monetary policies and have pressured China to allow the Renminbi to float freely in world markets.  In July 2005, the PRC government changed its policy of pegging the value of the Renminbi to the dollar.  Under the new policy the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of designated foreign currencies.  While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further and more significant appreciation of the Renminbi against the dollar.
 
 Any recurrence of Severe Acute Respiratory Syndrome (SARS), Avian Flu, or another widespread public health problem, in the PRC could adversely affect our operations.
 
 A renewed outbreak of Severe Acute Respiratory Syndrome, Avian Flu or another widespread public health problem in China, where all of our manufacturing facilities are located and where all of our sales occur, could have a negative effect on our operations. Such an outbreak could have an impact on our operations as a result of:
 
 32
 
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quarantines or closures of some of our manufacturing facilities, which would severely disrupt our operations,
 
 ·
the sickness or death of our key officers and employees, and
 
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a general slowdown in the Chinese economy.
 
 Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.
 
 Contract drafting, interpretation and enforcement in China involve significant uncertainty, which could leave us vulnerable to legal disputes and challenges related to our contracts.
 
 We have entered into numerous contracts governed by PRC law, many of which are material to our business. As compared with contracts in the United States, contracts governed by PRC law tend to contain less detail and are not as comprehensive in defining contracting parties’ rights and obligations. As a result, contracts in China are more vulnerable to disputes and legal challenges. In addition, contract interpretation and enforcement in China is not as developed as in the United States, and the result of any contract dispute is subject to significant uncertainties. Therefore, we cannot assure you that we will not be subject to disputes under our material contracts, and if such disputes arise, we cannot assure you that we will prevail.
 
 The scope of our business license in China is limited, and we may not expand or continue our business without government approval and renewal, respectively.
 
 Any company that conducts business in the PRC must have a business license that covers a particular type of work. Our business license covers our present business, which is to design, fabricate and install curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems, eco-energy saving building conservation systems and provision of related products, for public works and commercial real estate projects. Any amendment to the scope of our business requires further application and government approval. In order for us to expand our business beyond the scope of our license, we will be required to enter into a negotiation with the PRC authorities for the approval to expand the scope of our business. We cannot assure you that we will be able to obtain the necessary government approval for any change or expansion of its business.
 
 If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.
 
 PRC companies have not historically been required to adopt a Western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and, computer, financial and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
 
 You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws, including the federal securities laws or other foreign laws against us or our management.
 
 Most of our current operations are conducted in China. Moreover, most of our directors and officers are nationals and residents of China. All or substantially all of the assets of these persons are located outside the United States and in the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these persons. In addition, uncertainty exists as to whether the courts of China would recognize or enforce judgments of U.S. courts obtained against us or our officers and/or directors predicated upon the civil liability provisions of the securities law of the United States or any state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon the securities laws of the United States or any state thereof.
 
 The ability of our Chinese operating subsidiaries to pay dividends may be restricted due to foreign exchange control regulations of China.
 
 The ability of our Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balance of the Chinese operating subsidiaries. Because substantially all of our operations are conducted in China and a majority of our revenues are generated in China, all of our revenue being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into US Dollars.
 
 33
 
 We will not be able to complete an acquisition of prospective acquisition targets in the PRC unless their financial statements can be reconciled to U.S. generally accepted accounting principles in a timely manner.
 
 Companies based in the PRC may not have properly kept financial books and records that may be reconciled with U.S. generally accepted accounting principles. If we attempt to acquire a significant PRC target company and/or its assets, we would be required to obtain or prepare financial statements of the target that are prepared in accordance with and reconciled to U.S. generally accepted accounting principles. Federal securities laws require that a business combination meeting certain financial significance tests require the public acquirer to prepare and file historical and/or pro forma financial statement disclosure with the SEC. These financial statements must be prepared in accordance with, or be reconciled to U.S. generally accepted accounting principles and the historical financial statements must be audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), or PCAOB. If a proposed acquisition target does not have financial statements that have been prepared in accordance with, or that can be reconciled to, U.S. generally accepted accounting principles and audited in accordance with the standards of the PCAOB, we will not be able to acquire that proposed acquisition target. These financial statement requirements may limit the pool of potential acquisition targets with which we may acquire and hinder our ability to expand our retail operations. Furthermore, if we consummate an acquisition and are unable to timely file audited financial statements and/or pro forma financial information required by the Exchange Act, such as Item 9.01 of Form 8-K, we will be ineligible to use the SEC’s short-form registration statement on Form S-3 to raise capital, if we are otherwise eligible to use a Form S-3. If we are ineligible to use a Form S-3, the process of raising capital may be more expensive and time consuming and the terms of any offering transaction may not be as favorable as they would have been if we were eligible to use Form S-3.
 
 RISKS RELATED TO OUR SECURITIES AND RELATED REGULATIONS
 
 Our stock price is volatile and you might not be able to sell your securities at or above the price you have paid.
 
 Since our initial public offering and listing of our common stock in October 2007, the price at which our common stock had traded has been highly volatile, with an adjusted high and low sales price of $0.52 and $82.04, respectively, as through April 15, 2011. On April 14, 2011, the closing trading price of our common stock was $1.22 per share. You might not be able to sell the shares of our common stock at or above the price you have paid. The stock market has experienced extreme volatility that often has been unrelated to the performance of its listed companies. Moreover, only a limited number of our shares are traded each day, which could increase the volatility of the price of our stock. These market fluctuations might cause our stock price to fall regardless of our performance.
 
 The market price of our Common Stock might fluctuate significantly in response to many factors, some of which are beyond our control, including, but not limited to, the following:
 
 ·
actual or anticipated fluctuations in our annual and quarterly results of operations;
 
 ·
variations in our operating results, which could cause us to fail to meet analysts’ or investors’ expectations;
 
 ·
conditions and trends in our industry and the economy;
 
 ·
future sales of equity or debt securities, including sales which dilute existing investors.
 
 If our stock price decreases further, the NASDAQ Stock Market may delist our securities, which could limit investors’ ability to trade in our securities.
 
 On July 1, 2010, we received a notice from the Listing Qualifications Department (the “Staff”) of The NASDAQ Stock Market LLC (“NASDAQ”) stating that the minimum bid price of our common stock had been below $1.00 per share for 30 consecutive business days and that we therefore were not in compliance with the minimum bid price requirement for continued listing on The NASDAQ Global Select Market set forth in Listing Rule 5450(a)(1)  (the “Rule”).  On December 17, 2010, we filed a Certificate of Amendment to its Certificate of Incorporation with the Secretary of State of Delaware effectuating a 1-for-4 reverse stock split (the “Reverse Stock Split”) of our common stock effective as of 12:01 AM EST on December 21, 2010, as a potential means to increase the per share price of our common stock such that we come into compliance with the NASDAQ Global Select Market Rule.  On December 29, 2010, we received a further delisting determination letter from the Staff, indicating that the listed security was now subject to delisting from The NASDAQ Global Select Market. Subsequently, we successfully appealed NASDAQ’s delisting determination to a NASDAQ Listing Qualification Panel and has since regained compliance with the NASDAQ Rule.
  As of April 14, 2011, our stock price closed at $1.22.  If our stock price decreases below the minimum in the future, we could be subject to delisting from NASDAQ, which could have an adverse effect on our business and on the trading of our common stock. If a delisting of our common stock were to occur, our common stock would trade on the OTC Bulletin Board or on the “pink sheets” maintained by the National Quotation Bureau, Inc. Such alternatives are generally considered to be less efficient markets, and our stock price, as well as the liquidity of our common stock, may be adversely impacted as a result. Delisting from The NASDAQ Global Select Market could also have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities.
 
 34
 
 Shares eligible for future sale may adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public marketplace could reduce the price of our common stock.
 
 The market price of our Common Stock could decline as a result of sales of a large number of shares of our common stock in the market or the perception that these sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. Under Rule 144, an affiliate stockholder who has satisfied a the required holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. As of December 31, 2010, 1% of our issued and outstanding shares of common stock were approximately 200,000 shares. Non-affiliate stockholders are not subject to volume limitations. Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price of our Common Stock by creating an excessive supply.
 
 Our officers and directors have limited experience in public company reporting and financial accounting, which could impair our ability to satisfy public company filing requirements and increase our securities compliance costs.
 
 Our officers and directors have limited experience as officers and directors of a publicly traded company, or in complying with the regulatory requirements applicable to a public company. As a result, we could have difficulty satisfying the regulatory requirements applicable to public companies, which could adversely affect the market for our common stock. At present, we rely upon outside experts to advise us on matters relating to financial accounting and public company reporting. While we believe that it will be possible to satisfy our public company reporting requirements through the use of third party experts, our general and administrative costs will remain higher to the extent our officers alone are not able to satisfy our public company reporting requirements.
 
 We do not foresee paying cash dividends in the foreseeable future.
 
 We do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and we currently intend to retain any future earnings for funding growth. As a result, you should not rely on an investment in our securities if you require dividend income. Capital appreciation, if any, of our shares may be your sole source of gain for the foreseeable future. Moreover, you may not be able to sell your shares in our company at or above the price you paid for them.
 
 ITEM 1B. UNRESOLVED STAFF COMMENTS
 
 Not applicable.
 
 ITEM 2. PROPERTIES
 
 We have offices and processing sites in Zhuhai, Shenzhen, Shanghai, Beijing, Wuhan in China and a corporate office in Hong Kong. All buildings and land are leased. The leases end within 2010 and were renewed. The central office is in Zhuhai, where the majority of design and engineering staff are located. The Beijing and Shanghai offices have smaller design teams as well. All offices are also sales centers for the area. Our office in Changzhou is our principal office for online gaming operations.
 
 ChangZhouResearch Building, No.801 Wuzhong Road, Changzhou Science and Education Industrial Park Wujin District, Changzhou, Jiangsu

1,500 square meters (office)ShanghaiA2-3, Garden Lane, No.171 Huayuan Road, HongKou District, Shanghai

Room 81022, No.881 Tianbao Road, HongKou District, Shanghai

1,550 square meters (office)

123 square meters (office)Hong KongRoom 2, 10/F Block D, Ka Ming Court, No.688 Castle Peak Road,

40 square meters (office)Kowloon, Hong KongZhuhai105 Baishi Road, Jiuzhou West Avenue, Zhuhai, Guangdong

1,080 square meters (office)1,700 square meters (factory)Beijing1302, No.1 Baiyun Road, XiCheng District, Beijing

146 square meters (office)ShenzhenWest Building 1302, Innovation and Technology Square II, Tain’an Cyber Park, Futian District, Shenzhen

390 square meters (office)WuhanFloor 38, No. 568 Jianshe road, Wu Han International Trade Center, Jianghan district, WuHan city

200 square meters (office)
 
 35
 
 ITEM 3. LEGAL PROCEEDINGS
 
 Techwell Litigation
 
 Pursuant to a Stock Purchase Agreement dated November 7, 2007, the previous shareholders of Techwell Engineering Limited (“Techwell”), Mr. Ng, Chi Sum and Miss Yam, Mei Ling Maria, agreed to sell 100% of the shares in Techwell to the Company for approximately $11.7 million in cash and shares of common stock of the Company. Subsequent to the acquisition, Mr. Ng and Miss Yam were employed by Techwell.
 
 On January 14, 2009, the board of directors of Techwell passed a board resolution, to dismiss both Mr. Ng and Miss Yam with immediate effect and remove Mr. Ng from the board of Techwell (the “Resolution”).  On January 16, 2009, Mr. Ng and Miss Yam filed a lawsuit in the High Court of Hong Kong against the Company and its subsidiary, Full Art International Limited. The lawsuit alleges that,inter alia , (i) the Company misrepresented to them the financial status of the Company and its operations during the course the negotiations of the Techwell acquisition; (ii) the Company failed to perform its obligations under a settlement agreement alleged to have been agreed to by the Company in January 2009; and (iii) the dismissal of Mr. Ng was unlawful and invalid. The lawsuit filed by Mr. Ng and Miss Yam requests the court for specific performance of the settlement agreement that was allegedly entered into, which would require the return of the Techwell company to Mr. Ng and Miss Yam, and in the absence of such grant of relief, Mr. Ng and Miss Yam request unspecified damages in lieu of return of the Techwell company.
 
 On January 23, 2009 an ex-parte injunction order was granted to Mr. Ng, restraining the Company from implementing the Resolution, which was eventually dismissed with immediate effect on February 25, 2009 after a court session in the High Court of Hong Kong. Mr. Ng was also ordered to bear the costs of the various court proceedings in connection with the injunction order. On March 27, 2009, Mr. Ng and Miss Yam filed a summons in the High Court of Hong Kong seeking a court order for leave to join the Company’s principal shareholder, KGE Group Limited, as a defendant in the lawsuit, which was granted on April 9, 2009. As a result, KGE Group Limited became one of the defendants of the lawsuit. On May 12, 2009, the Company filed a Defense and Counterclaim at the High Court of Hong Kong in response to a Statement of Claim served by Mr. Ng and Miss Yam on the Company on April 7, 2009.
 
 As of the date of this Annual Report, the Company, Mr. Ng, and Miss Yam are in discussions and negotiations to settle all disputes between the parties. However, there is no guarantee that the parties will reach an agreement to settle the dispute, in which case the Company intends to vigorously defend itself against the lawsuit. There can be no assurance that the lawsuit will be resolved in the Company’s favor. Even if the Company successfully defends the lawsuit, the Company may incur substantial costs defending or settling the lawsuit, in addition to a possible diversion of the time and attention of the Company’s management away from its business. If the Company is unsuccessful in defending the lawsuit, it may be required to pay a significant amount of damages and/or it may potentially lose ownership of Techwell, which will have a material adverse effect on the Company’s business, financial condition or results of operations. In the event we lose ownership of Techwell, we will lose the approximately $17.3 million of profit contribution since the acquisition of Techwell.
 
 Dubai Metro Rail Project Dispute
 
 On September 9, 2009, the Red Line, or first phase, of the Dubai Metro was officially opened. The Company, through its subsidiary Techwell, had been working towards completion of its external envelopes for stations along the Red Line of the Dubai Metro System. According to the Company’s original construction blueprint, the majority of its construction work was completed at the end of June 2009, and final construction milestones were scheduled for completion in the third quarter of 2009. With less than 5% of its contract remaining to be completed, Techwell was removed by the master contractor of the project, which also called for and received payment of $2.1 million in performance bonds and $7.3 million in advance payment bonds that were issued on Techwell's behalf for the project. The calling of the advance payment bonds was based on the master contractor's belief that it had paid in excess of the construction work performed.  The Company and certain of its subsidiaries are guarantors of the bonds that were paid by the banks, and the Company is liable under the guarantee agreements for such amounts paid by the banks. The Company does not believe that the master contractor had a proper basis for calling the bonds and intends to vigorously pursue and defend all of its legal rights and remedies related to the dispute. The Company has engaged a construction claims consultant to facilitate resolution of the dispute. The Company and its construction claims consultant, based on a review of the facts, documents, and materials available, believe that the Company has a reasonable opportunity to collect the amounts due to Techwell from the master contractor, less appropriate credits as its final amount due for work performed through September 2009. The Company, with the assistance of its claims consultant, have been continuously evaluating the dispute and probability of success on this dispute going forward and make the appropriate adjustments; however, no assurance can be given that the dispute will be resolved in the Company’s and Techwell’s favor.
 
 36
 
 In July 2010, the Company met the master contractor and the master contractor agreed to arrange a further meeting to explore the possibility of settlement. No such meeting was arranged by date of this report.  The Company’s counsel in Dubai was preparing the legal documents for the claims as of September 30, 2010. On November 8, 2010 the Company issued a notice informing the master contractor that the Company would seek resolution through arbitration with 56 day waiting period for the master contractor to respond. In April 2011, the master contractor reiterated that it does not believe that it is obligated to pay to the Company any of the amounts that the Company believes it is due. The Company intends to file for arbitration in the Courts of Dubai in April 2011.
 
 ITEM 4.  RESERVED
 
 PART II
 
 ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 From September 28, 2007 to June 9, 2008, our shares of common stock were listed for trading on the NYSE Amex under the ticket symbol “RCH.” On June 10, 2008, our common stock commenced trading on the NASDAQ Global Select Market under the symbol "CAEI." As of March 31, 2011 we had approximately 59 stockholders of record. This number does not include an indeterminate number of stockholders whose shares are held by brokers in street name.
 
 On April 14, 2011 the closing sales price for our common stock on the NASDAQ Global Select Market was $1.22 per share.
 
 The following table summarizes the high and low sales prices of our common stock as reported by the NASDAQ Global Select Market for each quarter in the years ended December 31, 2010 and 2009.
 
 On December 21, 2010, we conducted a 1:4 reverse stock split and the per share prices below have been adjusted to reflect the split
 
 High


LowYear ended December 31, 2010 (reversed split adjusted)Fourth Quarter

$
3.48


$
1.39Third Quarter

$
3.96


$
2.46Second Quarter

$
4.84


$
3.04First Quarter

$
5.00


$
3.66
 
 Year ended December 31, 2009 (reversed split adjusted)Fourth Quarter

$
7.16


$
3.68Third Quarter

$
11.36


$
5.84Second Quarter

$
9.88


$
3.56First Quarter

$
10.40


$
2.40
 
 The price of our common stock will likely fluctuate in the future. The stock market in general has experienced extreme stock price fluctuations in the past few years.Please see “Risk Factors—Our stock price is volatile and you might not be able to sell your securities at or above the price you have paid.”
 
 Dividend Policy
 
 We do not expect to declare or pay any cash dividends on our common stock in the foreseeable future, and we currently intend to retain future earnings, if any, to finance the expansion of our business. The decision whether to pay cash dividends on our common stock will be made by our board of directors, in its discretion, and will depend on our financial condition, operating results, capital requirements and other factors that the board of directors considers significant. We did not pay any cash dividends during 2010, 2009 and 2008.
 
 The ability of our Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balance of the Chinese operating subsidiaries. Because substantially all of our operations are conducted in China and a majority of our revenues are generated in China, substantially all of our revenue being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the exchange control regulation in China, and, as a result, we may unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into US Dollars.
 
 37
 
 Transfer Agent
 
 The transfer agent and registrar for our common stock is Computershare Trust Company.
 
 Equity Compensation Plan Information
 
 Our equity compensation plan information is provided as set forth in Part III, Item 11.
 
 Recent Sales of Unregistered Securities
 
 Not applicable.
 
 38
  ITEM 6. SELECTED FINANCIAL DATA
 
 As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
 
 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
 Forward-Looking Statements
 
 The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report.
 
 This Annual Report contains forward-looking statements that involve substantial risks and uncertainties.  The words “anticipated,” “believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, difficulties related to integration and management of the combined operations of the Company and ConnGame; entrance into the highly competitive MMORPG online game industry and difficulties in developing, testing and launching games; identification and remediation of the Company's deficiencies and weaknesses in its internal controls over financial reporting, potential claims or litigation that may result from the occurrence of restatements; ability to identify and secure debt, equity, and/or other financing required to continue the operations of the Company; ability to obtain an extension for the required Company payments under the waiver agreement and ability to maintain the conditions of the bondholder; difficulties in moving into the online gaming market; reduction or reversal of the Company's recorded revenue or profits due to "percentage of completion" method of accounting and expenses; increasing provisions for bad debt related to the Company's accounts receivable; fluctuation and unpredictability of costs related to our products and services; adverse capital and credit market conditions; fluctuation and unpredictability of costs related to the Company's products and services; expenses and costs associated with its convertible bonds, regulatory approval requirements and competitive conditions; and various other matters, many of which are beyond our control.  Actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated should one or more of these risks or uncertainties occur or if any of the risks or uncertainties described below in this Annual Report occur.  Consequently, all of the forward-looking statements made in this Annual Report are qualified by these cautionary statements and there can be no assurance of the actual results or developments.
 
 Overview
 
 We have traditionally specialized in high-end curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems, eco-energy saving building conservation systems and related products, for public works and commercial real estate projects.
 
 Revenues and earnings recognition on many construction contracts are measured based on progress achieved as a percentage of the total project effort or upon the completion of milestones or performance criteria rather than evenly or linearly over the period of performance.  Our work is performed under cost-plus-fee contracts and fixed-price contracts. The length of our contracts varies but typically has a duration of approximately one to two years. Approximately 95% of our sales are from-fixed price contracts. The remaining sales are from cost-plus-fee contracts. Under fixed-price contracts, we receive a fixed price. Consequently, we realize a profit on fixed-price contracts only if we control our costs and prevent cost over-runs on the contracts. Approximately 70% of contracts are modified after they begin, usually to accommodate requests from clients to increase project size and scope. In cases where fixed-price contracts are modified, the fixed price is renegotiated and adjusted upwards accordingly. Under cost-plus-fee contracts, which may be subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be reimbursed for all our costs.
 
 The recent trends in the global economy have had a significant adverse impact on our results of operations and on the commercial construction industry as a whole. The competitive environment in which we operate has become more competitive, increasing the number of re-bid construction projects and amount of time between bidding and award of a project, reducing selling prices, and causing competitors to modify the scope and type of projects on which they bid.
 
 The three largest customers accounted for 18% of the Company’s contract revenues for the year ended December 31, 2010. No customer accounts for 10% or more of the Company’s contract revenues in 2010.
 
 39
 
 International Projects
 
 In 2009 and 2010, the spread of the global recession and reduction in the nature and scope of international construction projects have led us to primarily focus our attention on domestic projects in China.  Dubai, Doha, Kuwait and other Middle East region have suffered greatly under the impact of the global financial crisis.  Our projects have suffered significantly as well.  Beginning in 2009, we experienced a significant decrease in the project turnover and an increase in costs and delays in customer payments.  This negative trend has continued during fiscal 2010. Our results of operations have also suffered.  For instance, we have experienced significant difficulties with respect to our Dubai and Project, as discussed below under, "Dubai Metro Rail Project".
 
 We do not believe that the international economy will experience a swift recovery in the near future and therefore its negative impact on construction industry still exists and will exist in the near future.  As a result, we ended the orders of the construction of international projects in 2009, and shifted the focus of our business to design and professional consulting services.  To develop projects and generate revenue, we have sought to join new projects in the position of design and project consultant and the role of material supplier.
 
 In the past, the number and size of our international projects had been increasing, but during 2009 our management has moved to refocus our resources to projects in the mainland China.  During the second quarter of 2009, we decided to terminate our work on the project in Singapore and stop the guarantee related to the project. No new international project was taken in 2010.
 
 Domestic Projects
 
 During 2010, we believe that the Chinese market has fared better than most of the international markets.  With the strength of our reputation and history of notable projects in China, we have been focusing our resources and efforts in our domestic market.   We believe that we have long-standing relationships with leading Chinese and international architects, having completed high profile projects in China.  During the year 2009, we commenced certain landmark projects in China, which consisted of the Changsha Train Station, Changsha Museum, Guangzhou Science Town, and projects in Jinan and Inner Mongolia. These projects are expected to be completed in 2010. During fiscal 2010, we signed the contracts for the projects of Beijing Jiangtai Business Centre, Wuhan Xinhaigeming Museum and Liuzhou Nanning Gymnasium and Natatorium. The total contract value of these projects are estimated to be approximately $18.9 million. These projects are expected to be completed in 2011.
 
 We were also awarded a new contract by the Overseas Chinese Town ("OCT") Group during the third quarter 2010 for their Joy Coast project, with a total value of approximately $3.2 million. The Joy Coast project is the first large-scale, high-end integrated urban ecotourism project in China. We are responsible for implementing their design and construction of the Innovation Exhibition Center, one of the regional landmarks within Joy Coast. The structure uses the highly advanced technique of space arbitrarily curved surfaces with stainless steel plates.
 
 Operations after Acquisition of ConnGame
 
 As noted below, we acquired a 60% equity interest in Shanghai ConnGame Network Ltd. (“ConnGame”) on August 18, 2010.  We believe that our acquisition of ConnGame will permit us to refocus our core capabilities and facilitate our planned transformation into a high-end architectural design consultant and service provider, as we intend to leverage ConnGame’s design engines and virtual applications to broaden our service capabilities and scope of architectural collaborations.
 
 We intend to utilize ConnGame's technology and online platform to provide technical consulting and advisory services to architects, real estate developers and governments. We believe our acquisition of ConnGame will enable us to strengthen our core architectural engineering and design abilities. We believe that our planned focus on design and construction will permit us to reduce our exposure to unpredictable operational risks that relate to construction projects, in addition to providing us with the tools to strengthen our ability to complete projects within budget limitations. We also believe that our acquisition of ConnGame and its technologies will enable us to better evaluate estimated profitable of construction projects before we enter into contracts. We believe that our technology profile will be strengthened, particularly with ConnGame’s virtual and online and graphic technologies, and that the technology and capabilities will permit us to render more animated, detailed, and interactive designs that could assist us in attaining highly desirable projects from our bidding competitors.
 
 We believe that our acquisition will also enable us to enter China's large online game market, with ConnGame’s two to-be-released MMORPG games.  We believe that the online game industry and its related business model will be a growing market in China.  We will seek to divide our business services into the following:
 
 ·
Construction consulting—We intend to continue to conduct our construction consultancy services within China.
 
 ·
Construction  design services—We believe that we will be able to utilize the technical skills and expertise of ConnGame to provide unique consulting services for the design and fabrication projects globally, with such services to include real-time and interactive capabilities.
 
 40
 
 ·
Online Games—ConnGame expects to launch its first game in Q2 2011 and its another game in Q3 2011, subject to successful testing.
 
 ·
Network Gaming and Home Decoration—We intend to develop a platform to provide services on home decoration through an interactive style, develop online games to provide to architects, other professionals, and individual consumers the ability to design and interact with other users.
 
 ConnGame
 
 Overview
 
 ConnGame, a company formed under the laws of the People’s Republic of China, develops MMORPG (Massively Multiplayer Online Role Playing Game) for operation in China. While utilizing its game engines, scalable development platforms, and production teams, ConnGame focuses on self-developed MMORPGs game titles that are based on China's iconic characters and nostalgic epochs.
 
 ConnGame owns two self-developed game engines, "Turbo" and "Apocalypse". ConnGame's online game-engines were created and developed independently by its research and development team. Apocalypse provides a solution for development of MMORPG games and can be applied to game content development and enhancement of the standardization process. The Turbo engine tool set is designed to facilitate the development of three dimensional MMORPG games, in conjunction with development of online role-playing games. Turbo encompasses all parts of the client programming, including management of server and client-side resources.
 
 Warring State Online is developed based on the Turbo engine. We completed numerous closed beta tests for our first planned MMORPG game entitled "Warring State", a realistic MMORPG based on China's i it's conic characters and nostalgic epochs, featuring recreations of historically popular heroes and warlords set in dramatic backdrops and varied according to the four seasons. ConnGame conducted the fourth closed beta testing of Warring State in November 2010. During testing, thousands of players explored the game for three days to test their experience and performance of the game. The beta testing was viewed by our management as successful and management expects that, after one to two additional closed beta testing, "Warring State Online" could be launched to the marketing. It is anticipated that the open beta would occur in the first quarter of 2011.
 
 During the 2010 fiscal year, ConnGame completed a contract with the China Ministry of Public Security for development of a Safe Driving Game project based on its proprietary "Apocalypse" game engine. The Company has recognized revenues of approximately $0.2 million from this project during the period.
 
 ConnGame is a start-up, development-stage company and has not yet generated or realized material revenues from its business operations. We expect to incur significant expenses from ConnGame's operations primarily due to its continued research and development activities, the operations and marketing of its products. Operations expenses related to ConnGame's operations for the year ended December 31, 2010 totaled approximately $3.6 million, with a substantial majority of this amount relating to research and development expenses. ConnGame anticipates that during the next 12 months, it will incur additional expenses towards the operations and marketing of the products.
 
 ConnGame anticipates that initial revenue, if any, from its MMORPG games will likely be generated through subscription fees paid by players of its MMORPG games and software licensing to third-party companies. The revenue model of ConnGame’s MMORPG business is based on the item-based revenue model, meaning game players can play our games for free, but may choose to pay for virtual items, which are non-physical items that game players can purchase and use within an MMORPG. Such items include gems, pets, fashion items, magic medicine, riding animals, hierograms, skill books and fireworks, all designed to enhance the game-playing experience. ConnGame intends to sell prepaid game cards to a range of regional distributors throughout China, who in turn sub-distribute them to numerous retail outlets, including Internet cafés and various Websites, newsstands, software stores, book stores and retail stores. ConnGame also intends to directly sell game points to players through our online sales platform. ConnGame’s ability to generate revenue and attain profitability depends upon its ability to develop quality products and the acceptance and popularity of its products by the end consumer.
 
 ConnGame plans to continue to improve its product quality through a various testing series to attain player feedback. If feedback of players indicates consumer desire for further improvement to game content and quality, it will take additional development efforts and the cost of research and development will increase, in addition to lengthening the time for ConnGame to generate revenue.
 
 August 2010 Acquisition of 60% Equity Interest in ConnGame
 
 In December 2009, we and First Jet Investments Limited (“First Jet”) entered into a letter of intent for the acquisition (“Letter of Intent”) that set forth the principal terms under which we would issue up to 6,250,000 shares of our common stock to First Jet to acquire 60% of the equity interest of ConnGame. In January 2010, our board of directors and stockholders approved our acquisition of a 60% equity interest in ConnGame. On August 11, 2010, we entered into a stock purchase agreement (“Agreement”) with First Jet, New Crown Technology Limited, a wholly owned subsidiary of First Jet and the holder of 100% of the equity interests of ConnGame (“New Crown”), and Mr. Jun Tang, the principal of First Jet and New Crown. Pursuant to the Agreement, we agreed to issue First Jet 6,250,000 shares of our common stock, $0.001 par value per share, in exchange for 60% of the equity interest of New Crown on the date of closing of the acquisition. The acquisition was completed on August 18, 2010.
 
 41
 
 Effective upon the closing of the acquisition, our Board of Directors appointed Mr. Jun Tang as a member and Chairman of the Board of Directors. Immediately prior to the effective time of Mr. Jun Tang’s appointment, Luo Ken Yi resigned as the Chairman of the Board of Directors but remains as a member of the Board. In addition, Mr. Tang Nianzhong resigned as a member of the Board of Directors to ensure that our company has a majority of independent directors on the Board in compliance with NASDAQ continued listing standards. In addition, on September 12, 2010, in relation to the acquisition of ConnGame, the following resignations and appointments occurred:
 
 ·
Luo Ken Yi resigned as the Chief Executive Officer and Mr. Luo maintained his position as President of the Company and a member of the Board of Directors of the Company (the “Board”),
 ·
Gene Michael Bennett resigned as the Company’s Chief Financial Officer,
 ·
Zheng Jin Feng and Zhao Bao Jiang each resigned as a director,
 ·
A new Chief Executive Officer was appointed, currently Zhixin (Steven) Xing,
 ·
Qin (Andy) Lu was appointed as the Acting Chief Financial Officer and Corporate Secretary,
 ·
Ping Xu was appointed as an independent director and as a member of the Audit Committee and Nominating and Corporate Governance Committee, and
 ·
Shibin Jo was appointed as an independent director and as a member of the Compensation committee and a member and chairman of the Nominating and Corporate Governance Committee, and
 ·
Chen Huang was appointed as an independent director and as a member of the Audit Committee.
 
 Wavier Agreement
 
 On February 24, 2010, we entered into an Amendment and Waiver Agreement (the “Waiver Agreement”) with the holders of our outstanding Variable Rate Convertible Bonds due 2012 (the “2007 Bonds”) and 12% Convertible Bonds due 2011 (the “2008 Bonds,” and collectively with the 2007 Bonds, the “Bonds”) and warrants to purchase 300,000 shares of our common stock expiring 2013 (the “2008 Warrants”). Pursuant to the Waiver Agreement, the holders of the Bonds and the 2008 Warrants agreed to waive their right to a reduction in the conversion price of the Bonds and the exercise price of the 2008 Warrants upon our anticipated issuance of up to 6,250,000 shares for the acquisition of a 60% ownership interest in ConnGame. Additionally, the holders of the 2008 Bonds agreed to waive any default under the terms and conditions of the trust deed governing the 2008 Bonds relating to the requirement that KGE Group Limited, our largest shareholder, own at least 45% of our issued and outstanding common stock. The waiver had a term of three months and expired on May 24, 2010. The parties entered into a new waiver on July 13, 2010, which has a three month term subject to the terms and conditions contained therein. As indicated above, we closed the ConnGame acquisition during the three-month period.
 
 The waivers contained in the Waiver Agreement are subject to numerous conditions.
 
 ·
Under the Waiver Agreement, we agreed to pay the Bondholders the interest on the Bonds in the amount of approximately $3.84 million on scheduled dates, of which we made a payment of approximately $1.26 million on March 31, 2010 and $1.32 million on April 15, 2010. Under the terms of the waiver, we agreed that we would pay to the bondholders all outstanding interests in arrears on the Bonds, plus all other applicable interest up until the payment date, within 30 days after the closing of the issuance of the shares to acquire ConnGame, but which in any event, would not be later than September 30, 2010.
 
 ·
We also agreed to repay an overdraft facility in the amount of approximately $4.91 million on three scheduled dates. We made payment of approximately one-half of this amount and agreed to pay all unsettled amounts, which include all outstanding principal and interest amounts, within 30 days after the closing of the issuance of the Shares, but which in any event, would not be later than September 30, 2010.
 
 ·
We also agreed that we will not repay or prepay any debt prior to its currently scheduled due date until we make all of the payments specified in the Waiver and the Bonds have been redeemed in full and that any new indebtedness incurred by us for the purpose of repaying the overdraft facility shall (i) not exceed the outstanding amount due and payable under the overdraft facility and (ii) be subordinated to all amount owed under the Bonds (the “Waiver Covenants”).
 
 As of the date of this report, we did not pay make the payments required under the Waiver and we were negotiating with the Bondholders for extension of the scheduled payments dates.
 
 If we are unable to successfully to obtain an extension for the payment dates, then all rights of the holders of the Bonds and 2008 Warrants waived under the Waiver to or to be waived under the Waiver, shall not be waived and will be reinstated, and any previous waivers will be null and void. In such case, appropriate adjustments will be made to the conversion prices of the Bonds and the exercise price of the 2008 Warrants and an event of default under the terms and conditions of the trust deed governing the 2008 Bonds shall exist, making the 2008 Bonds immediately due and payable.
 
 42
 
 Since we were unable to comply with the payment terms of the Waiver and unless we are able to successfully negotiate an extension of the scheduled payment dates, the issuance of the Shares could result in an adjustment of the conversion price of the Bonds and the 2008 Warrants pursuant to the governing Trust Deeds and warrant agreement, respectively, which could result in substantial dilution to our shareholders. The 2007 Bonds are currently convertible at a per share price of $9.80 per share and the 2008 Bonds and 2008 Warrants are convertible and exercisable, respectively, at $25.40 per share (taking into account the 1 for 4 share reverse stock split that occurred on December 21, 2010). If we are not able to obtain an extension for payment under the terms of the Waiver Agreement, an adjustment to the conversion and exercise prices could be adjustable downward to the value of the assets that we received for the issuance of the Shares, as calculated in accordance with the provisions of the Trust Deeds and the warrant agreement.
 
 Dubai Metro Rail Project Dispute
 
 On September 9, 2009, the Red Line, or first phase, of the Dubai Metro was officially opened. We, through our subsidiary Techwell Engineering Limited, had been working towards completion of our external envelopes for stations along the Red Line of the Dubai Metro System. According to our original construction blueprint, the majority of our construction work was completed at the end of June 2009, and final construction milestones were scheduled for completion in the third quarter of 2009. With less than 5% of our contract remaining to be completed, Techwell was removed by the master contractor of the project, who also called for and received payment of $2.1 million in performance bonds and $7.3 million in advance payment bonds that were issued on Techwell's behalf for the project. The calling of the advance payment bonds was based on the master contractor's belief that it had paid in excess of the construction work performed. We and certain of our subsidiaries are guarantors of the bonds that were paid by the banks, and we are liable under the guarantee agreements for such amounts paid by the banks. We do not believe that the master contractor had a proper basis for calling the bonds and intend to vigorously pursue and defend all of our legal rights and remedies related to this dispute. We have engaged a construction claims consultant to facilitate resolution of this dispute. We and our construction claims consultant, based on a review of the facts, documents, and materials available, believe that we have a reasonable opportunity to collect the amounts due to Techwell from the master contractor, less appropriate credits as our final amount due for work performed through September 2009. We, with the assistance of our claims consultant, have been continuously evaluating the dispute and probability of success on this dispute going forward and make the appropriate adjustments; however, no assurance can be given that the dispute will be resolved in our and Techwell’s favor. The Company’s counsel in Dubai is preparing the legal documents for the claims by the time of this Annual Report.
 
 With the use of “percentage-of-completion” method, the revenue to be recognized for each period will included both (1) the revenue earned for the current period and (2) the adjustment to previously recognized revenue that is required because of the changes in estimated total revenue, costs and profitability of projects from which the previous revenue had been recognized. The changes in the estimates may be the result of, for example, increased costs or overhead expenses of the projects, changes of the scope of the works of the contract as well as the changes of technologies used which in turn affect the costs of the project. Under these circumstances, the estimated revenue and costs can change and as a result the estimated profitability of the project can change, which affects the profit elements in the revenue previously recognized and may be required to be revised accordingly. The “adjustments” or “revisions” are made via adjustment to the current period revenue because it is the changes in estimates that are requiring the revisions and not a restatement of the previous period figures.
 
 With respect to the Dubai Metro Rail Project, which was the primary focus of Techwell, an adjustment under the percentage-of-completion method described above may be required if, for example, the Company and the Company’s claim consultant modifies its evaluation of the Company’s claims such that the Company is not likely to recover its claims as currently anticipated, if the Company encounters any unexpected difficulties in the claiming process which making the increase of claiming costs, and if a commercial settlement between the parties is reached on a amounts different from current value estimates. In such scenarios, the final project revenue or estimated costs may be changed to affect the revenue recognition of the project. However, neither of the situations is considered to exist at the moment of the reporting that affects the accounting estimates of revenue and costs used for the period. As such, the Company believes that the revenue recognized to date is appropriate as there were periodic reviews of the estimates of the project revenue and costs by the Company to reflect the latest profitability of the project for revenue recognition.
 
 One of the primarily reasons that the aging of Company’s contract receivables have increased is the delay in payment by client of the Dubai projects since April 2009. The underlying receivable as of December 31, 2010 from the Dubai projects was approximately $42 million, which represented 52% of the total contract receivables as of such date. The Company has employed a claim consultant, Hill International, to facilitate the Company’s claim for the back payment. The Company currently expects that there will be progress and payments will be received. However, due to the ongoing dispute, there is no guarantee that the Company will collect all or a portion of the contract receivable. For receivables related to the Dubai Project, the client delayed payment to us since April 2009 by refusing to issue the Certificates for Value of Work Done. No Certificates have been issued since April 2009. The Certificates are pre-requisites to proceed with payment to the Company. The client paid for all work for Certificates for Value of Work Done issued in or before April 2009. Such payments were made prior to December 31, 2009. As a result, no account receivables at December 31, 2010 represent work for the above-referenced Certificates issued in or before April 2009. The receivables as of December 31, 2010 were recognized in accordance with the Percentage of Completion Method and based on the claim consultant’s report on the estimated final value of work done that the Company completed as of December 31, 2010.
 
 43
 
 The Company has not recorded an allowance for doubtful accounts related to the Dubai project. The Company has engaged a construction claims consultant to facilitate resolution of the dispute. The Company and its construction claims consultant, based on a review of the facts, documents, and materials available, believe that the Company has a reasonable opportunity to collect the amounts due to Techwell from the master contractor, less appropriate credits as its final amount due for work performed through September 2009. The Company, with the assistance of its claims consultant, have been continuously evaluating the dispute and probability of success on this dispute going forward and make the appropriate adjustments; however, no assurance can be given that the dispute will be resolved in the Company’s and Techwell’s favor. In the report of the claim consultant, there are the high and low estimates for the final total value of work done for the Dubai project. The Company started with the low estimates with prudence and adjusted such amounts with the amounts that the claim consultant’s expressed that there was an excellent opportunity for the Company to be recovered. Furthermore, as the client of the projects being the joint venture of two reputable Japanese corporations and one Turkish corporation with long operating histories, the Company believes that the possibility of default in payment is considered not likely to occur. Based on these supporting documents and analysis, the Company believes that the receivables will be collected and no allowance is required. However, the Company will be required to account for doubtful collection of the receivables related to the Dubai Project in the event it concludes that it is not likely that the Company will be able to collect the receivables.
 
 In July 2010, the Company met the master contractor and the master contractor agreed to arrange a further meeting to explore the possibility of settlement. On November 8, 2010 the Company issued a notice informing the master contractor that the Company would seek resolution through arbitration with 56 day waiting period for the master contractor to respond. In April 2011, the master contractor reiterated that it does not believe that it is obligated to pay to the Company any of the amounts that the Company believes it is due. The Company intends to file for arbitration in the Courts of Dubai in April 2011.
 
 Techwell Litigation
 
 Pursuant to a Stock Purchase Agreement dated November 7, 2007, the previous shareholders of Techwell Engineering Limited (“Techwell”), Mr. Ng, Chi Sum and Miss Yam, Mei Ling Maria, agreed to sell 100% of the shares in Techwell to the Company for approximately $11.7 million in cash and shares of common stock of the Company. Subsequent to the acquisition, Mr. Ng and Miss Yam were employed by Techwell.
 
 On January 14, 2009, the board of directors of Techwell passed a board resolution, to dismiss both Mr. Ng and Miss Yam with immediate effect and remove Mr. Ng from the board of Techwell (the “Resolution”). On January 16, 2009, Mr. Ng and Miss Yam filed a lawsuit in the High Court of Hong Kong against the Company and its subsidiary, Full Art International Limited. The lawsuit alleges that,inter alia, (i) the Company misrepresented to them the financial status of the Company and its operations during the course the negotiations of the Techwell acquisition; (ii) the Company failed to perform its obligations under a settlement agreement alleged to have been agreed to by the Company in January 2009; and (iii) the dismissal of Mr. Ng was unlawful and invalid. The lawsuit filed by Mr. Ng and Miss Yam requests the court for specific performance of the settlement agreement that was allegedly entered into, which would require the return of the Techwell company to Mr. Ng and Miss Yam, and in the absence of such grant of relief, Mr. Ng and Miss Yam request unspecified damages in lieu of return of the Techwell company.
 
 On January 23, 2009 an ex-parte injunction order was granted to Mr. Ng, restraining the Company from implementing the Resolution, which was eventually dismissed with immediate effect on February 25, 2009 after a court session in the High Court of Hong Kong. Mr. Ng was also ordered to bear the costs of the various court proceedings in connection with the injunction order. On March 27, 2009, Mr. Ng and Miss Yam filed a summons in the High Court of Hong Kong seeking a court order for leave to join the Company’s principal shareholder, KGE Group Limited, as a defendant in the lawsuit, which was granted on April 9, 2009. As a result, KGE Group Limited became one of the defendants of the lawsuit. On May 12, 2009, the Company filed a Defense and Counterclaim at the High Court of Hong Kong in response to a Statement of Claim served by Mr. Ng and Miss Yam on the Company on April 7, 2009.
 
 As of the date of this Annual Report, the Company, Mr. Ng, and Miss Yam, after several counter proposals among the parties, are still in discussions and negotiations to settle all disputes. However, there is no guarantee that the parties will reach an agreement to settle the dispute, in which case the Company intends to vigorously defend itself against the lawsuit. There can be no assurance that the lawsuit will be resolved in the Company’s favor. Even if the Company successfully defends the lawsuit, the Company may incur substantial costs defending or settling the lawsuit, in addition to a possible diversion of the time and attention of the Company’s management away from its business. If the Company is unsuccessful in defending the lawsuit, its may be required to pay a significant amount of damages and/or it may potentially lose ownership of Techwell, which will have a material adverse effect on the Company’s business, financial condition or results of operations. In the event we lose ownership of Techwell, we will lose the approximately $20.3 million of profit contribution since the acquisition of Techwell.
 
 In the last quarter of 2009, Mr. Ng made a settlement proposal to the Company for consideration and the Company is still under negotiation of the settlement agreement with Mr. Ng as of December 31, 2010. The Company’s management intends to take further legal action in the event no settlement agreement could be reached by end of June 2011.
 
 44
 
 December 2010 Reverse Stock Split and Decrease of Authorized Shares
 
 On December 17, 2010, we filed a Certificate of Amendment to its Certificate of Incorporation with the Secretary of State of Delaware effectuating a 1-for-4 reverse stock split (the “Reverse Stock Split”) of our common stock effective as of 12:01 AM EST on December 21, 2010. The Certificate of Amendment also reduced the number of authorized shares of common stock from 150 million to 100 million. Par value and other terms of our common stock were not affected by the Reverse Stock Split.
 
 Critical Accounting Policies, Estimates and Assumptions
 
 Management’s discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. The most significant estimates and assumptions include provisions for income taxes, allowance for doubtful accounts, and the recoverability of the long-lived assets. Actual results could differ from these estimates. Periodically, we review all significant estimates and assumptions affecting the financial statements and record the effect of any necessary adjustments.
 
 The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:
 
 Revenue and Cost Recognition –Revenues from fixed-price and modified fixed-price construction contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total cost for each contract. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the amount can be reliably estimated. Total estimated gross profit on a contract, being the difference between total estimated contract revenue and total estimated contract cost, is determined before the amount earned on the contract for a period can be determined. The measurement of the extent of progress toward completion is used to determine the amount of gross profit earned to date and that the earned revenue to date is the sum of the total cost incurred on the contract and the amount of gross profit earned.
 
 Earned revenue, cost of earned revenue, and gross profit are determined as follows: -
 
 a.
Earned Revenue is the amount of gross profit earned on a contract for a period plus the costs incurred on the contract during the period.
 b.
Cost of Earned Revenue is the cost incurred during the period, excluding the cost of materials not unique to a contract that have not been used for the contract.
 c.
Gross Profit earned on a contract is computed by multiplying the total estimated gross profit on the contract by the percentage of completion. The excess of that amount over the amount of gross profit reported in prior periods is the earned gross profit that should be recognized in the income statement for the current period.
 
 Change orders are common for the changes in specifications or design. Contract revenue and costs are adjusted to reflect change orders approved by the customer and the contractor regarding both scope and price. Recognition of amounts of additional contract revenue relating to claims is appropriate only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably estimated.
 
 Selling, General, And Administrative Costs – Selling, general, and administrative costs are charged to expense as incurred.
 
 Contract Receivable – Contract receivable represents billings to customers on the percentage of work completed and recognized to date based on contract price. An allowance is provided for doubtful collections, which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. We record an allowance for doubtful collections for our outstanding contract receivable at the end of the period in accordance with generally accepted accounting principles in the United States, and we consider that allowance to be reasonable at December 31, 2010, 2009, and 2008. As of December 31, 2010, our provision for doubtful accounts was $5.5 million, which was 6.3% of our construction contract related receivables of $87.0 million.
 
 45
 
 Among the contract receivables as of December 31, 2010, $59.4 million was outstanding over 365 days and $18.5 million over 730 days, in total of $77.9 million which including $15.4 million of retention money which would only be settled after the retention periods of two or three years. The Company periodically prepares the aging of the receivables information and reviews the balances with consideration of the background of each client for assessing the realizable value of the balances and would make provision when appropriate. The Company notes that its account receivables that are 365 and 720 days old are primarily related to the Company’s PRC operations, and the payment cycle in the PRC commonly entails a receivable being outstanding for over one to two years before collection. Such situations are particularly common in the construction market and with the clients from government. Since the Company’s older outstanding receivables are mainly of government projects, the final accounts and payments are required to be processed through a lengthy bureaucratic process in the PRC government. Based on the foregoing, and despite the receivables being outstanding from 365 to 720 days, the Company considers them to be realizable because the Company believes that there is a remote chance that the PRC Government will go into bankruptcy or otherwise refuse to make payment on the receivables. In addition, the Company has the policy of conducting a comprehensive review the aging of account receivables on a regular basis every three months. Furthermore, the Company has a designated staff member from one of its PRC subsidiaries to remain in constant communication with the Company’s various departments regarding PRC receivables collection status, and allowances for doubtful accounts is made, as necessary, based on the collection status updates. As of December 31, 2010, the contract receivables under aging of 1 to 30 days amounted to $3.4 million.
 
 Comprehensive Income – Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other consolidated financial statements. Our current components of other comprehensive income are the foreign currency translation adjustment.
 
 Income Taxes – The Company uses the accrual method of accounting to determine and report its taxable reduction of income taxes for the year in which they are available. The Company has implementedASC 740-270, Accounting for Income Taxes . Income tax liabilities computed according to the United States, People’s Republic of China (PRC), Hong Kong SAR, Macau SAR and Australia tax laws are provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the basis of fixed assets and intangible assets for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize that tax benefit, or that future realization is uncertain.
 
 Accounting for the Impairment of Long-Lived Assets –The long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the reporting periods, there was no impairment loss.
 
 Goodwill and Intangible Assets - In accordance with ASC 350, “Goodwill and Other Intangible Assets.” the Company does not amortize goodwill or intangible assets with indefinite lives. Upon indication that the carrying values of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations. The Company performs an analysis on its goodwill balances to test for impairment on an annual basis and whenever events occur that indicate an impairment could exist. The goodwills presented as December 31, 2010, approximately $23.8 million, are attributable to the acquired subsidiaries. Approximately $15.8 million was attributed to ConnGame, which was acquired in August 2010, and approximately $8.0 million was attributed to Techwell Engineering Limited. There are several instances that may cause the Company to further test its goodwill for impairment between the annual testing periods including: (i) continued deterioration of market and economic conditions that may adversely impact its ability to meet its projected results; (ii) declines in the Company’s stock price caused by continued volatility in the financial markets that may result in increases in its weighted-average cost of capital or other inputs to its goodwill assessment; (iii) the occurrence of events that may reduce the fair value of a reporting unit below its carrying amount, such as the sale of a significant portion of one or more of the Company’s reporting units. In the year ended December 31, 2010, the Company believes that no instance indicates that an impairment could exist in respect to Techwell.
 Material assumptions include: (1) The reporting unit continues to have the profitable operations for a period of next 10 years; (2) the revenue has the steady annual growth rate ranging from 5% to 8% as in line with the estimated growth rate of PRC economy; (3) costs of funds kept stable for the period of next 10 years resulting in a stable discount rate for the projection of estimated fair value; and (4) no material change in the prevailing payment terms of the construction industry that allowing the working capital requirement kept at a low level at 15%. Uncertainties include: (1) The ability of the reporting unit to continue as a profitable operation may be affected by changes in technologies and the market of the construction industry; (2) the growth of the PRC economy may not be as steady as projected that in turn affect the steady growth of the revenue of the reporting unit, (3) it is also uncertain about the capital market that affect the costs of fund of the company; and (4) the prevailing payment terms used in the construction industry may be changed as a result of changes in the business environment for the construction industry. Potential events include (1) the appreciation of the value of RMB that would slow down the export and in turn the economic development of China that in turn have negative effect of property development industry in China; and (2) the controlling policies towards the property market by the PRC government. For other intangible assets, impairment tests are performed annually and more frequently whenever events or changes in circumstances indicate carrying values exceed estimated reporting unit fair values. See above,“Risk Factors—If our goodwill resulting from our 2007 acquisition of Techwell becomes impaired, then our financial condition and profits may be reduced.”
 
 46
 Foreign Currency Translation – The consolidated financial statements are presented in United States Dollars (US$). Our functional currency is the US$, while domestic subsidiaries’ use the Renminbi (RMB) and Hong Kong and overseas subsidiaries use local currencies as their functional currencies. The consolidated financial statements are translated into United States dollars from RMB, HKD, MOP and AED at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.
 
 Statutory Reserves – Surplus reserves for foreign investment enterprises are referring to the amount appropriated from the net income in accordance with PRC laws or regulations, which can be used to recover losses and increase capital, as approved, and are to be used to expand production or operations.
 
 Results of Operations
 
 The following table sets forth our consolidated statements of income for the years ended December 31, 2010, 2009 and 2008 in U.S. dollars:
 
 Year Ended December 31,2010


2009(in thousands, except share amounts and

earnings per share)Contract revenues earned

$
27,565



117,191Cost of contract revenues earned


(25,654)



(94,722
)Gross profit

$
1,911



22,469Selling, general and administrative expenses


(16,014)



(21,092
)Non-recurring general and administrative expenses


—



—Finance Expense


—



—Income/(Loss) from operations

$
(14,103)



1,377Interest income


11



58Interest expense


(7,630)



(6,331
)Other income


865



177Other expenses


(2,314)



(329
)Income/(Loss) before taxation

$
(23,171)



(5,048
)Income tax


(24)



107Discontinued Operation Loss, net of tax


—



(1,901
)Net Earnings/(Loss)


(23,195)



(6,842
)Net Loss attributable to non-controlling interest


892



33Net Earnings/(Loss) attributable to the Company

$
(22,303)



(6,809
)Basic net income/(loss) per common share


(1.39)



(0.51
)Diluted net income/(loss) per common share


(1.39)



(0.51
)Basic weighted average common shares outstanding (reverse split adjusted)


16,091,958



13,314,825Basic weighted average common shares outstanding (reverse split adjusted)


16,091,958



13,314,825
 
 47
 
 Years ended December 31, 2010 and 2009
 
 Contract revenues earned for the year ended December 31, 2010 were $27.6 million, a decrease of $89.6 million, or 76%, from the contract revenues earned of $117.2 million for the comparable period in 2009. The primary reasons for the decrease in contract revenues earned was due to the decline in the global economy and construction industry and the resulting negative effects on our business operations, in addition to few new projects for our company in 2010 after our completion of international projects in 2009 such as the Dubai Metro Red Line and Doha High Rise Office Tower. We believe our cessation of international projects contributed significantly to the decline in our revenue, as approximately 57% of our annual revenue came from international projects in 2009, while 2% of our annual revenue came from international projects in the 2010 fiscal year. Of our total contract revenues earned, approximately $0.2 million was generated from operations through ConnGame.
 
 Cost of contract revenues earned for year ended December 31, 2010 was $25.7 million, a decrease of $69.0 million, or 73%, from $94.7 million for the comparable period in 2009. Cost of contract revenues earned consists of the raw materials, labor and other operating costs related to manufacturing. The decrease in costs of contract revenues earned was primarily due to a reduction in the number of projects and thus, a decrease in the revenues earned, as stated above. Provisions for estimated losses on uncompleted contracts are charged to cost of contract revenues earned in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the amount can be reliably estimated. Cost of revenues related to our MMORPG gaming operations were approximately $55,905 for the 2010 fiscal year.
 
 Gross profit for the year ended December 31, 2010 was $1.9 million, a decrease of $20.6 million, or 92%, from $22.5 million for the comparable period of 2009. Our gross margin for the year ended December 31, 2010 was 6.9% as compared with 19.2% for the year ended December 31, 2009. The decrease in gross margin was primarily a result of increases in raw material, labor and administrative costs in our domestic market of China including effects of recent RMB appreciation as well as the adjustments in accordance to the percentage-completion method for accounting of projects revenue. Such adjustments were made as a result of increases in the projects’ estimated costs, which reduced the projects’ estimated profits and the revenues.
 
 Selling, general and administrative expenses were $16.0 million for the year ended December 31, 2010, a decrease of approximately $5.1 million, or 24.2%, from approximately $21.1 million for the comparable period in 2009. The decrease was due to decrease in revenue in earned. Among the selling, general and administrative expenses which included $1.9 million stock compensation granted and $6.0 million bad debts expenses, payroll and social securities was the largest expenditure of the group, which accounted for approximately 19.4% of the expenses during the 2010 fiscal year. Other major expenses included rental expenses of 5.6% and depreciation expenses of 5.3%.
 
 Interest expenses and finance expenses were $7.6 million for the year ended December 31, 2010, an increase of $1.3 million, from approximately $6.3 million for the comparable period in 2009. The increase was primarily due to the additional interest expense in the 2010 fiscal year related to borrowing by short-term bank loans and the acceleration of interest expenses on convertible bonds.
 
 Income tax expenses were $24,000 for the year ended December 31, 2010 at an effective tax rate of 0.11%, compared with income tax benefit of $107,000 for the same period of 2009 at an effective tax rate of -2.11%.
 
 As a result of the above, net loss for the year ended December 31, 2010 was $22.3 million, an increase of $15.5 million, or 228%, from net loss of $6.8 million for the comparable period in 2009.
 
 Liquidity and Capital Resources
 
 At December 31, 2010, we had cash and cash equivalents of $4.1 million.
 
 Prior to October 17, 2006, we financed our business operations through short-term bank loans, cash provided by operations, and credit provided by suppliers. On October 17, 2006, concurrently with the close of our Share Exchange, we received gross proceeds of $3.7 million in a private placement transaction. In October 2007, we completed an initial public offering consisting of 847,550 shares of our common stock. Our sale of common stock resulted in net proceeds of approximately $2.0 million.
 
 We have also financed our operations through the issuance of convertible bonds. On April 12, 2007, we completed a financing transaction pursuant to which we issued the 2007 Bonds in the principal amount of $10 million. The 2007 Bonds bear cash interest at the rate of 6% per annum for the first year after April 12, 2007 and 3% per annum thereafter, of the principal amount of the 2007 Bonds. Each 2007 Bond is convertible at an initial conversion price of $14.00 per share (adjusted for the December 2010 reverse stock split). At any time after April 12, 2010, holders of the 2007 Bonds can require us to redeem the 2007 Bonds at 126.51% of the principal amount. We are required to redeem any outstanding 2007 Bonds at 150.87% of its principal amount on April 4, 2012. In September 2008, $2 million worth of bonds were converted into shares of common stock pursuant to which we issued 571,428 shares of common stock.
 
 48
 
 On April 15, 2008, we completed a financing transaction pursuant to which we issued the 2008 Bonds in the principal amount of $20 million. The 2008 Bonds bear cash interest at the rate of 12% per annum. Interest is payable semi-annually in arrears on April 15 and October 15 of each year (each an “Interest Payment Date”). On any Interest Payment Date on or after April 15, 2010, the holders of the Bonds can require us to redeem the Bonds at 116.61% of the principal amount. We are required to redeem any outstanding Bonds at 116.61% of its principal amount on April 15, 2011.
 
 On July 13, 2010, we entered into the Waiver Agreement with the holders of our 2007 Bonds and 2008 Bonds and 2008 Warrants. Under the Waiver Agreement, we agreed to pay the Bondholders the interest on the Bonds in the amount of approximately $3.84 million on scheduled dates, of which we made a payment of approximately $1.26 million on March 31, 2010 and $1.32 million on April 15, 2010. Under the terms of the waiver, we agreed that we would pay to the bondholders all outstanding interests in arrears on the Bonds, plus all other applicable interest up until the payment date, within 30 days after the closing of the issuance of the shares to acquire ConnGame, but which in any event, would not be later than September 30, 2010. We also agreed to repay an overdraft facility in the amount of approximately $4.91 million on three scheduled dates. We made payment of approximately one-half of this amount and agreed to pay all unsettled amounts, which include all outstanding principal and interest amounts, within 30 days after the closing of the issuance of the Shares, but which in any event, would not be later than September 30, 2010. We also agreed that we will not repay or prepay any debt prior to its currently scheduled due date until we make all of the payments specified in the Waiver and the Bonds have been redeemed in full and that any new indebtedness incurred by us for the purpose of repaying the overdraft facility shall (i) not exceed the outstanding amount due and payable under the overdraft facility and (ii) be subordinated to all amount owed under the Bonds. The closing of the ConnGame acquisition was completed on August 18, 2010.
 
 As of December 31, 2010, we did not pay make the required payments scheduled under the waivers and was negotiating with the Bondholders for extension of the date of the scheduled payments. If we are required to repurchase all or a portion of the outstanding amount of $28.0 million in bonds and we do not have sufficient cash to make the repurchase, we will be required to obtain third party financing to do so, and there can be no assurances that we will be able to secure financing in a timely manner and on favorable terms, which could have a material adverse effect on our financial performance, results of operations and stock price.
 
 As indicated above, on April 15, 2011, the 2008 Bonds were matured. The payables amount to $23.3 million. The Company did not redeem the Bonds and was under negotiation with the Bondholders for the repayment schedule.
 
 Full Art International Limited incurred an automobile capital lease obligation due November 9, 2012 that had an outstanding amount of $108,845 as of December 31, 2010.
 
 On February 19, 2008, we and Techwell Engineering Limited were granted a bond facility by the Hong Kong Branch of ABN AMRO Bank N.V. The facility amount was $10,000,000, at a tenor of up to one year with 2% flat interest rate on the issued amount of bonds such as bank guarantees, performance bonds, advanced payment bonds and standby letters of credit. ABN AMRO required guarantees as follows: (i) an irrevocable and unconditional guarantee executed by Zhuhai King Glass Engineering Co. Limited and (ii) share charge over the shares of us for a minimum value of $5,000,000 or equivalent, executed by KGE Group Limited. On May 2, 2008, the facility was increased to $12,000,000 with additional cash collateral of $2,000,000, which is also the total amount of cash collateral for the facility. All cash collateral was then fully used to off-set a portion of the calling of the bonds for projects in Dubai by the beneficiary. As of December 31, 2010, the facility was converted into the temporary loan of $4.5 million resulted from the calling of performance and advance payment bonds at interest rate at Bank's Cost of Fund + 6%.
 
 On March 28, 2008, we, Full Art and Techwell Engineering Limited were granted a bonding facility by the Hong Kong Branch of HSBC. The facility amount was $10,000,000, at a tenor of up to one year with 1% flat interest rate on the issued amount of bonds such as bank guarantees, performance bonds, advanced payment bonds and standby letters of credit. HSBC required guarantees as follows: (i) an unlimited guarantee among CHINA CGAME, INC., Full Art International Limited and Techwell Engineering Limited; and (ii) an “all monies” securities deposits with 15% margin. On August 18, 2008, the facility was increased to $20,000,000 with additional cash collateral of $1,500,000 that increased the total amount of cash collateral to $3,000,000. In September 2009, $2,818,440 of the cash collateral was used to off-set of the calling of the bonds for projects in Dubai by the beneficiary. As of December 31, 2010, the facility amount was reduced to $0.9million and was fully utilized.
 
 On July 19, 2008, Zhuhai King Glass Engineering Co., Ltd. (“Zhuhai KGE”), our wholly-owned subsidiary was granted a Bank Accepted Draft facility by the Shenzhen Branch of ABN AMRO Bank N.V. The facility amount is RMB70,000,000 (US$10,218,978). On September 30, 2009, the facility was amended to allow Open Account Financing – Accounts Receivable against invoices from acceptable buyers up to RMB21,000,000 and Open Account Financing and Overdraft in Current Account up to RMB16,800,000. ABN AMRO requires irrevocable and unconditional guarantee from us and cash collateral of 20% of bank’s acceptance bill issued and Open Account Financing. As of December 31, 2010, Zhuhai KGE utilized RMB Nil (US $Nil) of Bank Accepted Draft and RMB11.0 million (US$1.7 million) of Overdraft in Current Account.
 
 49
 
 In September 2009, the beneficiary of a performance bond and advance payment bonds for the projects in Dubai demanded the drawing of approximately $9.4 million in total from the two issuing banks, ABN AMRO Bank NV and HSBC. The calling of the bonds was based on the beneficiary’s belief that it had paid in excess of the construction work performed. We do not believe that the beneficiary had the proper basis for calling the bonds and intend to vigorously defend all of their rights and remedies related to the dispute.As of December 31, 2010, after an offset against collateral accounts that we held with the banks, there was approximately $4.5 million in a shortfall amount due to ABN AMRO Bank NV by us that was not paid off. Such amount is currently outstanding as the temporary loan from the bank at the interest rate at the bank’s cost of funds plus 6%.
 
 Working capital management, including prompt and diligent billing and collection, is an important factor in our results of operations and liquidity. When we are awarded construction project, we work according to the percentage-of-completion method which matches the revenue streams with the relevant cost of construction based on the percentage-of-completion of project as determined based on certain criteria, such as, among other things, actual cost of raw material used compared to the total budgeted cost of raw material and work certified by customers. There is no guarantee that the cash inflow from these contracts is being accounted for in parallel with the cash outflow being incurred in the performance of such contract. In addition, a construction project is usually deemed to be completed once we prepare a final project account, the account is agreed upon by our customers, and all amounts related to the contract must be settled according to the account within three months to a year from the customer’s agreement on the final project account. As there may be different time intervals to reach a consensus on the amount as being accounted for in the projects before the project finalization account is being mutually agreed by each other. We experience an average accounts settlement period ranging from three months to as high as one year from the time we provide services to the time we receive payment from our customers. Below is a summary of typical steps in our processing of accounts:
 
 ·
It takes approximately one month for our client to collect the payment application from contractors for the contract work completed.
 
 ·
Thereafter, it takes approximately one to two months for the verification, agreement and certification of work completed, with timing to largely depend on whether there is disagreement in the calculation of certified value between the parties.
 
 ·
Moreover, if it is the case that the application is to finalize the project account, it may take up to three months.
 
 ·
Additionally, in the event that the client is not the owner of the project, it normally requires an additional one to two months for processing and obtaining the funds from the owner.
 
 ·
One to two months the client to pay the contractors.
 
 In contrast to collection times, we typically need to place certain deposit with our suppliers on a portion of the purchase price in advance and for some suppliers we must maintain a deposit for future orders. We attempt to maintain a credit policy of receiving certain amounts of deposit from customers before we begin a new project.
 
 We experienced revenue of $27.6 million for the year ended December 31, 2010 compared to revenue of $117.2 million for the same period in 2009. Construction contract related receivables, including contract receivables and costs and earnings in excess of billings as of December 31, 2010 were $84.4 million, a decrease of $12.9 million from construction related receivables of $97.3 million as of December 31, 2009. The decrease was a result of the reduction in projects revenue.
 
 The collection period typically runs from two months to one year, the long aging of receivables reflects the long collection period. In addition, our payment cycle is considerably shorter than our receivable cycle, since we typically pay our suppliers all or a portion of the purchase price in advance and for some suppliers we must maintain a deposit for future orders.
 
 Among the $87.0 million contract receivables as of December 31, 2010, $59.4 million (68.3%) was outstanding over 365 days and $18.5 million (21.2%) over 730 days, in total of $77.9 million which including $15.4 million (19.8%) million of retention money which would only be settled after the retention periods of two or three years. The Company periodically prepares the aging of the receivables information and reviews the balances with consideration of the background of each client for assessing the realizable value of the balances and would make provision when appropriate. The Company notes that its account receivables that are 365 and 720 days old are primarily related to the Company’s PRC operations, and the payment cycle in the PRC commonly entails a receivable being outstanding for over one to two years before collection. Such situations are particularly common in the construction market and with the clients from government. Since the Company’s older outstanding receivables are mainly of government projects, the final accounts and payments are required to be processed through a lengthy bureaucratic process in the PRC government.
 
 Based on the foregoing, and despite the receivables being outstanding from 365 to 720 days, the Company considers them to be realizable because the Company believes that there is a remote chance that the PRC Government will go into bankruptcy or otherwise refuse to make payment on the receivables. In addition, the Company has the policy of conducting a comprehensive review the aging of account receivables on a regular basis every three months. Furthermore, the Company has a designated staff member from one of its PRC subsidiaries to remain in constant communication with the Company’s various departments regarding PRC receivables collection status, and allowances for doubtful accounts is made, as necessary, based on the collection status updates.
 
 50
 
 We provide for bad debts principally based upon the aging of accounts receivable, in addition to collectability of specific customer accounts, our history of bad debts, and the general condition of the industry. We effected a direct write off of $7.1 million provisions to the account receivables during the year ended December 31, 2010. We recorded additional provision for doubtful accounts of $6.0 million in the year ended December 31, 2010. As of December 31, 2010, our provision for doubtful accounts was $5.5 million, which was 6.4% of our gross construction contract related receivables of $87.0 million. We believed our current reserve for doubtful accounts is commensurate to cover the associated credit risk in the portfolio of our construction contract related receivables. Due to the difficulty in assessing future trends, we could be required to further increase our provisions for doubtful accounts. As our accounts receivable age and become uncollectible our cash flow and results of operations are negatively impacted.
 
 In addition to the foregoing, we had a provision for contracts receivables that was reclassified as “Other receivable” in the amount of approximately $11.4 million that represented account receivables of a subsidiary, Techwell Engineering Ltd. (Techwell). The receivables were acquired through our acquisition of the Techwell in 2007 and have been outstanding since acquisition. The receivables are guaranteed by previous shareholders of Techwell if not paid within 24 months of the acquisition. Accordingly, the provision was made and the receivable amount was transferred to amount due from the shareholders under other receivable balances.
 
 We have also funded our operations through loans made to us by our two largest shareholders. All of these loans are interest-free, fee-free and due upon demand. As of December 31, 2010, the balance of these loans was approximately $9.5 million, as compared to $13.6 million as of December 31, 2009.
 
 At December 31, 2010, we had no material commitments for capital expenditures other than for those expenditures incurred in the ordinary course of business.
 
 Net cash provided by operating activities for the year ended December 31, 2010 was approximately $4.9 million, as compared to $21.2 million used in the same period in 2009. The change was primarily due to differences in changes in receivables $11.5 million, payables $2.4 million and stock compensation expenses $2.0 million.
 
 Net cash used in investing activities was approximately $14.6 million for the year ended December 31, 2010 compared to approximately $4.2 million net cash provided for the year ended December 31, 2009. The change was mainly a result of the difference in change in restricted cash $15.8 million and the acquisition of goodwill in 2010.
 
 Net cash provided by financing activities was $0.2 million for the year ended December 31, 2010 compared to $8.3 million provided by for the year ended December 31, 2009. The change was primarily due to difference in changes of repayments of notes payables $10.2 million.
 
 Contractual obligations
 
 The following table describes our contractual commitments and obligations as of December 31, 2010:
  Payments due by periodTotal


Less than

1 year


1-3 years


3-5 years


More than

5 yearsOperating Lease Obligations

$
1,913,291



1,037,869



875,422



-



-Contingent Liabilities (1)

$
910,000


$
910,000


$
-


$
-


$
-Long-term debt (2)

$
28,991,263



22,687,021



6,304,242



-



-
  
 (1)
The amount represents $910,000 retention bond expiring December, 2011 issued by HSBC.
 
 (2)
Includes the $8 million convertible bond which is required to be redeemed at 150.87% at maturity at April 4, 2012, which may also be converted into our common stock at a current conversion price of $9.80 per share, accordingly we may re-classify upon conversion, if any. Also includes the $20 million convertible bond which is required to be redeemed at 116.61% at maturity at April 15, 2011, which may be converted into our common stocks at a current conversion price of $25.40 per share, accordingly we may re-classify upon conversion, if any (adjusted for the December 2010 reverse stock split).
 
 Quarterly Information
 
 The table below presents selected results of operations for the quarters indicated.  All amounts are in thousands, except share and per share amounts.
 
 51
  Quarter EndedDecember 31, 2010


September 30, 2010


June 30, 2010


March 31, 2010


TotalContract revenues earned

$
5,943


$
4,442


$
5,708


$
11,472



27,565Income / (loss) from operations


(3,313
)


(6,620
)


(2,275
)


(1,895
)


(14,103
)Net earnings (loss)


(6,967
)


(8,486
)


(3,330
)


(3,520
)


(22,303
)Net earnings / (loss) per share:Basic and Diluted (reverse split adjusted)


(0.43
)


(0.53
)


(0.21
)


(0.22
)


(1.39
)
  Quarter EndedDecember 31, 2009


September 30, 2009


June 30, 2009


March 31, 2009


TotalContract revenues earned

$
24,691


$
25,558


$
30,599


$
36,343


$
117,191Income / (loss) from operations


389



(5,074
)


3,832



2,230



1,377Net earnings (loss)


(1,918
)


(8,387
)


2,552



944



(6,809
)Net earnings / (loss) per share:Basic and Diluted (reverse split adjusted)


(0.16
)


(0.63
)


0.20



0.08



(0.51
)
 
 Segment Information
 
 We have one reportable segment that conducts business in the following geographic regions. All amounts are in thousands.
 
 Revenues
 
 For the year ended December 31,2010


2009Middle East

$
366


$
58,685Asia


27,012



51,979United States


148



6,527Total

$
27,565


$
117,191
 
 Long-lived assets
 
 Middle East


Asia


United States


TotalAs of December 31, 2010Plant and equipment, net

$
279


$
2,568


$
74


$
2,921Intangible assets


-



168



-



168Goodwill


-



23,772



-



23,772Other non-current assets


187



227



-



414Total

$
466


$
26,735


$
74


$
27,275As of December 31, 2009Plant and equipment, net

$
384


$
2,026


$
130


$
2,540Intangible assets


-



71



-



71Goodwill


-



7, 996



-



7, 996Other non-current assets


161



95



31



287Total


545


$
10,188


$
161


$
10,894
 
 Off-Balance Sheet Arrangements
 
 None.
 
 52
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 The information required by this Item 8 is incorporated by reference to CHINA CGAME, INC.’s Consolidated Financial Statements and Independent Auditors’ Report beginning at page F-1 of this Form 10-K.
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
 None.
 
 ITEM 9A. CONTROLS AND PROCEDURES
 
 Evaluation of Disclosure Controls and Procedures
 
 Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
 
 As of the end of the period covered by this Annual Report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Acting Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Acting Chief Financial Officer concluded that the Company’s disclosure controls and procedures identified certain material weaknesses, as described below, that caused our controls and procedures to be ineffective. Notwithstanding the existence of the material weaknesses described below, management has concluded that the interim consolidated financial statements in this Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods and dates presented.
 
 Management’s Report on Internal Control over Financial Reporting
 
 Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
 
 ·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
 
 ·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
 
 ·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of our assets that could have a material effect on the financial statements.
 
 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, our management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework . Based on this assessment, management believes that as of December 31, 2010, our internal control over financial reporting is not effective based on those criteria and due to material weaknesses.
 
 These material weaknesses primarily related (i) our restatements that we conducted in May 2010 and (ii) one of our material operating subsidiaries, Techwell Engineering Limited. (“Techwell”) that we acquired in November 2007.
 
 53
 
 Restatements
 
 In May 2010, we discovered that certain of our previously filed quarterly and annual reports contained errors that required correction and restatement. The errors related to the timing of the interest expense related to the Company’s outstanding $8,000,000 Variable Rate Convertible Bonds due 2012 and $20,000,000 12% Convertible Bonds due 2011 that resulted in overstatements and understatements of the interest expenses related to the bonds during various quarters before the second quarter of 2008. Due to the accounting errors, the interest expense was overstated by approximately $0.3 million, $0.5 million, and $0.7 million for the second, third, and fourth quarters of fiscal year 2007, respectively, for a total overstatement of approximately $1.5 million for fiscal 2007. The interest expense was overstated by approximately $0.1 million in the first quarter of 2008 and all the overstatements, approximately $1.6 million, were reversed in the second quarter of 2008. For the year ended December 31, 2009, there was an overstatement of the interest expense of $8,000 in the second quarter and an understatement of $6,000 during the third quarter, for a total of overstatement of $2,000 for fiscal year 2009. The net bonds payable amounts were presented correctly in the Company’s financial statements as of December 31, 2008 and 2009, and it was only the components of the Convertible Bonds that were restated, while the net payable amounts as of December 31, 2007 was stated with correction of errors.
 
 Additionally, a correction was needed for the addition of an equity compensation charge in the amount of $4,976 related to a portion of options granted in October 2009 that the Company inadvertently omitted in the original Form 10-K filing. Together with the overstatement of interest expenses of $2,000, the loss for the year ended December 31, 2009 was understated by 2,983 and the retained earnings as of December 31, 2009 was overstated by 2,983. Additionally, $1.5 million of consolidation exchange loss resulted from the inter-company investments elimination was incorrectly included in the additional paid in capital instead of the accumulated comprehensive income presented in the Stockholders’ Statement of Equity and Comprehensive Income for the year ended December 31, 2009.
 
 We believe that the accounting errors were caused by lack of personnel with expertise in US generally accepted accounting principles and SEC rules and regulations, in addition to inadequate staffing and supervision that lead to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely and effective reviews. We intend to take action to remediate these deficiencies going forward.
 
 Techwell
 
 On November 6, 2007, we acquired Techwell and its wholly owned subsidiaries, Techwell Building Systems (Shenzhen) Ltd. in China and Techwell International Ltd. in Macau. At the time, Techwell was a privately-held company and its financial systems were not designed to facilitate the external financial reporting required of a publicly held company under the Sarbanes-Oxley Act of 2002. In addition, Techwell’s accounting records were historically maintained using accounting principles generally accepted in the People's Republic of China, its personnel was not fully familiar with accounting principles generally accepted in the United States of America.
 
 A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected in a timely basis. We identified the following material weaknesses:
 
 1.
Techwell lacked the technical expertise and processes to ensure compliance with our policies and did not maintain adequate controls with respect to (a) timely updating engineering budget and analysis, (b) coordination and communication between Corporate Accounting and Engineering Staffs, and (c) timely review and analysis of corporate journals recorded in the consolidation process.
 
 2.
Techwell did not maintain a sufficient complement of personnel with an appropriate knowledge and skill to comply with our specific engineering financial accounting and reporting requirements and low materiality thresholds. This was evidenced by a number of documents missing or not matching with the records and contributed to the adjustment of financial results. As evidenced by the significant number and magnitude of out-of-period adjustments identified from Techwell during the period-end closing process, management has concluded that the controls over the period-end financial reporting process were not operating effectively. Specifically, controls were not effective to ensure that significant accounting estimates and other adjustments were appropriately reviewed, analyzed, and monitored on a timely basis.
 
 3.
Techwell did not comply with our authorization policy. This was evidenced by a number of expenses incurred without appropriate authorization. This material weakness resulted in an unauthorized and significant increase of expenses, which significantly impacted our operating results.
 
 Remediation Efforts
 
 We are in the process of developing and implementing remediation plans to address our material weaknesses.
 
 54
 
 Restatements
 
 We have taken and intend to take the following actions to address the material weaknesses and improve our internal controls over financial reporting:
 
 1.
We are seeking to improve supervision, education, and training of our accounting staff. We are also considering engaging third-party financial consultants to review and analyze our financial statements and assist us in improving our reporting of financial information.
 
 2
Management intends to hire additional personnel with technical knowledge, experience and training in the application of generally accepted accounting principles commensurate with our financial reporting and U.S. GAAP requirements.
 
 3.
We will continue to monitor the effectiveness of these improvements. We are also considering working with outside consultants in assessing and improving our internal controls and procedures when necessary.
 
 4.
An internal SOX 404 task force was set up in order to help the company strengthening its controls and procedures on the financial reporting.
 
 5.
In September 2009, we hired a new Vice President of Finance who was later appointed as our Acting Chief Financial Officer in November 2009. This person served as the sensible financial officer of our company until his resignation in September 2010.
 
 6.
In December 2009, our then-Acting Chief Financial Officer lead an extensive review of the controls and procedures of our company and developed a detailed remediation and implementation plan for Sarbanes-Oxley Act of 2002 Section 404 compliance to be carried out starting in 2010.
 
 7.
The remediation and implementation plan is being carried out which including the drafting up of the details internal control documents for SOX compliance. With the additions of new subsidiaries in the third quarter of 2010, the company currently is considering to further develop the internal controls and procedures in responses to the new group structure.
 
 Techwell
 
 One key change for us going forward will be the design and implementation of internal controls over the accounting and oversight of all subsidiaries, including enhanced accounting systems, processes, policies and procedures. We have taken the following actions to address the material weaknesses and improve our internal controls over financial reporting:
 
 1.
On January 14, 2009, the board of directors of Techwell passed a board resolution to replace management of Techwell. We have appointed a new general manager to Techwell, as well as three experienced project managers to the Dubai Metro project.
 
 2.
Management has initiated a Sarbanes-Oxley Act of 2002 Section 404 Compliance Assistance Project, which is intended to meet all requirements required by SEC in our company and all of our subsidiaries. We engaged a consulting firm to assist in the set-up of project and our staff thereafter continued with its implementation.
 
 3.
We have established a dedicated and qualified internal control and audit team to implement the policies and procedures to the standard of a US public company.
 
 4.
In June 2009, we reorganized and restructured Techwell’s Corporate Accounting by (a) modifying the reporting structure and establishing clear roles, responsibilities, and accountability, (b) hiring skilled technical accounting personnel to address our accounting and financial reporting requirements, and (c) assessing the technical accounting capabilities in the operating units to ensure the right complement of knowledge, skills, and training.
 
 5.
In 2009, we also reorganized and restructured the budgeting process by (a) centralizing the procurement function to our company to ensure budgets and analyses of Techwell are timely prepared and properly reviewed; (b) implementing new policies and procedures to ensure that appropriate communication and collaboration protocols among our Engineering, Procurement and Corporate Accounting departments; and (c) hiring the necessary technical procurement personnel to support complex procurement activities. We have hired two experienced technical procurement managers and expect to increase the headcount in the purchase department in the future if necessary.
 
 55
 
 6.
We strengthened the period-end closing procedures of our operating subsidiaries by (a) requiring all significant estimate transactions to be reviewed by Corporate Accounting, (b) ensuring that account reconciliations and analyses for significant financial statement accounts are reviewed for completeness and accuracy by qualified accounting personnel, (c) implementing a process that ensures the timely review and approval of complex accounting estimates by qualified accounting personnel and subject matter experts, where appropriate, and (d) developing better monitoring controls at Corporate Accounting and the operating units.
 
 7.
In September 2009, we hired a new Vice President of Finance who was later appointed as our Acting Chief Financial Officer in November 2009. We believe that the addition of this person will assist the strengthening of the controls and procedures of our company.
 
 8.
In December 2009, our Acting Chief Financial Officer lead an extensive review of the controls and procedures of our company and developed a detailed remediation and implementation plan for Sarbanes-Oxley Act of 2002 Section 404 compliance to be carried out starting in 2010, which is currently underway. With the additions of new subsidiaries in the third quarter of 2010, the company currently is considering to further develop the internal controls and procedures in responses to the new group structure.
 
 Attestation Report of the Registered Public Accounting Firm
 
 This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
 
 Changes in internal control over financial reporting
 
 Based on the evaluation of our management as required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act, we believe that there were changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The changes include the integration of ConnGame, which was acquired in August 2010, in addition to the appointment of a new principal officer and such other actions as described above under “Remediation Efforts.”
 
 ITEM 9B. OTHER INFORMATION
 
 On April 13, 2011, Miu Cheung resigned as a director of the Company, effective immediately. Mr. Cheung’s resignation was not due to a disagreement with the Company on any matter relating to the Company's operations, policies or practices.
 
 56
 
 PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 The information required by this Item 10 is incorporated by reference from our definitive proxy statement on Schedule 14A which will be filed before the end of the 120-day period immediately following the end of our 2010 fiscal year, or, if our definitive proxy statement is not filed within that time, the information will be filed as part of an amendment to this annual report on Form 10-K/A, not later than the end of the 120-day period.
 
 ITEM 11. EXECUTIVE COMPENSATION
 
 The information required by this Item 11 is incorporated by reference from our definitive proxy statement on Schedule 14A which will be filed before the end of the 120-day period immediately following the end of our 2010 fiscal year, or, if our definitive proxy statement is not filed within that time, the information will be filed as part of an amendment to this annual report on Form 10-K/A, not later than the end of the 120-day period.
 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 The information required by this Item 12 is incorporated by reference from our definitive proxy statement on Schedule 14A which will be filed before the end of the 120-day period immediately following the end of our 2010 fiscal year, or, if our definitive proxy statement is not filed within that time, the information will be filed as part of an amendment to this annual report on Form 10-K/A, not later than the end of the 120-day period.
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
 The information required by this Item 13 is incorporated by reference from our definitive proxy statement on Schedule 14A which will be filed before the end of the 120-day period immediately following the end of our 2010 fiscal year, or, if our definitive proxy statement is not filed within that time, the information will be filed as part of an amendment to this annual report on Form 10-K/A, not later than the end of the 120-day period.
 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
 The information required by this Item 14 is incorporated by reference from our definitive proxy statement on Schedule 14A which will be filed before the end of the 120-day period immediately following the end of our 2010 fiscal year, or, if our definitive proxy statement is not filed within that time, the information will be filed as part of an amendment to this annual report on Form 10-K/A, not later than the end of the 120-day period.
 
 57
 
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 1. Financial Statements: See “Index to Consolidated Financial Statements” on page F-1 of this Annual Report on Form 10-K.
 
 2. Financial Statement Schedule: See Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
 
 3. Exhibits: The exhibits listed in the accompanying “Exhibit Index” are filed or incorporated by reference as part of this Annual Report on Form 10-K.
 
 Exhibit Index
 
 Exhibit

No.

Exhibit Description2.1

Share Exchange Agreement, dated as of August 21, 2006, by and among the Registrant, KGE Group, Limited, and Full Art International, Ltd. (incorporated by reference from Exhibit 2.1 to Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2006).2.1(a)

Amendment No. 1 to the Share Exchange Agreement, dated as of October 17, 2006, by and among the Registrant, KGE Group, Limited, and Full Art International, Ltd. (incorporated by reference from Exhibit 2.1(a) to Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2006).3.1

Certificate of Incorporation of CHINA CGAME, INC. (incorporated by reference from Exhibit 3.1 to Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on April 20, 2004).3.1(a)

Certificate of Amendment of Certificate of Incorporation dated July 8, 2005 (incorporated by reference to Registrant's Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on August 11, 2005)3.1(b)

Certificate of Amendment of Certificate of Incorporation dated July 8, 2005 (incorporated by reference to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 24, 2010)3.1(c)

Certificate of Amendment of Certificate of Incorporation dated July 8, 2005, dated and as filed with the Secretary of State of Delaware on December 17, 2010 (incorporated by reference to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 22, 2010)3.2

Bylaws of the Registrant (incorporated by reference from Exhibit 3.2 to Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on April 20, 2004, and incorporated herein by reference).3.3

Articles of Merger Effecting Name Change (incorporated by reference from Exhibit 3.3 to Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2006).3.4

Certificate of Ownership and Merger, dated and as filed with the Secretary of State of Delaware on March 25, 2011 (incorporated by reference to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 30, 2011)4.1

Specimen Certificate of Common Stock (incorporated by reference to Exhibit 4. 1 of the Registrant's Registration Statement on Form SB-2 filed August 20, 2004).4.2

Trust Deed, dated April 12, 2007, by and between the Registrant and The Bank of New York, London Branch (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2007).4.2(a)

Amended and Restated Trust Deed, originally dated April 12, 2007, amended and restated August 29, 2007 by and between the Registrant and The Bank of New York, London Branch (incorporated by reference to Exhibit 4.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on September 4, 2007).4.3

Paying and Conversion Agency Agreement, dated April 12, 2007, by and among the Registrant, The Bank of New York, and The Bank of New York, London Branch (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2007).4.4

The Warrant Instrument, dated April 12, 2007, by and between the Registrant and ABN AMRO Bank N.V. (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2007).4.5

Warrant Agency Agreement, dated April 12, 2007 among Company, The Bank of New York and The Bank of New York, London Branch (incorporated by reference to Exhibit 4.4 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2007).4.6

Registration Rights Agreement, dated April 12, 2007, by and between the Registrant and ABN AMRO Bank N.V. (incorporated by reference to Exhibit 4.5 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2007).4.6(a)

Written description of oral agreement between the Registrant and ABN AMRO Bank N.V. (incorporated by reference to Exhibit 4.8(a) to the Form S-1/A filed with the Securities and Exchange Commission on September 21, 2007).
 
 58
 
 4.7

Trust Deed, dated April 15, 2008, by and between the Registrant and The Bank of New York, London Branch (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2008).4.8

Paying and Conversion Agency Agreement, dated April 15, 2008, by and among the Registrant, The Bank of New York, and The Bank of New York, London Branch (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2008).4.8(a)

Amended and Restated Paying and Conversion Agency Agreement, originally dated April 15, 2008, amended and restated September 29, 2008 by and among the Registrant, The Bank of New York Mellon, and The Bank of New York Mellon, London Branch (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 30, 2008).4.9

The Warrant Instrument, dated April 15, 2008, by and among the Registrant, ABN AMRO Bank N.V., London Branch and CITIC Allco Investments Ltd. (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2008).4.10

Warrant Agency Agreement, dated April 15, 2008, by and among the Registrant, The Bank of New York and The Bank of New York, London Branch (incorporated by reference to Exhibit 4.4 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2008).4.11

Registration Rights Agreement, dated April 15, 2008, by and among the Registrant, ABN AMRO Bank N.V., London Branch and CITIC Allco Investments Ltd. (incorporated by reference to Exhibit 4.5 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2008).4.12

CHINA CGAME, INC. 2009 Omnibus Incentive Plan (incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the Securities and Exchange Commission on June 18, 2009).4.13

Amendment No. 1 to CHINA CGAME, INC. 2009 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on December 10, 2010).4.14

Amendment No. 2 to CHINA CGAME, INC. 2009 Omnibus Incentive Plan ((incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the Securities and Exchange Commission on June 18, 2009).4.15

Form of Stock Option Agreement for 2009 Omnibus Incentive Plan (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 21, 2010).4.16

Form of Restricted Stock Agreement for 2009 Omnibus Incentive Plan (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 21, 2010).4.17

Form of Restricted Stock Unit Agreement for 2009 Omnibus Incentive Plan (incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 21, 2010).4.18

Form of Stock Appreciation Rights Agreement for 2009 Omnibus Incentive Plan (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 21, 2010).10.1

Form of Subscription Agreement dated October 17, 2006 (incorporated by reference to Exhibit 10.1 to the Form S-1/A filed with the Securities and Exchange Commission on February 5, 2007).10.1(a)

Form of Waiver of Penalties dated August 29, 2007 Related to Registration Rights (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on September 4, 2007).10.2

Form of Subscription Agreement dated October 2004 (incorporated by reference to Exhibit 10.2 to the Form SB-2/A filed with the Securities and Exchange Commission on October 1, 2004).10.3

Employment Agreement dated December 30, 2005 by and between the Registrant and Luo Ken Yi (translated to English) (incorporated by reference from Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2006).10.4

Employment Agreement dated January 11, 2004 by and between the Registrant and Tang Nianzhong (translated to English) (incorporated by reference to Exhibit 10.4 to the Form S-1/A filed with the Securities and Exchange Commission on February 5, 2007).10.5

Employment Agreement by and between the Registrant and Ye Ning (translated to English) (incorporated by reference from Exhibit 10.5 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2006).10.6

Employment Agreement dated January 1, 2006 by and between the Registrant and Li Guoxing (translated to English) (incorporated by reference to Exhibit 10.6 to the Form S-1/A filed with the Securities and Exchange Commission on February 5, 2007).
 
 59




10.7

Employment Agreement dated January 1, 2005 by and between the Registrant and Bai Fai (translated to English) (incorporated by reference to Exhibit 10.7 to the Form S-1/A filed with the Securities and Exchange Commission on February 5, 2007).10.8

Employment Agreement dated December 26, 2005 by and between the Registrant and Wang Zairong (translated to English) (incorporated by reference to Exhibit 10.8 to the Form S-1/A filed with the Securities and Exchange Commission on February 5, 2007).10.9

Employment Agreement dated December 20, 2005 by and between the Registrant and Feng Shu (translated to English) (incorporated by reference to Exhibit 10.9 to the Form S-1/A filed with the Securities and Exchange Commission on February 5, 2007).10.10

Employment Agreement dated December 26, 2006 by and between the Registrant and Wang Xin (translated to English) (incorporated by reference to Exhibit 10.10 to the Form S-1/A filed with the Securities and Exchange Commission on February 5, 2007).10.11

Employment Agreement dated March 12, 2008 by and between the Registrant and Xin Yue Jasmine Geffner (translated to English) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on March 14, 2008).10.12

Employment Agreement dated March 12, 2008 by and between the Registrant and Charles John Anderson (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on March 14, 2008).10.13

Employment Agreement dated September 12, 2010 by and between the Registrant and Wing Lun (Alan) Leung (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 13, 2010).10.14

Office and Factory Lease Agreement dated July 13, 2005 by and between the Registrant and Zhuhai Yuping Kitchen Equipment Co., Ltd. (translated to English) (incorporated by reference to Exhibit 10.11 to the Form S-1/A filed with the Securities and Exchange Commission on February 5, 2007).10.15

Lease Agreement by and between the Registrant and Beijing Aoxingyabo Technology Development Co., Ltd (translated to English) (incorporated by reference to Exhibit 10.12 to the Form S-1/A filed with the Securities and Exchange Commission on February 5, 2007).10.16

Property Rental Contract by and between the Registrant and Shanghai Sandi CNC equipment Ltd. Co (translated to English) (incorporated by reference to Exhibit 10.13 to the Form S-1/A filed with the Securities and Exchange Commission on February 5, 2007).10.17

Subscription Agreement, dated March 27, 2007, by and between the Registrant and ABN AMRO Bank N.V. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2007).10.18

Joint Venture Agreement dated May 11, 2007 entered into by and between CPD (Australia) Holding Pty Ltd. and the Registrant (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 15, 2007).10.19

Form of Registration Rights Agreement entered into by and between the Registrant, First Alliance Financial Group, Inc. and WestPark Capital, Inc. Affiliates (incorporated by reference to Exhibit 10.16 to Form S-1/A filed with the Securities and Exchange Commission on September 4, 2007).10.19(a)

Form of Waiver of Penalties Related to Registration Rights entered into by and between the Registrant, First Alliance Financial Group, Inc. and WestPark Capital, Inc. Affiliates (incorporated by reference to Exhibit 10.16(a) to the Form S-1/A filed with the Securities and Exchange Commission on September 4, 2007).10.19(b)

Written description of oral agreement between the Registrant, First Alliance Financial Group, Inc., and WestPark Capital, Inc. Affiliates (incorporated by reference to Exhibit 10.16(b) to the Form S-1/A filed with the Securities and Exchange Commission on September 21, 2007).10.20

CHINA CGAME, INC. 2007 Equity Incentive Plan (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2007).10.21

Form of Notice of Grant of Stock Option of the Registrant (incorporated by reference from Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2007).10.22

Form of Stock Option Agreement (including Addendum) of the Registrant (incorporated by reference from Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2007).10.23

Form of Stock Issuance Agreement (including Addendum) of the Registrant (incorporated by reference from Exhibit 10.5 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2007).10.24

Form of Stock Purchase Agreement (including Addendum) of the Registrant (incorporated by reference from Exhibit 10.4 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2007).




60





10.25

Stock Purchase Agreement dated November 6, 2007, entered into by and among Ng Chi Sum, Yam Mei Ling, the Registrant and Full Art (incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2007).10.26

Stock Purchase Agreement dated August 11, 2010, among CHINA CGAME, INC., First Jet Investments Limited, New Crown Technology Limited and Jun Tang (incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 16, 2010).10.27

Subscription Agreement, dated April 2, 2008, by and among the Registrant, ABN AMRO Bank N.V., London Branch, CITIC Allco Investments Ltd., and CITIC Capital Finance Ltd. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 18, 2008).10.28

Employment Agreement with Albert Jan Grisel dated as of January 12, 2009 (incorporated by reference from Exhibit 10.1 to Current Report on Form 8-K filed with the Securities and Exchange Commission on January 16, 2009).10.29

Employment Agreement with Li Chengcheng dated as of March 30, 2009 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed with the Securities and Exchange Commission on April 3, 2009).10.30

Employment Agreement with Gene Michael Bennett dated as of October 5, 2009 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 8, 2009).10.31

Stock Option Agreement with Gene Michael Bennett dated as of October 5, 2009 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 8, 2009).10.32

Securities Purchase Agreement dated as of August 6, 2009 by and between CHINA CGAME, INC., KGE Group Limited and certain investors (incorporated by reference from Exhibit 10.1 to Current Report on Form 8-K filed with the Securities and Exchange Commission on August 10, 2009).10.33

Amendment and Waiver Agreement dated as of August 6, 2009, by and among CHINA CGAME, INC., KGE Group Limited, ABN AMRO Bank N.V., London Branch, and CITIC Allco Investment Ltd.10.34

Loan Agreement dated June 17, 2009 entered into by and between KGE Group Ltd. and the Company (incorporated by reference to Exhibit 4.1 to the Form 8-K filed with the Securities and Exchange Commission on June 18, 2009).10.35

Amendment and Waiver Agreement dated February 24, 2010 by and among The Royal Bank of Scotland N.V., London Branch (formerly ABN AMRO Bank N.V., London Branch); CITIC Capital China Mezzanine Fund Limited; ABN AMRO Bank (China) Co., Ltd., Shenzhen Branch; Mr. Luo Ken Yi; Mr. Jun Tang; KGE Group Limited; and First Jet Investments Limited (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on February 24, 2010).10.35(a)

Amendment and Waiver Agreement dated July 13, 2010 by and among The Royal Bank of Scotland N.V., London Branch (formerly ABN AMRO Bank N.V., London Branch); CITIC Capital China Mezzanine Fund Limited; The Royal Bank of Scotland (China) Co. Ltd. Shenzhen Branch (formerly ABN AMRO Bank (China) Co., Ltd., Shenzhen Branch); Mr. Luo Ken Yi; Mr. Jun Tang; KGE Group Limited; and First Jet Investments Limited (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on July 19, 2010).10.36

Framework Agreement of Marine Park and Holiday Resorts Project entered into by and between the Company and Shanghai Nine Dragon Co. Ltd (translated) (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 17, 2009).10.37

Supplemental Agreement to Cooperation Agreement dated March 30, 2011, by and between Shanghai ConnGame Network, Ltd and the Administrative Committee of Jiangsu Wujin High Technology Industrial Development Zone (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2011).10.38

Cooperation Agreement dated July 12, 2010 by between the Shanghai ConnGame Network Co., Ltd and The Administrative Committee of Jiangsu Wujin High Technology Industrial Development Zone.23.1

Consent of Samuel H. Wong & Co., LLP21.1

List of Subsidiaries31.1

Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.


61





SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Changzhou, People’s Republic of China, on April 15, 2011.





CHINA CGAME, INC.April 15, 2011
By:
/s/  Zhixin (Steven) XingName:
Zhixin (Steven) XingTitle:
Chief Executive Officer





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.





SIGNATURE

TITLE

DATE/s/ Jun Tang

Chairman of the Board

April 15, 2011Jun Tang/s/Zhixin (Steven) Xing

Chief Executive Officer and Director

(Principal Executive Officer)

April 15, 2011Zhixin (Steven) Xing/s/Qin (Andy) Lu

Acting Chief Financial Officer and Corporate Secretary

(Principal Financial and Accounting Officer)

April 15, 2011Qin (Andy) Lu/s/  Luo Ken Yi

Director and President

April 15, 2011Luo Ken Yi/s/  Ping Xu

Director

April 15, 2011Ping Xu/s/  Shibin Jo

Director

April 15, 2011Shibin Jo/s/  Chen Huang

Director

April 15, 2011Chen Huang/s/  Kelly Wang

Director

April 15, 2011Kelly Wang/s/  Chia Yong Whatt

Director

April 15, 2011Chia Yong Whatt




62


CHINA CGAME, INC.





AUDITED CONSOLIDATED FINANCIAL STATEMENTS





DECEMBER 31, 2010 AND 2009





(Stated in US dollars)





INDEX





CONTENTS

PAGESREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

F-2CONSOLIDATED BALANCE SHEETS

F-3 – F-4CONSOLIDATED STATEMENTS OF INCOME

F-5CONSOLIDATED STATEMENTS OF CASH FLOWS

F-6CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

F-7NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-8 – F-30


F-1





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To:
The Board of Directors and Stockholders of

China CGame, Inc.





We have audited the accompanying consolidated balance sheets of China CGame, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 2010 and 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





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





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China CGame, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years ended December 31, 2010 and 2009 in conformity with accounting principles generally accepted in the United States of America.





The accompanying consolidated financial statements as of and for the year ended December 31, 2010 have been prepared assuming that Company will continue as a going concern. The Company has suffered operation net loss of $23,195,174 in the current year. As of December 31, 2010, the Company has an accumulated deficit of $11,172,099 due to the fact that the Company continued to incur losses over the past few years. The Company also has difficulty to maintain sufficient working capital for operation activities. All of these matters raise substantial doubt of its ability to continue as a going concern. Management’s plans concerning this matter are also described in Note 20. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





San Mateo, California
Samuel H. Wong & Co., LLPApril 14, 2011
Certified Public Accountants


F-2





CHINA CGAME, INC.





CONSOLIDATED BALANCE SHEETS


AS OF DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)


Notes

As of December 31,2010


2009ASSETSCurrent assetsCash and cash equivalents



$
4,129,992


$
740,125Restricted cash




334,888



3,033,819Contract receivables, net

(3)


81,440,212



89,189,103Costs and earnings in excess of billings




3,009,487



8,100,580Job disbursements advances




2,519,798



2,696,794Other receivables, net

(4)


26,357,227



30,768,067Inventories

(5)


30,117



727,499Deferred income taxes, current




112,625



113,033Other current assets




191,865



297,838Total current assets




118,126,211



135,666,858Non-current assetsPlant and equipment, net

(6)


2,920,593



2,539,457Intangible Assets

(7)


167,813



70,610Goodwill




23,771,636



7,995,896Other non-current assets




414,980



287,586TOTAL ASSETS



$
145,401,233


$
146,560,407LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilitiesShort-term bank loans

(8)

$
6,281,185


$
9,529,880Convertible Bond Payable due within one year, net

(9)


22,687,021



-Accounts payable




28,709,080



26,614,484Billings over costs and estimated earnings




8,901,533



6,098,666Amount due to shareholder




13,592,883



10,080,345Other payables

(10)


10,962,392



9,360,314Income tax payable




-



-Business and other taxes payable




4,432,562



4,923,771Customers’ deposits




254,771



6,392,676Other Accruals

(11)


6,819,560



4,324,011Total current liabilities




102,640,987



77,324,147





See Accompanying Notes to the Financial Statements and Accountant’s Report


F-3





CHINA CGAME, INC.





CONSOLIDATED BALANCE SHEETS (Continued)


AS OF DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)


Notes

As of December 31,2010


2009Non-current liabilitiesLong term bank loans

(8)

$
32,013


$
109,239Convertible bond payable, net

(9)


6,304,242



24,564,161TOTAL LIABILITIES



$
108,977,242


$
101,997,547STOCKHOLDERS’ EQUITYPreferred stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding at December 31, 2010 and 2009




-



-Common stock, $0.001 par value, 100,000,000 shares authorized, 20,039,825 and 13,314,825 shares issued and outstanding at December 31, 2010 and 2009, respectively



$
20,040


$
13,315Additional paid in capital




43,880,995



26,535,818Statutory reserves




3,040,595



3,040,595Accumulated other comprehensive income




1,572,840



3,868,437Retained earnings




(11,172,099
)


11,131,084Total Company shareholders’ equity




37,342,371



44,589,249Non-controlling interests




(918,380
)


(26,389)Total shareholders’ equity




36,423,991



44,562,860TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY



$
145,401,233


$
146,560,407





See Accompanying Notes to the Financial Statements and Accountant’s Report


F-4





CHINA CGAME, INC.





CONSOLIDATED STATEMENTS OF INCOME


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





Notes

Years ended December 31,2010

2009Contract revenues earned

(12)

$
27,565,254

$
117,190,918Cost of contract revenues earned




25,654,242


94,721,967Gross profit



$
1,911,012

$
22,468,951Selling, general and administrative expenses




16,014,371


21,092,107Income / (Loss) from operations



$
(14,103,359
)
$
1,376,844Interest income




10,759


58,425Interest expense




(7,629,462
)

(6,331,493)Other income




864,764


176,871Other expenses




(2,313,538
)

(329,241)Income / (Loss) before taxation on Continuing Operations



$
(23,170,836
)
$
(5,048,594)Income tax /(tax benefit)

(13)


24,338


(107,031)Discontinued Operation Loss, net of tax

(14)


-


1,900,794Net Earnings/(Loss) including non-controlling interest



$
(23,195,174
)
$
(6,842,357)Net Loss attributable to non-controlling interest




891,991


33,020Net Earnings/(Loss) attributable to the Company



$
(22,303,183
)
$
(6,809,337)Earnings/(Loss) per share:Basic



$
(1.39
)
$
(0.51)Diluted



$
(1.39
)
$
(0.51)Weighted average shares outstanding:Basic




16,091,958


13,314,825Diluted




16,091,958


13,314,825





See Accompanying Notes to the Financial Statements and Accountant’s Report


F-5





CHINA CGAME, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





Years ended December 31,2010


2009Cash flows from operating activitiesNet Earnings/(loss)

$
(22,303,183
)

$
(6,842,357)Non-controlling interest


(891,991
)


33,020Depreciation expense


945,716



851,441Bad debt expense


5,973,576



1,426,685Amortization expenses on intangible assets


56,090



19,735Amortization expenses on convertible bond discount


4,427,102



1,549,682Equity compensation expenses


1,976,902



4,976Loss on disposal of fixed assets


207,482



2,670,851Deferred income tax


408(Increase)/decrease in inventories


697,382



(418,657
)Increase/(decrease) in receivables


11,454,244



(23,068,960
)(Increase)/decrease in other assets


(21,421)



551,698Increase  in payables


2,365,976



2,061,608Net cash used in operating activities

$
4,888,283


$
(21,160,278
)Cash flows from investing activitiesDecrease/(increase) in restricted cash

$
2,698,931


$
4,417,569Purchases of intangible assets


(153,293
)


(44,148
)Purchase of goodwill


(15,775,740)



-Loss from disposal of intangible assets


-



4,523Purchases of assets


(1,534,334
)


(209,639)Net cash provided/(used) in investing activities

$
(14,764,436
)

$
4,168,305Cash flows from financing activitiesProceeds from / (Repayments) of short-term loans

$
(3,325,921
)

$
9,529,880Repayments of short-term loans


-



-Repayments of notes payable


-



(10,193,088
)Repayments of long-term loans


-



(219,046
)Proceeds from / (Repayments ) of shareholder loan


3,512,538



9,155,658Repayments of amount due to shareholder


-



-Increase in additional paid in capital from issuance of common stock


-



-Issuance of convertible bond and warrants


-



-Net cash provided in financing activities

$
(3,383,379)


$
8,273,404Net increase/(decrease) in cash and cash equivalents

$
(9,689,536
)

$
(8,718,569)Effect of foreign currency translation on cash and cash equivalents


(2,295,597
)


(57,508)Cash and cash equivalents - beginning of year


740,125



9,516,202(11,245,008
)


740,125Cash and cash equivalents - end of year

$
4,129,992


$
740,125Non-cash transactionsIssuance of stock for subsidiary acquisition


15,375,000Other supplementary information:Cash paid during the year for:Interest paid

$
2,580,000


$
508,055Income tax paid

$
-


$
-


See Accompanying Notes to the Financial Statements and Accountant’s Report


F-6





CHINA CGAME, INC.





CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


AS OF DECEMBER 31, 2010 AND 2009


(Amount Stated in USD)





Total

Number of shares


Common

stock


Additional paid

in capital


Statutory

reserves


Accumulated other

comprehensive income


Retained earnings


Non-controlling

Interest


TotalBalance, January 1, 2009


13,314,825


$
13,315


$
23,076,534


$
3,040,595


$
5,450,632


$
17,940,421


$
10,541


$
49,532,038Net Loss including non-controlling interests






















(6,809,337
)


(33,020
)


(6,842,357
)Additional Paid-in Capital from warrants and beneficial conversion










3,454,308



















3,454,308Additional Paid-in Capital from grant of employee stock options










4,976



















4,976Foreign currency translation adjustment


















(1,582,195
)










(1,582,195
)Non-controlling interests


























(3,910
)


(3,910
)Total comprehensive income






























(4,969,178
)Balance, December 31, 2009


13,314,825



13,315


$
26,535,818



3,040,595



3,868,437



11,131,084



(26,389
)


44,562,860Balance, January 1, 2010


13,314,825



13,315


$
26,535,818


$
3,040,595


$
3,868,437


$
11,131,084


$
(26,389
)

$
44,562,860Net loss including non-controlling interests






















(22,303,183
)


(891,991
)


(23,195,174
)Additional Paid-in Capital from grant of employees stock options










19,902



















19,902Value of stocks grant to employees


475,000



475



1,956,525



















1,957,000Value of stocks to acquire New Crown


6,250,000



6,250



15,368,750



















15,375,000Foreign currency translation adjustment


















(2,295,597
)










(2,295,597
)Balance, December 31, 2010


20,039,825


$
20,040


$
43,880,995


$
3,040,595


$
1,572,840


$
(11,172,099
)

$
(918,380
)

$
36,423,991




Comprehensive


ComprehensiveIncome


Income


Accumulated2010


2009


TotalNet Income

$
(22,303,183
)

$
(6,809,337
)

$
(29,112,520
)Unrealized Gain (Loss) on Investment






-



-Foreign Currency Translation Adjustment


(2,295,597
)


(1,582,195
)


(3,877,792
)$
(24,598,780
)

$
(8,391,532
)

$
(32,990,312
)





The accompanying notes are an integral part of these financial statements.


F-7





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





1.
ORGANIZATION AND PRINCIPAL ACTIVITIES





CHINA CGAME, INC. (the “Company”) formerly China Architectural Engineering, Inc., was incorporated in the State of Delaware, United States on March 16, 2004. The Company’s common stock was initially listed for trading on the NYSE Amex LLC on September 28, 2007.  The Company transferred its listing to The NASDAQ Stock Market LLC on June 10, 2008.




The Company through its subsidiaries conducts its principal activity as building envelope systems contractors, specializing in the design, engineering, fabrication and installation of curtain wall systems, roofing systems, steel construction systems and eco-energy saving building conservation systems, throughout China, Australia, Southeast Asia, the Middle East, and the United States.




The Company's work is performed under cost-plus-fee contracts, fixed-price contracts, and fixed-price contracts modified by incentive and penalty provisions. These contracts are undertaken by the Company or its wholly owned subsidiaries. The length of the Company's contracts varies but is typically about one to two years.




On August 18, 2010, pursuant to a stock purchase agreement that was entered into on August 11, 2010 by and among the Company, First Jet Investments Limited (“First Jet”), New Crown Technology Limited, First Jet’s wholly-owned subsidiary (“New Crown”) and Mr. Jun Tang, the principal of First Jet and New Crown, the Company completed an acquisition of 60% of the issued and outstanding shares of New Crown, which is the holder of 100% of the equity interests of Shanghai ConnGame Network Ltd. (“ConnGame”).  In exchange for the 60% equity interest of New Crown, the Company issued 6,250,000 shares of the Company’s common stock, $0.001 par value per share, to First Jet.  ConnGame is a company organized under the laws of the People’s Republic of China with a registered capital of RMB 10,000,000.  ConnGame is a developer and publisher of MMORPG (Massively Multiplayer Online Role Playing Game). Since ConnGame has not launched any games, no material revenue has been generated in year 2010. In connection with the foregoing transaction, the Company transferred to New Crown 100% of the equity interests of China Architectural Engineering (Shenzhen) Co., Ltd., which had immaterial operations and assets at the time of transfer.




In August 2010, connection with the acquisition of ConnGame and the issuance of 6,250,000 shares of the Company's common stock, the Company increased its authorized shares of common stock from 100,000,000 to 150,000,000 shares of common stock.




Effective December 21, 2010, the Company conducted a 1-for-4 Reverse Stock Split of all issued and outstanding shares of its common stock and reduced the number of the authorized shares of the common stock from 150,000,000 to 100,000,000. Upon the effect of the Reverse Stock Split, the Company’s issued and outstanding shares reduced from 80,156,874 to 20,039,825. Except as otherwise specified, all information in these financial statements and notes and all share and per share information has been retroactively adjusted to reflect the reverse stock split.




2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





(a)
Method of accounting





The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes.  The consolidated financial statements and notes are representations of management.  Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of consolidated financial statements, which are compiled on the accrual basis of accounting.





(b)
Consolidation





The consolidated financial statements include the accounts of the Company and its 17 subsidiaries. Significant inter-company transactions have been eliminated in consolidation. The consolidated financial statements include 100% of the assets and liabilities of these majority-owned subsidiaries, and the ownership interests of minority investors are recorded as non-controlling interests.


F-8





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 (Stated in US Dollars)





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)





As of December 31, 2010, detailed identities of the consolidating subsidiaries are as follows:





Name of Company

Place of Incorporation

Attributable Equity

interest %Full Art International Limited

Hong Kong

100Zhuhai King Glass Engineering Co., Ltd.

PRC

100Zhuhai King General Glass Engineering Technology Co., Ltd.

PRC

100King General Engineering (HK) Limited

Hong Kong

100KGE Building System Limited

Hong Kong

100KGE Australia Pty Limited

Australia

55Zhuhai Xiangzhou District Career Training School

PRC

72Faith Mount International Limited

Hong Kong

100Techwell Engineering Limited

Hong Kong

100Techwell International Limited

Macau

100Techwell Building System (Shenzhen) Co., Ltd.

PRC

100CAE Building Systems, Inc.

USA

100Techwell International S.E.A.

Singapore

100China Architectural Engineering (Shenzhen) Co., Ltd.

PRC

60CAE Building Systems (Singapore) Pte Ltd

Singapore

100New Crown Technology Limited

Hong Kong

60Shanghai ConnGame Network Ltd.

PRC

60





(c)
Use of estimates





The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates.


F-9


CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 (Stated in US Dollars)





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)





(d)
Plant and equipment





Plant and equipment are carried at cost less accumulated depreciation.  Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the plant and equipment are as follows: -





Motor vehicle
5 yearsMachinery and equipment
5 - 10 yearsFurniture and office equipment
5 yearsBuilding
20 years





The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.





(e)
Accounting for the impairment of long-lived assets





The long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes.  Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets.





If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.





During the reporting periods, there was no impairment loss.


F-10





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)





(f)
Goodwill and Intangible Assets





In accordance with ASC 350, “Goodwill and Other Intangible Assets.” the Company does not amortize goodwill or intangible assets with indefinite lives.
 
 Upon indication that the carrying values of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations.
 
 The Company performs an analysis on its goodwill balances to test for impairment on an annual basis and whenever events occur that indicate an impairment could exist.  Of the goodwill presented as December 31, 2010, approximately $23.8 million is attributable to the acquired subsidiaries.
 
 Approximately $15.8 million was attributed to ConnGame, which was acquired in August 2010, and approximately $8.0 million was attributed to Techwell Engineering Limited. There are several instances that may cause the Company to further test its goodwill for impairment between the annual testing periods including:  (i) continued deterioration of market and economic conditions that may adversely impact its ability to meet its projected results; (ii) declines in the Company’s stock price caused by continued volatility in the financial markets that may result in increases in its weighted-average cost of capital or other inputs to its goodwill assessment; (iii) the occurrence of events that may reduce the fair value of a reporting unit below its carrying amount, such as the sale of a significant portion of one or more of the Company’s reporting units. In the year ended December 31, 2010, the Company believes that no instance indicates that an impairment could exist in respect to Techwell.
 
 With respect to Techwell, material assumptions include:  (1) The reporting unit continues to have the profitable operations for a period of next 10 years; (2) the revenue has the steady annual growth rate ranging from 5% to 8% as in line with the estimated growth rate of PRC economy; (3) costs of funds kept stable for the period of next 10 years resulting in a stable discount rate for the projection of estimated fair value; and (4) no material change in the prevailing payment terms of the construction industry that allowing the working capital requirement kept at a low level at 15%.  Uncertainties include: (1)  The ability of the reporting unit to continue as a  profitable operation may be affected by changes in technologies and the market of the construction industry; (2) the growth of the PRC economy may not be as steady as projected that in turn affect the steady growth of the revenue of the reporting unit, (3) it is also uncertain about the capital market that affect the costs of fund of the company; and (4) the prevailing payment terms used in the construction industry may be changed as a result of changes in the business environment for the construction industry. Potential events include (1) the appreciation of the value of RMB that would slow down the export and in turn the economic development of China that in turn have negative effect of property development industry in China; and (2) the controlling policies towards the property market by the PRC government.
 
 For other intangible assets, impairment tests are performed annually and more frequently whenever events or changes in circumstances indicate carrying values exceed estimated reporting unit fair values.


(g)
Inventories





Inventories are raw materials, which are stated at the lower of weighted average cost or market value.





(h)
Contracts receivable





Contracts receivable from performing construction of industrial and commercial buildings are based on contracted prices.  The Company provides an allowance for doubtful debts, which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions.





(i)
Cash and cash equivalents





The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.





(j)
Restricted cash





Restricted cash represents deposits in bank accounts to secure notes payables, bank loans, project performance bond and guarantee.


F-11





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009





(Stated in US Dollars)





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)





(k)
Earnings per share





The Company computes earnings per share (“EPS’) in accordance with ASC 260, “Earnings per Share”. ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.





The calculation of diluted weighted average common shares outstanding for the years ended December 31, 2010 and 2009 is based on the estimate fair value of the Company’s common stock during such periods applied to warrants and options using the treasury stock method to determine if they are dilutive. The Convertible Bond is included on an “as converted “basis when these shares are dilutive.





Components of basic and diluted earnings per share were as follows:





Year ended

December 31,

2010


Year ended

December 31,

2009Net Earnings/(Loss) attributable to the Company

$
(22,303,183
)

$
(6,809,337
)Basic Weighted Average Shares Outstanding


16,091,958



13,314,825Dilutive Shares:-    Addition to Common Stock from Conversion of Bonds


-



--    Addition to Common Stock from Exercise of Warrants


-



-Diluted Weighted Average Outstanding Shares:


16,091,958



13,314,825Earnings Per Share-    Basic

$
(1.39
)

$
(0.51
)-    Diluted

$
(1.39
)

$
(0.51
)




F-12


CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)





(l)
Revenue and cost recognition





Revenues from fixed-price and modified fixed-price construction contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total cost for each contract.





Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs.





Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the amount can be reliably estimated.


Selling, general, and administrative costs are charged to expense as incurred.


Total estimated gross profit on a contract, being the difference between total estimated contract revenue and total estimated contract cost, is determined before the amount earned on the contract for a period can be determined.





The measurement of the extent of progress toward completion is used to determine the amount of gross profit earned to date and that the earned revenue to date is the sum of the total cost incurred on the contract and the amount of gross profit earned.





Earned revenue, cost of earned revenue, and gross profit are determined as follows: -


a.
Earned Revenue is the amount of gross profit earned on a contract for a period plus the costs incurred on the contract during the period.





b.
Cost of Earned Revenue is the cost incurred during the period, excluding the cost of materials not unique to a contract that have not been used for the contract.





c.
Gross Profit earned on a contract is computed by multiplying the total estimated gross profit on the contract by the percentage of completion. The excess of that amount over the amount of gross profit reported in prior periods is the earned gross profit that should be recognized in the income statement for the current period.





Change orders are common for the changes in specifications or design.  Contract revenue and costs are adjusted to reflect change orders approved by the customer and the contractor regarding both scope and price.  Recognition of amounts of additional contract revenue relating to claims is appropriate only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably estimated.


F-13





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)





(m)
Income taxes





The Company uses the accrual method of accounting to determine and report its taxable reduction of income taxes for the year in which they are available.  The Company has implemented ASC 740-270, Accounting for Income Taxes.





Income tax liabilities computed according to the United States, People’s Republic of China (PRC), Hong Kong SAR, Macau SAR and Australia tax laws are provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the basis of fixed assets and intangible assets for financial and tax reporting.  The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled.  Deferred taxes also are recognized for operating losses that are available to offset future income taxes.  A valuation allowance is created to evaluate deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize that tax benefit, or that future realization is uncertain.





In respect of the Company’s subsidiaries domiciled and operated in different tax jurisdictions, the taxation of these entities can be summarized as follows:





·
Zhuhai King Glass Engineering Co., Limited (“Zhuhai KGE”) and Zhuhai King General Glass Engineering Technology Co., Limited (“Zhuhai KGGET”) are located in Zhuhai and were subject to the PRC corporation income tax rate of 18% in 2008 and 20% in 2009. In accordance to China’s Enterprise Income Tax Law (“EIT Law”) effective from January 1, 2008, the tax rate for these two subsidiaries will be gradually increased 25% in 2012. The Company anticipates that as a result of the EIT law, its income tax provision will increase, which could adversely affect Zhuhai KGE’s financial condition and results of operations.





·
China Architectural Engineering (Shenzhen) Co., Ltd. is located in Shenzhen and is subject to a 20% income tax rate that will be gradually increased to the uniform rate of 25% by 2012 as according to the new EIT law.





·
Full Art International Limited, King General Engineering (HK) Limited, and KGE Building System Limited are subject to a Hong Kong profits tax rate of 16.5%.





·
Techwell Engineering Limited is subject to a Hong Kong profits tax rate of 16.5%. Techwell International Limited is a Macau registered company and therefore is subject to Macau profits tax rate of 12%.  Techwell Building System (Shenzhen) Co. Limited is located in Shenzhen and is subject to PRC corporate income tax rate of 20% in 2009 that will be gradually increased to the uniform rate of 25% by 2012 as according to the new EIT law.





·
KGE Australia Pty Limited is subject to a corporate income tax rate of 30%.





·
The Company is subject to United States Tax according to Internal Revenue Code Sections 951 and 957.





·
The Company, after a reverse-merger on October 17, 2006, revived to be an active business enterprise because of the operations with subsidiaries in the PRC and Hong Kong.  Based on the consolidated net income for the year ended December 31, 2010, the Company shall be taxed at the 34% tax rate.





·
Techwell Engineering Limited has established a branch in Dubai, which has zero corporate income tax rate.





·
New Crown Technology Limited is subject to a Hong Kong profits tax rate of 16.5%.





·
Shanghai ConnGame Network Ltd. is located in Shanghai and is subject to a 25% income tax rate.




F-14





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)





(n)
Advertising





The Company expensed all advertising costs as incurred.  Advertising expenses included in selling expenses were $3,668, and $11,302 for the years ended December 31, 2010 and  2009, respectively.





(o)
Research and development





All research and development costs are expensed as incurred.  Research and development costs included in general and administrative expenses were $3,102,729 and $2,926 for the years ended December 31, 2010 and 2009, respectively.





(p)
Retirement benefits





Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to the statements of income as incurred.





(q)
Selling, general and administrative expenses





Selling, general and administrative expenses including employee salaries, pension costs, marketing costs, insurance, rent, and depreciation, etc.





(r)
Foreign currency translation





The accompanying consolidated financial statements are presented in United States Dollars (US$). The Company’s functional currency is the US$, while certain domestic subsidiaries’ use the Renminbi (RMB) and Hong Kong and overseas subsidiaries use local currencies as their functional currency.   The consolidated financial statements are translated into US$ from RMB, Hong Kong Dollars (HKD), United Arab Emirate Dirham (AED) and other local currencies at December 31, 2010 exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.





2010


2009Period end RMB : US$ exchange rate


6.6118



6.8372Average yearly RMB : US$ exchange rate


6.7788



6.8331Period end HKD : US$ exchange rate


7.7832



7.7551Average yearly HKD : US$ exchange rate


7.7695



7.7518Period end AED : US$ exchange rate


3.6737



3.6738Average yearly AED : US$ exchange rate


3.6737



3.6710





The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.  No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.


F-15





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)





(s)
Statutory reserves





Statutory reserves for foreign investment enterprises are referring to the amount appropriated from the net earnings in accordance with PRC laws or regulations, which can be used to recover losses and increase capital, as approved, and are to be used to expand production or operations.





(t)
Comprehensive income





Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners.  Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other consolidated financial statements.  The Company’s current components of other comprehensive income are the foreign currency translation adjustment.


F-16





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





3.
CONTRACT RECEIVABLES





December 31, 2010


December 31, 2009Contract receivables

$
86,972,165


$
95,831,489Less: Allowance for doubtful accounts


(5,531,953
)


(6,642,386
)Net

$
81,440,212


$
89,189,103





Allowance for Doubtful Accounts

December 31, 2010


December 31, 2009Beginning balance

$
6,642,386


$
5,215,701Add: Allowance created


5,973,576



1,426,685Less: Written off against allowance


(7,084,009
)


-Ending balance

$
5,531,953


$
6,642,386





For additional information, see above, "Item 1A Risk Factors—Risks Related to Our Operations —More than half of our contracts receivables are attributable to a Dubai project, which is under dispute and we may never be paid.”


F-17





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





4.
OTHER RECEIVABLES





Other receivables consisted of the following:





December 31,

2010


December 31,

2009Due from sellers of Techwell, the subsidiary (1)

$
11,362,494


$
11,333,253Due from Kangbao Electrical Company Limited (Kangbao) , a related party  (2)


1,169,876



6,054,905Drawdown of advance payment and performance bonds by client of the projects in Dubai (3)


9,380,408



9,414,397Other related parties receivables


703,539



253,638Deposits for site operations of projects in PRC


3,049,100



2,903,171Other


691,810



808,703Total

$
26,357,227


$
30,768,067





(1)
On November 6, 2007, the Company, through Full Art International, Ltd. (“Full Art”), acquired all of the issued and outstanding shares in the capital of Techwell Engineering Limited, a limited liability company incorporated in Hong Kong (“Techwell”) pursuant to a Stock Purchase Agreement (the “Agreement”) dated November 6, 2007, entered into by and among Ng Chi Sum and Yam Mei Ling (each a “Shareholder” and collectively, the “Shareholders”), the Company and Full Art.  Pursuant to the terms and conditions of the Agreement, the Shareholders agreed that each of them would pay any and all accounts receivables of Techwell if not paid by the customers within 24 months of the acquisition date.  The 24 month period has expired and a total of $9,909,130 is due and payable from the Shareholders. The amount is included in the other receivable due from sellers of Techwell.





(2)
The amount mainly represents the purchases advances to Kangbao Electrical Company Limited (Kangbao) for the supplies of materials for the projects of the Company.





(3)
The Company believes that the client of the Dubai projects did not have proper grounds for the drawdown of the advance payment and performance bonds which the company issued for the projects, The Company also believes that the client should not be entitled to the drawdown and is now proceeding the claim back of the amount.





5.
INVENTORIES





December 31, 2010


December 31, 2009Raw materials at sites

$
30,117


$
727,499


F-18





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





6.
PLANT AND EQUIPMENT





Plant and equipment consist of the following as of: -





December 31, 2010


December 31, 2009At costMotor vehicle

$
894,984


$
1,242,928Machinery and equipment


2,464,614



2,381,755Furniture, software and officeEquipment


2,374,776



1,795,595Building


-



-Leasehold improvement


1,004,538



267,038$
6,738,912


$
5,687,316Less: Accumulated depreciationMotor vehicle

$
743,086


$
825,536Machinery and equipment


1,649,806



1,420,536Furniture, software and office equipment


1,196,484



804,516Building


-



-Leasehold improvement


228,943



97,271$
3,818,319


$
3,147,859$
2,920,593


$
2,539,457





Depreciation expenses included in the selling and administrative expenses for years ended December 31 2010 and 2009 were $945,716 and $851,441 respectively.





7.
INTANGIBLE ASSETS





December 31,

2010


December 31,

2009At costIntangible Assets

$
251,966


$
98,673Less: Accumulated amortization


84,153



28,063$
167,813


$
70,610




F-19





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





8.
LOANS





A.
SHORT-TERM BANK LOANS





December 31,

2010


December 31,

2009ABN Amro N.V. Overdraft in Current Account at interest rate at 6.5% per annum


1,674,263



4,906,266ABN Amro N.V. Temporary Loan for the drawing of performance and advance payment bonds at interest rate at Bank's Cost of Fund + 6%


4,530,090



4,546,504Automobile capital lease obligation (hire purchase),amount due within one year, last installment due November 9, 2012


76,832



77,110$
6,281,185


$
9,529,880





B.
LONG-TERM BANK LOANS





December 31,

2010


December 31,

2009Automobile capital lease obligation (hire purchase),amount due to DBS Bank, last installment due November 9, 2012


32,013



109,239$
32,013


$
109,239





F-20





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





9.
CONVERTIBLE BONDS AND BOND WARRANTS





(a)
$10,000,000 Variable Rate Convertible Bonds due in 2012





On April 12, 2007, the Company completed a financing transaction with The Royal Bank of Scotland, London Branch (formerly “ABN AMRO N.V., London Branch) (the “Subscriber”) issuing (i) $10,000,000 Variable Rate Convertible Bonds due in 2012 (the “Bonds”) and (ii) 800,000 warrants to purchase an aggregate of 800,000 shares of the Company’s common stock, subject to adjustments for stock splits or reorganizations as set forth in the warrant, that expire in 2010 (the “Warrants”).





On September 29, 2008, the Subscriber converted $2,000,000 into 571,428 shares at the conversion price of $14.00 per share (adjusted for the December 2010 reverse stock split). As of March 31, 2009, the face value of the bonds outstanding was $8,000,000.





Effective from April 12, 2009, the conversion price has been reset to $9.80, which is 70% of $14.00 as the average closing price of the Company’s shares for the period of 20 consecutive trading days immediately prior to April 12, 2009 was $3.76. The reset of the conversion price resulted in additional $3.4 million of bonds discount and will be amortized over the remaining outstanding periods of the bonds. All per share amounts are adjusted to reflect the December 2010 reverse stock split.





On November 8, 2008, the Subscriber exercised all the 800,000 warrants into 800,000 shares at the exercise price of $0.01 per share.





(b)
$20,000,000 12% Convertible Bonds due in 2011





On April 15, 2008, the Company completed a financing transaction with the Subscriber, CITIC Allco Investments Limited (the “Subscribers,” and each a “Subscriber”), and CITIC Capital Finance Limited issuing (i) $20,000,000 12% Convertible Bonds due in 2011 (the “Bonds”) and (ii) 300,000 warrants to purchase an aggregate of 300,000 shares of the Company’s common stock, subject to certain adjustments as set forth in the warrant instrument, that expire in 2013 (the “Bond Warrants”). The transaction was completed in accordance with a subscription agreement entered into by the Company, Subscribers, and CITIC Capital Finance Limited, dated April 2, 2008 (the “Subscription Agreement”).


The above items (a) and (b) are to be amortized to interest expense over the term of the bonds by the effective interest method as disclosed in the table below.





The Convertible Bonds Payable, net consists of the following:





December

31, 2010


December

31, 2009Convertible Bonds Payable

$
28,000,000


$
28,000,000Less: Interest discount – Warrants


(3,305,938
)


(3,305,938
)Less: Interest discount – Beneficial conversion feature


(1,882,404
)


(1,882,404
)Less: Bond discount


(760,069
)


(760,069
)Accretion of interest discount


6,939,674



2,512,572Total Convertible Bonds Payable, Net

$
28,991,263


$
24,564,161





December

31, 2010


December

31, 2009Convertible Bonds Payable – current portion

$
22,687,021


$
-Convertible Bonds Payable – non-current portion


6,304,242



24,564,161Total Convertible Bonds Payable, Net

$
28,991,263


$
24,564,161





F-21




Waiver of Conversion Price Adjustment on Convertible Bonds





On July 13, 2010, the Company and the holders of the Company’s outstanding Variable Rate Convertible Bonds due 2012 (the “2007 Bonds”), 12% Convertible Bonds due 2011 (the “2008 Bonds,” and collectively with the 2007 Bonds, the “Bonds”) and warrants to purchase 300,000 shares of common stock of the Company expiring 2013 (the “2008 Warrants”) entered a new Waiver Agreement (the “Waiver”) , which has a three month term subject to the terms and conditions contained therein. Pursuant to Waiver, the bondholders and warrantholder agreed to waive their right to a reduction in the conversion price of the Bonds and exercise price of the 2008 Warrants due to the Company’s proposed sale of the shares pursuant to the Purchase Agreement at a price per share less than the current conversion prices of the Bonds and exercise price of the 2008 Warrants.





The waivers contained in the Waiver Agreement are subject to numerous conditions.  Under the Waiver Agreement, the Company agreed to pay the Bondholders the interest on the Bonds in the amount of approximately $3.84 million on scheduled dates, of which the Company made a payment of approximately $1.26 million on March 31, 2010 and $1.32 million on April 15, 2010. Under the terms of the waiver, the Company agreed that the Company would pay to the bondholders all outstanding interests in arrears on the Bonds, plus all other applicable interest up until the payment date, within 30 days after the closing of the issuance of the shares to acquired ConnGame, but which in any event, would not be later than September 30, 2010.





The Company also agreed to repay an overdraft facility in the amount of approximately $4.91 million on three scheduled dates.  The Company made payment of approximately one-half of this amount and agreed to pay all unsettled amounts, which include all outstanding principal and interest amounts, within 30 days after the closing of the issuance of the Shares, but which in any event, would not be later than September 30, 2010.





The Company also agreed that the Company will not repay or prepay any debt prior to its currently scheduled due date until the Company make all of the payments specified in the Waiver and the Bonds have been redeemed in full and that any new indebtedness incurred by us for the purpose of repaying the overdraft facility shall (i) not exceed the outstanding amount due and payable under the overdraft facility and (ii) be subordinated to all amount owed under the Bonds (the “Waiver Covenants”).





As of December 31, 2010, the Company did not make the payments scheduled under the waivers and was negotiating with the Bondholders for extension of the date of the scheduled payments.  The Company was communicating with the Bondholders for the extension for the payment and adjustment of the conversion price under the terms of the Waiver Agreement. By the date of this report, the Bondholders did not make the request of payment and adjustment of the conversion price.





If the Company is unable to successfully to obtain an extension for the payment dates, then all rights of the holders of the Bonds and 2008 Warrants waived under the Waiver to or to be waived under the Waiver, shall not be waived and will be reinstated, and any previous waivers will be null and void.  In such case, appropriate adjustments will be made to the conversion prices of the Bonds and the exercise price of the 2008 Warrants and an event of default under the terms and conditions of the trust deed governing the 2008 Bonds shall exist, making the 2008 Bonds immediately due and payable.





Since the Company was unable to comply with the payment terms of the Waiver and unless the Company is able to successfully negotiate an extension of the scheduled payment dates, the issuance of the Shares could result in an adjustment of the conversion price of the Bonds and the 2008 Warrants pursuant to the governing Trust Deeds and warrant agreement, respectively, which could result in substantial dilution to the Company's shareholders. The 2007 Bonds are currently convertible at a per share price of $9.80 per share and the 2008 Bonds and 2008 Warrants are convertible and exercisable, respectively, at $25.40 per share (taking into account the 1 for 4 share reverse stock split that occurred on December 21, 2010).  If the Company is not able to obtain an extension for payment under the terms of the Waiver Agreement, an adjustment to the conversion and exercise prices could be adjustable downward to the value of the assets that the Company received for the issuance of the Shares, as calculated in accordance with the provisions of the Trust Deeds and the warrant agreement.





On April 15, 2011, the 2008 Bonds matured. The payables amount to $23.3 million. The Company did not redeem the Bonds and was under negotiation with the Bondholders for the repayment schedule.


F-22





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





10.
OTHER PAYABLES





Other payables consisted of the following:





December 31,

2010


December 31,

2009Advances received from clients of construction projects

$
8,032,690


$
3,130,849Advances received from clients other than construction projects


2,184,418



-Site overhead and labour provision for projects in Dubai


-



5,879,978Others


745,284



349,487Total

$
10,962,392


$
9,360,314





11.
OTHER ACCRUALS





Other accruals consisted of the following:





December 31,

2010


December 31,

2009Accruals for interests on convertible bonds

$
3,145,768


$
3,091,333Accruals for interests on short-term bank loan


342,614



-Accruals for materials costs of projects in Dubai


2,025,311



-Others


1,305,867



1,232,678Total

$
6,819,560


$
4,324,011





12.
CONTRACT REVENUES EARNED





The contract revenues earned for the years ended December 31, 2010 and 2009 consist of the following: -





Year ended December

31, 2010


Year ended

December 31, 2009Billed

$
27,050,934


$
73,455,515Unbilled


514,320



43,735,403$
27,565,254


$
117,190,918





The unbilled contract revenue earned represents those revenue that should be recognized according to the percentage of completion method for accounting for construction contract because the Company is entitled to receive payment from the customers for the amount of work that has been rendered to and completed for that customer according to the terms and progress being made as stipulated under that contract between the Company and that customer. As an industrial practice, there are certain procedures that need to be performed, such as project account finalization, by both the customer and the Company before the final billing is issued; however this does not affect the Company’s recognition of revenue and respective cost according to the terms of the contract with the consistent application of the percentage-of-completion method.





The three largest customers accounted for 18% of the Company’s contract revenues for the year ended December 31, 2010. No customer accounts for 10% or more of the Company’s contract revenues in 2010.


F-23





CHINA CGAME, INC.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 and 2009


(Stated in US Dollars)




13.
INCOME TAXES





On October 17, 2006, income from the Company’s foreign subsidiaries became subject to U.S. income tax liability; however, this tax is deferred until foreign source income is repatriated to the Company, which has not yet occurred.


The Company has also retained an U.S. tax-preparer firm to aide in preparation of its U.S. income tax returns in order to maintain a high level of compliance with U.S. tax laws.





Effective January 1, 2008, the PRC income tax rules were changed.  The PRC government implemented a new 25% tax rate for all enterprises whether domestic or foreign enterprise, and abolished the tax holiday.


Income before taxes and the provision for taxes consists of the following:


December 31, 2010


December 31, 2009Continuing income before taxes:U.S.

$
(12,523,671
)

$
(9,410,523
)Singapore


-



683,895China


(11,356,123
)


(7,169,656
)Australia


(13,826
)


(3,197
)Hong Kong


2,696,686



(6,915,560
)Dubai


(1,973,902
)


17,823,687Macau


-



(57,240
)Total continuing income before taxes


(23,170,836
)


(5,048,594
)Provision for taxes expense/(benefit):Current:U.S. Federal


-



-U.S. State


-



--



-Deferred:U.S. Federal


-



-Hong Kong


24,338



(109,769
)Currency Effect


-



2,73824,338



(107,031
)Total provision for taxes

$
24,338


$
(107,031
)Effective tax rate


0.11
%


(2.11
)%





F-24


Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of our deferred tax assets and liabilities at December 31, 2010 and 2009 are as follows:


December 31,

2010


December 31,

2009Deferred tax assetsNet operating loss

$
112,625


$
113,033112,625



113,033Valuation allowance


-



-Total deferred tax assets


112,625



113,033Deferred tax liabilitiesTotal deferred tax liabilities


-



-Net deferred tax assets


112,625



113,033Reported as:Current deferred tax assets


112,625



113,033Non-current deferred tax assets


-



-Non-current deferred tax liabilities


-



-Net deferred taxes

$
112,625


$
113,033





Current deferred tax assets represents net operating loss of a subsidiary Techwell Engineering Limited in Hong Kong.  The losses can be carried forward to set-off future assessable profits in Hong Kong without expiry date.  The differences between the U.S. federal statutory income tax rates and the Company’s effective tax rate for the years ended December 31, 2010 and 2009 is shown in the following table:





2010


2009U.S. federal statutory income tax rate


34.00
%


34.00
%Lower rates in PRC, net


-9.00
%


-9.00
%Accruals in foreign jurisdictions


0.11
%


-2.11
%Tax Holiday


-25.00
%


-25.00
%0.11
%


-2.11
%





The following table accounts for the differences between the actual tax provision and the amounts obtained by applying the relevant applicable corporation income tax rate to income (see tax rates discussed above) before tax for the years ended December 31, 2010, 2009, and 2008: -





Year ended December

31, 2010


Year ended December

31, 2009Income/(loss) before tax


(23,170,836
)


(5,048,594
)Taxes at the applicable  income tax rates

$
24,338


$
285Miscellaneous non taxable income and non-deductible expenses


-



(107,316
)Current income tax expense

$
24,338


$
(107,031
)





Effective January 1, 2008, the PRC government implemented a new 25% tax rate across the board for all enterprises regardless of whether domestic or foreign enterprise without any tax preferences which is defined as "two-year exemption followed by three-year half exemption" enjoyed by tax payers. As a result of the tax law, a standard 15% tax preference terminated as of December 31, 2007. The PRC government has established a set of transition rules to allow enterprises using tax preferences before January 1, 2008 to continue using the tax preferences on a transitional basis until being the new tax rates are fully implemented over a five year period.


F-25


CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 and 2009


(Stated in US Dollars)





14.
QUARTERLY INFORMATION





The table below presents selected results of operations for the quarters indicated.  All amounts are in thousands, except share and per share amounts.





Quarter EndedDecember 31, 2010


September 30, 2010


June 30, 2010


March 31, 2010


TotalContract revenues earned

$
5,943


$
4,442


$
5,708


$
11,472


$
27,565Income / (loss) from operations


(3,313)



(6,620)



(2,275)



(1,895)



(14,103)Net earnings (loss)


(6,967)



(8,486)



(3,330)



(3,520)



(22,303)Net earnings / (loss) per share:Basic and Diluted


(0.43)



(0.53)



(0.21)



(0.22)



(1.39)





Quarter EndedDecember 31, 2009


September 30, 2009


June 30, 2009


March 31, 2009


TotalContract revenues earned

$
24,691


$
25,558


$
30,599


$
36,343


$
117,191Income / (loss) from operations


389



(5,074
)


3,832



2,230



1,377Net earnings (loss)


(1,918
)


(8,387
)


2,552



944



(6,809
)Net earnings / (loss) per share:Basic


(0.16
)


(0.63
)


0.20



0.08



(0.51
)





15.
SEGMENTAL INFORMATION





The Company has one reportable segment and conducts business in the following geographic regions. All amounts are in thousands.





Revenue :





2010


2009For the year ended December 31Middle East

$
366


$
58,685Asia


27,051



51,979United States


148



6,527Total

$
27,565


$
117,191




F-26





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 and 2009


(Stated in US Dollars)





15.
SEGMENTAL INFORMATION (CONT'D)





Long-lived assets :





Middle East


Asia


United States


TotalAs of December 31, 2010Plant and equipment, net

$
279


$
2,568


$
74


$
2,921Intangible assets


-



168



-



168Goodwill


-



23,772



-



23,772Other non-current assets


187



227



-



414Total

$
466


$
26,735


$
74


$
27,275As of December 31, 2009Plant and equipment, net

$
384


$
2,026


$
130


$
2,540Intangible assets


-



71



-



71Goodwill


-



7, 996



-



7, 996Other non-current assets


161



95



31



287Total

$
545


$
10,188


$
161


$
10,894





16.
DISCONTINUED OPERATION LOSS





In September 2009, the Company’s Shenzhen office was downsized and moved out from the leasehold multi-floor office building to a smaller leased place at minimal operations. The move was a result from the Company’s recent restructure and reorganization to turn back to the domestic market in China instead of overseas market due to the recent change in international economic environments. The set up of the Shenzhen office was originally for the support of the overseas operations which the Company decided to be discontinued.  As a result, the current improvement works to the leasehold multi-floor office building were stopped and being written off in the period under this report as discontinued operation loss of $1,900,794.


F-27





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 and 2009


(Stated in US Dollars)





17.
COMMITMENTS AND CONTINGENCIES





A. OPERATING LEASE COMMITMENTS





The Company leases certain administrative and production facilities from third parties.  Accordingly, for the years ended December 31, 2010 and 2009, the Company incurred rental expenses of $3,254,251 and $3,254,251 respectively.





The Company has commitments with respect to non-cancelable operating leases for these offices, as follows: -





For the years ended December 31,2011


1,037,8692012


875,4222013


-2014 or after


-$
1,913,291





B. PENDING LITIGATION





Techwell Litigation





Pursuant to a Stock Purchase Agreement dated November 7, 2007, the previous shareholders of Techwell Engineering Limited (“Techwell”), Mr. Ng, Chi Sum and Miss Yam, Mei Ling Maria agreed to sell 100% of the shares in Techwell to the Company for approximately $11.7 million in cash and shares of common stock of the Company. Subsequent to the said acquisition, Mr. Ng and Miss Yam were employed by Techwell.





On January 14, 2009, the board of directors of Techwell passed a board resolution, to dismiss both Mr. Ng and Miss Yam with immediate effect and remove Mr. Ng from the board of Techwell (the “Resolution”).   On January 16, 2009, Mr. Ng and Miss Yam filed a lawsuit in the High Court of Hong Kong against the Company and its subsidiary, Full Art International Limited.  The lawsuit alleges that,inter alia , (i) the Company misrepresented to them the financial status of the Company and operations during the course the acquisition of Techwell was being negotiated; (ii) the Company failed to perform its obligations under a settlement agreement alleged to be agreed by the Company in January 2009; and (iii) the dismissal of Mr. Ng was unlawful and invalid.  The lawsuit filed by Mr. Ng and Miss Yam requests the court for specific performance of the settlement agreement that was allegedly entered into, which would require the return of the Techwell company to Mr. Ng and Miss Yam, and in the absence of such grant of relief, Mr. Ng and Miss Yam request unspecified damages lieu of return of the Techwell company.


F-28





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 and 2009


(Stated in US Dollars)





17.
COMMITMENTS AND CONTINGENCIES (CONT'D)





On January 23, 2009 an ex-parte injunction order was granted to Mr. Ng, restraining the Company from implementing the Resolution, which was eventually dismissed with immediate effect on February 25, 2009 after a court session in the High Court of Hong Kong. Mr. Ng was also ordered to bear the costs of the various court proceedings in connection with the said injunction order. On March 27, 2009, Mr. Ng and Miss Yam filed a summons in the High Court of Hong Kong seeking a court order for leave to join the Company’s principal shareholder, KGE Group Limited, as a defendant of the said lawsuit, which was granted on April 9, 2009.  As a result, KGE Group Limited became one of the defendants of the lawsuit. On May 12, 2009, the Company filed a Defense and Counterclaim at the High Court of Hong Kong in response to a Statement of Claim served by Mr. Ng and Miss Yam on the Company on April 7, 2009.





The Company, Mr. Ng, and Miss Yam are in discussions and negotiations to settle the all disputes between the parties.  However, there is no guarantee that the parties will reach an agreement to settle the dispute, in which case the Company intends to vigorously defend against the lawsuit.  There can be no assurance that the lawsuit will be resolved in the Company’s favor.  Even if the Company successfully defends the lawsuit, the Company may incur substantial costs defending or settling the lawsuit, in addition to a possible diversion of the time and attention of the Company’s management from its business.  If the Company is unsuccessful in defending the lawsuit, its may be required to pay a significant amount of damages and/or it may potentially lose ownership of Techwell, which will have a material adverse effect on the Company’s business, financial condition or results of operations. In the last quarter of 2009, Mr. Ng made a settlement proposal to the Company for consideration and the Company is still under negotiation of the settlement agreement with Mr. Ng as of December 31, 2010.  The Company’s management intends to take further legal action in the event no settlement agreement could be reached by end of June 2011.





Dubai Metro Rail Project Dispute





On September 9, 2009, the Red Line, or first phase, of the Dubai Metro was officially opened. The Company, through its subsidiary Techwell, had been working towards completion of its external envelopes for stations along the Red Line of the Dubai Metro System.  According to the Company’s original construction blueprint, the majority of its construction work was completed at the end of June 2009, and final construction milestones were scheduled for completion in the third quarter of 2009.  With less than 5% of its contract remaining to be completed, Techwell was removed by the master contractor of the project, which also called for and received payment of $2.1 million in performance bonds and $7.3 million in advance payment bonds that were issued on Techwell's behalf for the project. The calling of the advance payment bonds was based on the master contractor's belief that it had paid in excess of the construction work performed.  The Company and certain of its subsidiaries are guarantor of the bonds that were paid by the banks, and the Company is liable under the guarantee agreements for such amounts paid by the banks.  The Company does not believe that the master contractor had a proper basis for calling the bonds and intend to vigorously defend all of its legal rights and remedies related to the dispute.  The Company has engaged a construction claims consultant to facilitate resolution of the dispute.  The Company and its construction claims consultant, based on a review of the facts, documents, and materials available, believes that it has a reasonable opportunity to collect the amounts due to Techwell from the master contractor, less appropriate credits as its final amount due for work performed through September 2009.  The Company, with the assistance of its claims consultant, will continue to evaluate the dispute and probability of success on this dispute going forward and make the appropriate adjustments; however, no assurance can be given that the dispute will be resolved in the Company’s and Techwell’s favor.





In July 2010, the Company met with the master contractor, and the master contractor agreed to arrange a further meeting to explore the possibility of settlement. No such meeting was arranged as of date.  The Company’s counsel in Dubai was preparing the legal documents for the claims as of September 30, 2010. On November 8, 2010 the Company issued a notice informing the master contractor that the Company would seek resolution through arbitration with 56 day waiting period for the master contractor to respond. In April 2011, the master contractor reiterated that it does not believe that it is obligated to pay to the Company any of the amounts that the Company believes it is due. The Company intends to file for arbitration in the Courts of Dubai in April 2011.


F-29





CHINA CGAME, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)





18.
RELATED PARTY TRANSACTIONS





The amount due to shareholder at December 31 2010 and 2009 were $9,479,026 and $10,080,345 respectively. The payables balance was mainly loans from the two largest shareholders, with such loans being interest-free, fee-free and are due upon demand.





During the year ended December 31, 2009, the Company purchased construction materials amounting to $22.9 million from Guangdong Canbo Electrical Co., Ltd. (Canbo) via its parent company, Kangbao Electrical Company Limited (Kangbao), a subsidiary of the Company’s major shareholder, KGE Group Limited. Canbo is a preferred supplier of the Company as it is able to procure materials at favorable price levels due to its purchased quantities. More important, application of certain of the Company’s patented technology is preferably routed through Canbo to prevent undesired distribution of this technology. The Company at times provides purchases advance payment to Kangbao in order to obtain a more favorable pricing. The Company has also obtained trade facilities for purchases through Canbo. During the year ended December 31, 2010, no material amount of materials were purchased from Canbo or Kangbao. As of December 31, 2010, the Company’s purchases advance to Canbo was $3.4 million for the purpose of future supplies of materials.





The transactions with related parties during the periods were carried out in the ordinary course of business and on normal commercial terms.





19.
SUBSEQUENT EVENTS





On March 25, 2011, the Company changed its name from China Architectural Engineering, Inc. to its current name China CGame, Inc.  The Board of Directors approved the change of the corporate name to better reflect the operations of the Company’s focus on providing MMORPG (Massively Multiplayer Online Role Playing Games) in China.  Pursuant to Section 253 of the Delaware General Corporation Law (the “DGCL”), the name change was effected by the merger of China CGame, Inc., a wholly-owned subsidiary of the Company, with and into the Company (the “Merger”), with the Company being the surviving corporation. This merger had the effect of amending the Company’s Certificate of Incorporation to reflect the new legal name of the Company.





20.
GOING CORNCERN





These consolidated financial statements have been prepared assuming that Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.





As of December 31, 2010, the Company has an accumulated deficit of $11,172,099 due to the fact that the Company continued to incur losses over the past few years. The Company was not in compliance with certain debt covenants, including the convertible bonds, due to the losses suffered. Management is attempting to renegotiate the terms of the debts and is in the process of evaluating funding alternatives including seeking refinance of the debts and temporary loans from the major shareholder for the Company operations.





As a result, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the Company’s ability to continue as a going concern.


F-30